<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1998
REGISTRATION NO. 333-56427
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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E3 CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 7372 58-1828841
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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1800 PARKWAY PLACE, SUITE 600
MARIETTA, GEORGIA 30067
(770) 424-0100
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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ANDERS H. HERLITZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
E3 CORPORATION
1800 PARKWAY PLACE, SUITE 600
MARIETTA, GEORGIA 30067
(770) 424-0100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
<TABLE>
<S> <C>
JOHN C. YATES, ESQ. CARMELO M. GORDIAN, ESQ.
GRANT W. COLLINGSWORTH, ESQ. S. MICHAEL DUNN, ESQ.
LAUREN Z. BURNHAM, ESQ. PHILIP W. RUSSELL, ESQ.
MORRIS, MANNING & MARTIN, L.L.P. BROBECK, PHLEGER & HARRISON, LLP
1600 ATLANTA FINANCIAL CENTER 301 CONGRESS AVENUE
3343 PEACHTREE ROAD, N.E. SUITE 1200
ATLANTA, GEORGIA 30326 AUSTIN, TEXAS 78701
TELEPHONE: (404) 233-7000 TELEPHONE: (512) 477-5495
FACSIMILE: (404) 365-9532 FACSIMILE: (512) 477-5813
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") please 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, please 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,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
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 OR AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject To Completion, Dated , 1998
PROSPECTUS
SHARES
[E3 LOGO]
E3 CORPORATION
COMMON STOCK
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Of the shares of Common Stock offered hereby,
shares are being sold by E3 Corporation (the "Company" or "E3")
and shares are being sold by the Selling Shareholders (the
"Selling Shareholders"). The Company will not receive any proceeds from the sale
of shares by the Selling Shareholders. Prior to this offering (the "Offering"),
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price of the Common Stock will be between
$ and $ per share. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price. The Company has
applied for quotation of the Common Stock on the Nasdaq National Market under
the symbol "EIII."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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>
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Proceeds to
Price to Underwriting Discounts Proceeds to Selling
Public and Commissions(1) Company(2) Shareholders
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<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
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Total (3).................... $ $ $ $
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</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $ .
(3) The Company and the Selling Shareholders have granted the Underwriters an
option, exercisable within 30 days from the date hereof, to purchase up to
a total of additional shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public will be
$ , the Underwriting Discounts and Commissions will be $ , the
Proceeds to Company will be $ , and the Proceeds to Selling
Shareholders will be $ . See "Principal and Selling Shareholders" and
"Underwriting."
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The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and are subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made through the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about
, 1998.
---------------------------
WARBURG DILLON READ LLC SOUNDVIEW FINANCIAL GROUP, INC.
, 1998
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES AND EXCHANGE ACT
OF 1934, AS AMENDED. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this Prospectus.
THE COMPANY
E3 is a leading provider of inventory management software solutions
designed to help businesses make purchasing decisions that optimize inventory
levels and increase profitability. The Company's solutions are designed
primarily for businesses in the wholesale and retail segments of the supply
chain. The Company complements its software products with a range of services
that leverage its comprehensive buying process expertise. To date, substantially
all of the Company's revenue has been generated through its direct sales force
based in the United States and abroad. E3 has provided solutions to a broad
range of distributors, wholesalers and retail chains in the general retail;
pharmaceutical; general manufacturing; electrical, industrial and automotive
supply; food and food service; wine and spirits; and office supply industries,
among others. Founded in 1980, E3 has installed its systems at more than 600
customers in 16 countries. Customers include Ace Hardware, Best Buy, CVS
Pharmacy, Eckerd Drugs, Rubbermaid, Staples, The Sports Authority and Victoria's
Secret. In the United States, E3's customers include seven of the largest ten
drug wholesalers, five of the largest ten drug retailers, 22 of the largest 50
food service distributors, and eight of the largest 17 hardware wholesalers.
Today's increasingly competitive business environment has forced
manufacturers, distributors and retailers to change their business practices.
There has been a fundamental shift in market power from manufacturers to
retailers and consumers. This shift in market power has had a profound effect on
the supply chain, which consists of the flow of goods from suppliers to
manufacturers, then to wholesalers and warehouses, next to distributors and
retailers, and ultimately, to the consumer. The competitive nature of today's
end markets requires retailers and wholesalers to effectively manage their
supply chains in order to provide their customers with the right products, at
the right price, and at the precise time and place they are needed.
As a result of these recent trends, a significant need has developed for
optimized inventory management solutions that: (i) not only track inventory
levels but also measure and improve inventory profitability; (ii) provide
sophisticated decision-support tools combined with simulation capabilities that
analyze numerous purchasing factors, such as demand patterns, purchasing costs,
the receipt and management of inventory, vendor pricing and discounts, and
forecasted demand; (iii) respond to changing business factors by automatically
recommending the optimal purchasing decisions; and (iv) enable companies to
manage millions of stock-keeping units ("SKUs") over broad geographic regions
with many stores and distributed users. Finally, the solutions should be easy to
implement, use and maintain.
The Company's solutions address the complex requirements of inventory
management by factoring in forward-buying and alternate-buying opportunities
while minimizing the required inventory levels needed to meet pre-established
customer service objectives. The Company's solutions are based on a
comprehensive suite of software modules, including demand forecasting, lead time
forecasting, order policy analysis, service level analysis, replenishment
analysis, investment analysis and order validity analysis. The Company offers
consulting and educational services that help customers maximize profitability
through the use of the Company's proprietary inventory management software and
techniques.
The Company's software solutions provide comprehensive and advanced
inventory management capabilities that enable organizations to reduce
inventories, increase profitability and meet customer service objectives. The
Company's product offerings target four distinct markets: (i) E3TRIM targets
warehouse inventory management; (ii) E3SLIM targets store inventory management;
(iii) E3CRISP targets vendor managed inventories; and (iv) ProfitTrack focuses
on shared services inventory management.
3
<PAGE> 5
The Company intends to maintain its leadership position in the inventory
management market by continuing to provide comprehensive and advanced
applications that allow customers to optimize inventory management. Key elements
of the Company's strategy include maintaining and enhancing its technology
leadership, expanding product offerings and targeting new market opportunities,
maintaining high quality customer relationships through consulting and
education, broadening distribution channels and strategic relationships and
increasing penetration of international markets.
The Company was founded in 1980 and incorporated in Georgia in 1986 as
Technology Investment Leasing & Loan, Inc. In 1998, the Company changed its name
to E3 Corporation. When used in this Prospectus, unless the context requires
otherwise, the term "Company" refers to E3 Corporation and its consolidated
subsidiaries. The Company's principal executive offices are located at 1800
Parkway Place, Suite 600, Marietta, Georgia 30067 and its telephone number is
(770) 424-0100.
THE OFFERING
Common Stock offered by the Company.... shares
Common Stock offered by the Selling
Shareholders......................... shares
Common Stock to be outstanding after
the Offering......................... shares(1)
Use of Proceeds........................ For working capital and other
general corporate purposes including
possible acquisitions.
Proposed Nasdaq National
Market Symbol........................ EIII
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(1) Excludes (i) 3,000,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the E3 Corporation Stock Incentive Plan
(the "Stock Incentive Plan"), of which options to purchase 898,919 shares
were outstanding as of the date of this Prospectus, at a weighted average
exercise price of $10.00 per share; and (ii) 148,354 shares of Common Stock
issuable upon the exercise of non-plan options outstanding as of the date of
this Prospectus, at a weighted average exercise price of $9.10 per share.
See "Management -- Stock Option and Other Compensation Plans."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Software license fees................ $ 4,827 $ 7,545 $ 11,199 $ 12,589 $ 14,519 $ 5,185 $ 4,107
Services and maintenance fees........ 2,340 3,576 5,044 7,200 10,342 2,351 3,392
------- ------- -------- -------- -------- ------- -------
Total revenue...................... 7,167 11,121 16,243 19,789 24,861 7,536 7,499
Income from operations............... 1,115 2,173 2,917 3,738 3,673 3,153 1,507
Net income........................... 857 1,249 2,058 2,261 2,258 1,874 893
Net income per share -- basic and
diluted............................ $ 0.05 $ 0.08 $ 0.13 $ 0.14 $ 0.14 $ 0.12 $ 0.06
Shares used in computing net income
per share -- basic and
diluted(1)......................... 15,850 15,555 15,555 15,645 15,649 15,649 15,649
Cash dividends declared per common
share.............................. $ -- $ 0.02 $ 0.04 $ 0.02 $ 0.02 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------------
AS
ACTUAL ADJUSTED(2)
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<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 7,318 $ 9,248 $
Working capital........................................... 5,573 6,318
Total assets.............................................. 15,824 16,519
Long-term debt, net of current portion.................... -- --
Shareholders' equity...................................... 6,838 7,650
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) As adjusted to give effect to the sale by the Company of the
shares of Common Stock offered hereby at an assumed initial public offering
price of $ per share, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
Unless otherwise indicated, the information contained in this Prospectus
assumes (i) no exercise of outstanding stock options and (ii) no exercise of the
Underwriters' over-allotment option.
E3(R), E3 Design(R), E3CRISP(R), E3SLIM(R) and E3TRIM(R) are registered
trademarks of the Company. This Prospectus also includes trademarks, service
marks, trade names and references to intellectual property owned by other
companies.
5
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered by this Prospectus. When used in this
Prospectus, the words "may," "will," "intends," "plans," "expects,"
"anticipates," "estimates" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below and elsewhere in this Prospectus. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risk factors discussed below and elsewhere in this Prospectus.
Potential Variability of Quarterly Operating Results and Seasonality. The
Company's operations, revenue and operating results are uncertain and are
expected to vary substantially from quarter to quarter. Among the factors
causing these potential variations are fluctuations in the demand for the
Company's products, the level of product and price competition in the Company's
markets, the length of the Company's sales cycle, the size and timing of
individual transactions, the mix of products and services sold, delays in or
cancellations of customer implementations, the timing of new product
introductions and enhancements by the Company or its competitors, the Company's
ability to attract and retain key technical, sales and managerial personnel, the
ratio of international to domestic sales, commercial strategies adopted by
competitors, changes in foreign currency exchange rates, customers' budget
constraints, the Company's ability to control costs and general economic
conditions. In addition, the Company has in the past, and may in the future,
provide a customer with a right to receive a full refund of the license fees
paid if such customer is dissatisfied with the Company's products in the period
following installation (typically up to 90 days). The grant of such a right may
have the effect of delaying the Company's recognition of revenue from such
license fees. In addition, in each year in which the Company paid bonuses to
certain executive officers, such bonuses were based on year-end operating
results and were paid in the fourth quarter, which has resulted in substantially
increased general and administrative expenses in that quarter. As a result of
the foregoing factors, comparisons of future operating results with prior
periods should not be relied upon as indicators of actual performance in future
periods. The Company establishes its expenditure levels for consulting, product
development, sales and marketing and other operating expenses based, in large
part, on its expected future revenue. Furthermore, since software license sales
are typically accompanied by a substantial amount of consulting, implementation
and support services, the Company's consulting and support resources must be
managed to meet anticipated software license revenue. As a result, any
unexpected decline in software license revenue is likely to adversely and
disproportionately affect operating results and net income because only a small
portion of the Company's expenses vary with its revenue. Based upon all of the
foregoing, the Company believes that its quarterly and annual revenue, expenses
and operating results are likely to vary significantly in the future and that
period-to-period comparisons of its operating results are not necessarily
meaningful. As a result, the Company's operating results for any particular
quarter may be below the expectations of securities analysts and investors,
which could materially and adversely affect the market price of the Company's
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company's quarterly operating results are also subject to certain
seasonal fluctuations. The Company's revenue, particularly its software license
fee revenue, and operating results are typically strongest in the first and
fourth quarter and weakest in the third quarter. The Company's revenue and
operating results for the first quarter typically benefit from customers making
corporate information technology ("IT") purchasing decisions early in the budget
year. The Company's revenue and operating results for the fourth quarter
typically benefit from the efforts of the Company's sales force to meet year-end
sales quotas and the tendency for IT departments to spend the remaining portion
of IT budgets prior to year-end. The Company experiences lower sales levels in
the third quarter, due in large part to the general decline in business activity
in Europe during the summer months.
Product Concentration. In recent years, the Company has derived a majority
of its revenue from its E3TRIM product. In 1997, the Company derived
approximately 70% of its revenue from sales of E3TRIM, and sales of E3TRIM may
continue to account for a majority of the Company's revenue for the foreseeable
future. As a result, the Company's future operating results are dependent upon
continued market acceptance
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<PAGE> 8
of E3TRIM and enhancements thereto. While the Company intends to develop and
introduce new products, the Company's success will depend on continued market
acceptance of its existing products, particularly its E3TRIM, E3SLIM and E3CRISP
products, as well as the Company's ability to introduce new versions of its
existing products. There can be no assurance that the Company's products will
continue to achieve market acceptance or that the Company will introduce
enhanced versions of its products on a timely basis, or at all, to meet the
evolving needs of its customers. Any material reduction in demand for the
Company's products, increased competition in the market for supply chain
management software or technological changes could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Products."
Dependence on IBM AS/400 Platform. Although the Company is in the process
of porting the server portion of its products to additional platforms, including
UNIX and Windows NT, the server portion of its products is currently designed to
operate solely on the AS/400 platform offered by International Business Machines
Corporation ("IBM"). The Company believes that it has lost sales in the past due
to prospective customers' refusal to purchase AS/400 hardware. Any decline in
the market for or support of the AS/400 platform, or any refusal on the part of
prospective customers generally to purchase AS/400 hardware for the operation of
the Company's products, may have a material adverse effect on the Company's
business, operating results and financial condition. In addition, there can be
no assurance that IBM will continue to develop and market AS/400 products in the
future. See "Business -- Products."
Dependence on Emerging Market for Supply Chain Management Software. The
Company currently derives, and is expected to continue to derive, a substantial
portion of its revenue from licenses and services related to its supply chain
management software products, particularly E3TRIM, E3SLIM and E3CRISP. Although
demand for these products has grown in recent periods, the market for enterprise
software in general, and for supply chain management software in particular, is
still emerging and there can be no assurance that it will continue to grow or
that even if the market does grow, businesses will continue to adopt the
Company's products. The Company has spent, and intends to continue to spend,
considerable resources educating potential customers generally about supply
chain management, inventory management software solutions and, specifically, its
products. However, there can be no assurance that such expenditures will enable
the Company's product line to achieve any additional degree of market
acceptance. If the supply chain management software market fails to grow or
grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition could be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Products."
Ability to Manage Growth. In recent years, the Company has rapidly and
significantly expanded its overall operations, including expanding the
geographic scope of its operations. Furthermore, the Company anticipates that
significant additional expansion will be required to properly address potential
market opportunities. For example, the Company has increased its direct sales
force from 15 salespersons in 1996 to 38 salespersons as of March 31, 1998. The
Company anticipates that it will continue to significantly increase the size of
its sales and marketing, support, services and product development operations,
both domestically and internationally, following the completion of the Offering.
There can be no assurance that such expansion will be completed successfully or
that it will generate sufficient revenue to cover the Company's expenses or
produce operating margins at rates comparable to those historically achieved by
the Company.
In addition, the Company is currently in the process of implementing new
management information and accounting software and systems (the "MIS System").
The Company's ability to implement the MIS System, especially in view of the
broad geographic scope of the Company's operations, will place substantial
demands on certain of the Company's managerial resources. If the Company is
unable to implement the MIS System in a timely manner, the Company's ability to
generate consolidated financial reports on a timely basis and to forecast and
manage its business accurately, may be adversely affected. Furthermore, the
Company has recently begun the process of developing the management and support
capabilities necessary to support its anticipated growth. For example, in July
1997, the Company hired its current Chief Financial Officer, R. Lee Morris, and
subsequently has made other additions to management in an effort to manage and
support the expansion of
7
<PAGE> 9
the Company's product and service offerings and the scope of its operations. The
ability of the Company to manage its growth, if any, will depend in large part
on its ability to expand its management and support capabilities (both
domestically and internationally), to implement the MIS System throughout its
operations, to improve and expand its operational and sales and marketing
capabilities, to develop the management skills of its managers and supervisors,
and to train, motivate and manage both its existing and future employees. There
can be no assurance that the Company will succeed in achieving any of these
objectives and any failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business -- Sales and Marketing" and "Management."
Dependence on Key Executive; Ability to Hire and Retain Personnel. The
Company's success will depend in large part upon the continued availability of
the services of Anders H. Herlitz, the Company's Chairman and Chief Executive
Officer. The loss of the services of Mr. Herlitz could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company does not maintain key man insurance on the life of Mr. Herlitz.
The Company believes its future success and ability to achieve revenue
growth will depend in significant part upon its ability to identify, attract,
retain and motivate highly skilled management, technical, support, service,
sales and marketing personnel. In particular, the Company's ability to install,
maintain and enhance its products is substantially dependent upon its ability to
locate, hire, train and retain qualified technical consultants. The software
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. Competition for personnel in all of these areas
is intense, and recruiting such personnel is becoming increasingly difficult
worldwide. The Company has been forced from time to time to increase
compensation levels to attract and retain key personnel. In view of the critical
roles of the Company's product development and consulting staffs, the Company's
inability to recruit additional personnel to, or the loss of a significant part
of, these staffs, or the loss of one or more other key personnel could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
retain its key employees or that it will be successful in attracting,
assimilating and retaining additional key employees in the future. Furthermore,
there can be no assurance that compensation levels will not increase
significantly in the future in order to attract and retain key personnel. The
failure to attract, assimilate and retain key personnel on a cost-effective
basis could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Employees" and "Management."
Risks Associated with International Operations. The Company derived
approximately 27%, 35% and 30% of its total revenue for 1995, 1996 and 1997,
respectively, from international sales. The Company's products currently are
marketed in North America, Europe, South America and Australia, and the Company
has offices or representatives in ten locations worldwide. The Company's future
success and ability to achieve revenue growth will depend upon the continued
expansion of its international sales, support, service and marketing
organizations and its ability to establish indirect distribution channels,
including relationships with systems vendors, application software vendors and
systems integrators, in international markets. Such international expansion has
required, and will continue to require, the Company to establish additional
offices, to hire additional personnel and to extend its MIS System in
international markets, which in turn have required, and will increasingly
require, significant management attention and financial resources and could
adversely affect the Company's operating margins and ability to sustain
profitability. To the extent that the Company is unable to expand efficiently
and in a timely manner, its growth, if any, in international sales will be
limited, and as a result, the Company's business, operating results and
financial condition could be materially and adversely affected. Further, the
Company intends to continue to expand its international operations by increasing
the number of direct customer support personnel in existing markets and in
additional international markets. Accordingly, the Company's business, including
its ability to expand its operations internationally, is subject to the risks
inherent in international business activities, including, in particular, greater
difficulty in safeguarding its intellectual property, general economic
conditions in each country, foreign currency exchange rate fluctuations, overlap
of different tax structures, management of an organization spread over various
countries, unexpected changes in regulatory requirements, compliance with a
variety of foreign laws and regulations, and longer accounts receivable payment
cycles in certain countries. Other risks associated with
8
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international operations include import and export licensing requirements, trade
restrictions and changes in tariff rates. Any of the foregoing factors could
have a material adverse effect on the Company's ability to expand its
international operations which could materially and adversely affect the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."
Exposure to Currency Fluctuations. A significant portion of the Company's
business is conducted in currencies other than the U.S. dollar (the Company's
reporting currency). As a result, depreciation of the value of the other
currencies in which the Company generates revenue relative to the U.S. dollar
could adversely affect operating results. The consolidated financial statements
of the Company are translated from the functional currency of certain of its
operating subsidiaries into U.S. dollars utilizing the current rate method.
Accordingly, assets and liabilities are translated at exchange rates in effect
at the end of the reporting period, and revenue and expenses are translated at
the average exchange rate during the period. All translation gains or losses
from the translation into the Company's reporting currency are included under
comprehensive income as a separate component of shareholders' equity.
Fluctuations in other currencies relative to the U.S. dollar will affect
period-to-period comparisons of the Company's reported consolidated results of
operations. Moreover, as a result of the significant uncertainty concerning the
effects of the conversion of many Western European currencies to a single
currency, it is possible that the relative value of the currencies of
participating countries will be subject to extreme volatility during the
conversion process, which is currently scheduled to begin in 1999. Due to the
constantly changing currency exposures and the volatility of currency exchange
rates, there can be no assurance that the Company will not experience currency
losses in the future, nor can the Company predict the effect of exchange rate
fluctuations upon future operating results. The Company does not currently
undertake hedging transactions to cover its currency exposure, but the Company
may choose to hedge a portion of its currency exposure in the future as, and to
the extent that, the Company deems it appropriate to do so. Fluctuations in the
exchange rates of currencies in which the Company's business is conducted,
particularly to the extent that the Company's international sales increase as a
percentage of total sales, could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with Rapid Technological Advances; Necessity of Developing
New Products. The market for supply chain management software is subject to
rapid technological change, changing customer needs, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. As a result, the Company's position in this market could
be eroded rapidly by unforeseen changes in customer requirements for application
features, functions and technologies or increased competition. The Company's
growth and future operating results will depend in part upon its ability to
enhance existing applications and develop and introduce new applications that
meet or exceed technological advances in the marketplace, respond to changing
customer requirements, provide superior functions, features and performance than
that offered by competitors' products and achieve market acceptance. The
Company's product development and testing efforts have required, and are
expected to continue to require, substantial investments by the Company. There
can be no assurance the Company will continue to possess sufficient resources to
make necessary investments in technology. In addition, there can be no assurance
that the Company's products will meet the requirements of the marketplace and
achieve market acceptance or that the Company's current or future products will
conform to applicable industry standards, especially as such standards evolve.
If the Company is unable, for technological or other reasons, to develop and
introduce new and enhanced products in a timely manner, the Company's business,
operating results and financial condition likely would be materially and
adversely affected. See "Business -- Competition" and "-- Product Development
and Technology."
Lengthy Sales Cycle. The sale of the Company's products generally requires
the Company to provide a significant level of education to prospective customers
regarding the use and benefits of its supply chain management solutions.
Implementation of the Company's products involves a further commitment of
resources by the Company and the customer. For these and other reasons, the
length of time between the date of initial contact with a potential customer and
the ultimate sale of the Company's products typically ranges from three to nine
months and is subject to delays over which the Company may have little or no
control. In
9
<PAGE> 11
addition, as the average dollar size of the sale of the Company's products and
services increases, the Company expects the sales cycle to lengthen as
additional internal approval procedures often will be required by prospective
customers. Although the Company has significantly increased the size of its
direct sales force over the past year, it will need to continue hiring qualified
sales personnel, particularly as future sales cycles lengthen. Failure to
attract and retain such persons or delays in sales of the Company's products
could have a material adverse effect on the Company's business, operating
results and financial condition and exacerbate quarter-to-quarter fluctuations
in the Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations" and "Business -- Sales and Marketing."
Competition. The market for the Company's products is intensely
competitive, highly fragmented and subject to rapid change. Competitors include:
(i) enterprise resource application ("ERP") software vendors such as SAP AG,
PeopleSoft, Inc., Oracle Corporation and Baan Company N.V., each of which
currently offers ERP solutions that may incorporate supply chain management
modules or advanced planning and scheduling software; (ii) other suppliers of
advanced planning and scheduling software, including i2 Technologies Inc.,
Manugistics Group, Inc. and Logility Inc.; (iii) other business application
software vendors who may broaden their product offerings by internally
developing, or by acquiring or partnering with independent developers of,
advanced planning and scheduling software; (iv) internal development efforts by
corporate IT departments; and (v) companies offering standardized or customized
products for mainframe and/or mid-range computer systems. Increased competition
may result in reduced operating margins and loss of market share, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Many of the Company's competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and larger installed customer bases
than the Company. In order to be successful in the future, the Company must
continue to respond promptly and effectively to technological change and
competitors' innovations. There can be no assurance that current or potential
competitors of the Company will not develop products comparable or superior in
terms of price and performance to those developed by the Company. In addition,
no assurance can be given that the Company will not be required to make
substantial additional investments in connection with its product development,
sales and marketing, and customer service efforts in order to meet any
competitive threat, or that the Company will be able to compete successfully in
the future. Increased competition will result in reductions in market share,
pressure for price reductions and related reductions in gross margins, any of
which could materially and adversely affect the Company's business, operating
results and financial condition. There can be no assurance that in the future
the Company will be able to successfully compete against current and future
competitors and the failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business -- Competition."
Potential Liability to Clients. Many of the Company's solutions are
critical to the operations of its customers' businesses and provide benefits
that may be difficult to quantify. Any failure in a customer's system could
result in a claim for substantial damages against the Company, regardless of the
Company's responsibility for such failure. Although the Company attempts to
limit contractually its liability for damages arising from negligent acts,
errors, mistakes or omissions, there can be no assurance that the limitations of
liability set forth in its contracts will be enforceable in all instances or
would otherwise protect the Company from liability for damages. Although the
Company maintains general liability insurance coverage, including coverage for
product liability and errors or omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims or that the insurer will
not disclaim coverage as to any future claim. The successful assertion of one or
more large claims against the Company that exceed available insurance coverage
or changes in the Company's insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, could adversely
affect the Company's business, operating results and financial condition.
Based on the Company's assessment, all of its products have been designed
to be Year 2000 compliant. Although the Company has not been a party to any
litigation or arbitration proceeding to date involving its
10
<PAGE> 12
products or services there can be no assurance that the Company will not in the
future be required to defend claims related to its products or services in such
proceedings or to otherwise resolve claims based on Year 2000 issues. The costs
of defending and resolving Year 2000-related disputes, and any liability of the
Company for Year 2000-related damages, could have a material adverse effect on
the Company's business, operating results and financial condition.
Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Despite product
testing, the Company has in the past released new versions of its products with
defects that were discovered only after installation and use by customers. The
Company regularly introduces new releases and periodically introduces new
versions of its products. There can be no assurance that, despite testing by the
Company and by its customers, defects and errors will not be found in existing
products or in new products, releases, versions or enhancements after
commencement of commercial shipments. Any such defects and errors could result
in adverse customer reactions, negative publicity regarding the Company and its
products, harm to the Company's reputation, loss of or delay in market
acceptance, loss of revenue or require product changes, any of which could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Products."
Pricing of Consulting Services. The Company's consulting services
historically have been billed to customers on a time-and-materials basis. The
Company recently has developed pricing policies for its consulting services that
will result in an increasing portion of such services being provided on a
fixed-price basis, often at the request of its customers. Under fixed-price
arrangements, the Company will be required to provide services at the agreed
price regardless of the actual costs the Company may incur in rendering such
services. As a result, to the extent that actual costs exceed projected costs,
the Company's gross margins in performing such services will be adversely
affected, which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Services and
Support."
Intellectual Property Rights. The Company relies on a combination of
copyright, trade secret, trademark and trade dress laws, confidentiality
procedures and contractual provisions to protect its proprietary rights in its
products and technology. The Company generally enters into confidentiality
agreements with its employees, consultants, customers and potential customers
and limits access to, and distribution of, its proprietary information. The
Company maintains trademarks to identify the source of its products, development
tools and service offerings and relies upon trademark and trade dress laws to
protect its proprietary rights in these marks. The Company licenses its products
to its customers in object code format and restricts the customer's use to
internal purposes without the right to sublicense its products. However, the
Company believes that the foregoing measures afford only limited protection. In
connection with certain of its license agreements, the Company has established
in the past, and may continue to establish, escrows of the source code for its
licensed products with third parties for the benefit of its customers. There can
be no assurance that unauthorized use of the Company's source code for its
products will not occur as a result of these escrow arrangements. Despite the
Company's efforts to safeguard and maintain its proprietary rights both in the
United States and abroad, there can be no assurance that the Company will be
successful in doing so or that the steps taken by the Company in this regard
will be adequate to deter misappropriation or independent third-party
development of the Company's technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using the Company's products or
technology. In addition, 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 may currently be or
could become a problem.
As the number of supply chain management applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time consuming, result in costly litigation, diversion of
management's attention and cause product shipment delays or require the Company
to enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to the
Company, if at all,
11
<PAGE> 13
which could have a material adverse effect on the Company's business, operating
results and financial condition. Adverse determinations in such claims or
litigation also could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company may be subject to additional risks as it enters into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of the Company's rights may
be ineffective in such countries. Litigation to defend and enforce the Company's
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition, regardless of the final outcome of
such litigation. Despite the Company's efforts to safeguard and maintain its
proprietary rights both in the United States and abroad, there can be no
assurance that the Company will be successful in doing so, or that the steps
taken by the Company in this regard will be adequate to deter misappropriation
or independent third-party development of the Company's technology or to prevent
an unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any such events could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Proprietary Rights and Licenses."
Risks Associated with Strategic Relationships. A component of the
Company's strategy is to establish formal and informal relationships with third
parties to rapidly address the market opportunities for the Company's products.
These relationships, which are in the early stages of development, have been,
and will continue to be, primarily with consulting and systems integration firms
as well as ERP and other software providers. The establishment and maintenance
of these relationships involve a number of risks, including: (i) substantial
investment of the Company's resources in the relationship; (ii) potential
inability to realize the intended benefits of the relationship; (iii) increased
reliance on third parties; (iv) potential for payment of third-party license
fees or royalties for the incorporation of third-party technology into the
Company's products; and (v) inadvertent transfer of the Company's proprietary
technology to strategic "partners". In addition, ERP and other software
providers with whom the Company has or establishes relationships may have
products that are perceived to be competitive with the Company's products, which
could lessen the effectiveness of such relationships. These providers also often
have prior relationships or establish relationships with the Company's customers
and prospective customers and could leverage these relationships to cause
customers or prospective customers to cease using or to not purchase the
Company's products. There can be no assurance that the Company will be
successful in identifying and entering into strategic relationships, if at all,
and any inability to do so could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Strategy."
Risks Associated with Possible Acquisitions. The Company in the future may
engage in selective acquisitions of other businesses or technologies, including
other providers of supply chain management solutions or technology. While the
Company has in the past considered acquisition opportunities, it has never
acquired a significant business and, as of the date of this Prospectus, has no
existing agreements or commitments to effect any acquisition. Accordingly, there
can be no assurance that the Company will be able to identify suitable
acquisition candidates available for sale at reasonable prices, consummate any
acquisition or successfully integrate any acquired business into the Company's
operations. Further, acquisitions may involve a number of special risks,
including diversion of management's attention, failure to retain key acquired
personnel, unanticipated events or circumstances, legal liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, operating results and
financial condition. Problems with an acquired business could have a material
adverse impact on the performance of the Company as a whole. The Company may
elect to finance any future acquisitions with the proceeds of the Offering, as
well as with possible debt financing or through the issuance or sale of equity
securities (common or preferred stock), or any combination of the foregoing.
There can be no assurance that the Company will be able to arrange adequate
financing on acceptable terms. If the Company were to proceed with one or more
significant future acquisitions in which the consideration consisted of cash, a
substantial portion of the Company's available cash (including a portion of the
proceeds of the Offering) could be used to consummate the acquisitions. If the
Company were to consummate one or more significant acquisitions in which the
consideration consisted of stock, shareholders of the Company could suffer
dilution of their interests in the
12
<PAGE> 14
Company. Many business acquisitions must be accounted for using the purchase
method of accounting. Most of the businesses that might become attractive
acquisition candidates for the Company are likely to have significant intangible
assets, and acquisition of these businesses, if accounted for as a purchase,
would typically result in substantial goodwill amortization charges to the
Company, which would reduce future earnings. In addition, such acquisitions
could involve non-recurring acquisition-related charges, such as write-offs or
write-downs of acquired software development costs or other intangible items,
which could have a material adverse effect on the Company's operating results
for the quarter in which such charges occur. See "Business -- Strategy."
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish twenty-first century dates from twentieth
century dates. As a result, over the next two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. All
of the Company's products have been designed to be Year 2000 compliant. However,
there can be no assurance that the Company's software products that are designed
to be Year 2000 compliant contain all necessary date code changes. The cost for
complying with the Year 2000 requirements has been immaterial to the Company's
business, operating results and financial conditions.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Potential customers may also choose to defer purchasing Year
2000 compliant products until they believe it is absolutely necessary, thus
potentially resulting in stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including current customers of the Company, to
reevaluate their current software needs and as a result, switch to other systems
or suppliers. Finally, the Company's software may be integrated with a
customer's non-Year 2000 compliant system, which could lessen the effectiveness
of the Company's solutions. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition.
There can be no assurance that the Company's suppliers and other
constituents' products will not experience Year 2000 compliance difficulties, or
that such difficulties will not have a material adverse effect on the operation
of the Company's products and the Company's resulting business, financial
condition and results of operations.
Concentration of Control. Upon completion of the Offering, the Company's
directors and executive officers and affiliates will beneficially own
approximately % of the Company's outstanding Common Stock. As a result,
these shareholders will have the ability to elect the Company's directors and to
determine the outcome of corporate actions requiring shareholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change of control of the Company. See "Management" and "Principal and Selling
Shareholders."
In addition, the Offering will provide substantial benefits to current
shareholders of the Company, including directors and executive officers of the
Company. Consummation of the Offering is expected to (i) create a public market
for the Company's Common Stock; (ii) provide an opportunity for the Selling
Shareholders to register their shares of Common Stock for resale; and (iii)
allow current shareholders to realize appreciation in the value of the shares of
Common Stock presently held by them. See "Principal and Selling Shareholders"
and "Shares Eligible for Future Sale."
Broad Management Discretion as to Use of Proceeds. Substantially all of
the net proceeds to be received by the Company in connection with the Offering
will be allocated to working capital and available for general corporate
purposes. Accordingly, management will have broad discretion with respect to the
expenditure of
13
<PAGE> 15
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 working capital
requirements and general corporate purposes to which the funds will ultimately
be applied. See "Use of Proceeds."
Certain Anti-Takeover Provisions. Under the Company's Amended and Restated
Articles of Incorporation (the "Restated Articles"), the Board of Directors has
the authority to issue up to 50,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
the Preferred Stock without further vote or action by the Company's
shareholders. The rights and preferences of any series of such Preferred Stock
could include a preference over the Common Stock on the distribution of the
Company's assets upon a liquidation or sale of the Company, preferential
dividends, redemption rights, the right to elect one or more directors and other
voting rights. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of shares of
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, such issuance, while
providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. In addition, the Company's Restated Articles and Amended and Restated
Bylaws (the "Restated Bylaws") contain provisions that may discourage proposals
or bids to acquire the Company including provisions establishing a Board of
Directors with staggered, three-year terms, requiring supermajority voting to
effect certain amendments to the Restated Articles, limiting the persons who may
call special meetings of shareholders, and establishing advance notice
requirements for nominations for election to the Board of Directors or for
proposing matters that can be acted upon at shareholders' meetings. These
provisions could have the effect of making it more difficult for a third party
to acquire control of the Company. See "Description of Capital Stock -- Certain
Articles of Incorporation and Bylaw Provisions" and "-- Certain Provisions of
Georgia Law."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales may occur, could
adversely affect the prevailing market price of the Common Stock or the ability
of the Company to raise capital through a public offering of its equity
securities. Upon completion of the Offering, the Company will have outstanding
shares of Common Stock (not including shares issuable upon exercise of
outstanding stock options). Under agreements entered into between the
representatives of the Underwriters and each of the Company's officers,
directors, principal shareholders and their respective affiliates (the "Lock-Up
Agreements") who beneficially held in the aggregate shares of Common
Stock prior to the Offering, no shares held by such holders will be eligible for
sale in the public market for a period of 180 days following the date of this
Prospectus. The Company intends to file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), covering the sale of
Common Stock reserved for issuance under the Stock Incentive Plan. As of May 30,
1998, there were options outstanding to purchase an aggregate of 1,047,273
shares, and all shares acquired upon exercise of options within 180 days of the
Offering are or will be subject to Lock-Up Agreements. Following the expiration
of the 180-day term of the Lock-Up Agreements, shares, including the
shares offered hereby and shares which may be purchased upon the
exercise of options then exercisable, will be eligible for sale in the public
market subject, in some cases, to compliance with Rule 144 or Rule 701 under the
Securities Act. UBS Securities LLC in its sole discretion and at any time
without notice, may release all or any portion of the securities subject to the
Lock-Up Agreements. Any such decision to release securities would likely be
based upon individual shareholder circumstances, prevailing market conditions
and other relevant factors. Any such release could have a material effect upon
the price of the Common Stock. See "Underwriting".
No Prior Public Market for Common Stock; Possible Volatility of Stock
Price. Prior to the Offering, there has been no public market for the Common
Stock. Although the Company has made application for the quotation of the Common
Stock on the Nasdaq National Market, there can be no assurance that an active
trading market will develop or be sustained after the Offering. In the event the
Company fails to appoint an additional independent director within 90 days after
the Offering, the National Association of Securities Dealers, Inc. could
terminate the listing of the Common Stock on the Nasdaq National Market, which
would have a material adverse effect on the liquidity and trading price of the
Common Stock. See "Management -- Election of Directors."
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<PAGE> 16
The initial public offering price of the Common Stock offered hereby will
be determined by negotiation between the Company, the Selling Shareholders and
the Underwriters and may bear no relationship to the market price of the Common
Stock after the Offering. See "Underwriting."
The market price of the Common Stock could be subject to significant
fluctuations based on a number of factors, including the announcement of new
products, product enhancements or services by the Company or its competitors,
variations in quarterly operating results of the Company or of the Company's
competitors, changes in earnings estimates or recommendations by securities
analysts, developments in the Company's industry and in its customers'
industries, general market and economic conditions and other factors. In
addition, stock prices for many companies in the technology and emerging growth
sectors have experienced wide fluctuations which often have been unrelated to
the operating performance of such companies. Such factors and fluctuations may
adversely affect the market price of the Common Stock.
Dilution. The estimated initial public offering price is substantially
higher than the book value per share of the outstanding Common Stock. As a
result, the purchasers of the Common Stock offered hereby will experience
immediate and significant dilution of $ from the estimated initial
public offering price. In addition, the Company has issued options to purchase
Common Stock at prices below the estimated initial public offering price. To the
extent such outstanding options are exercised, there will be further dilution to
purchasers in the Offering. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered by the Company hereby are estimated to be approximately
$ million, assuming an initial public offering price of $ per share
and after deducting estimated underwriting discounts and commissions and
estimated expenses payable by the Company in connection with the Offering. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders.
The Company intends to use the net proceeds from the Offering primarily for
working capital and other general corporate purposes including possible
acquisitions. The Company has no specific agreements, commitments or
understandings with respect to any acquisition. The amounts actually expended
for each purpose may vary significantly and are subject to change at the
Company's discretion depending upon certain factors, including economic or
industry conditions, changes in the competitive environment and strategic
opportunities that may arise. In addition, the Company believes that it is in
its best interest to create a public market for the Company's Common Stock to
facilitate future access to public market funds and provide the availability of
a publicly-traded stock in the event the Company desires to utilize its shares
in connection with future acquisitions. The Company also anticipates that as the
result of being a publicly-traded company, it will receive increased visibility,
credibility and overall acceptance in the marketplace. Pending application of
the net proceeds as described above, the Company intends to invest the net
proceeds of the Offering in investment-grade, interest-bearing securities. See
"Risk Factors -- Broad Management Discretion as to Use of Proceeds" and
"Business -- Strategy."
DIVIDEND POLICY
The Company paid cash dividends to its shareholders in an aggregate amount
of approximately $304,000 in each of 1996 and 1997. Although the Company has
historically declared and paid cash dividends on its capital stock, the Company
does not intend to declare or pay any cash dividends in the foreseeable future.
Management anticipates that all future earnings and other cash resources of the
Company, if any, will be retained by the Company for investment in its business.
The payment of dividends is subject to the discretion of the Board of Directors
of the Company and will depend on the Company's results of operations, financial
position and capital requirements, general business conditions, restrictions
imposed by financing arrangements, if any, legal and regulatory restrictions on
the payment of dividends and other factors that the Company's Board of Directors
deems relevant.
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<PAGE> 17
CAPITALIZATION
The following table sets forth as of March 31, 1998: (i) the actual
capitalization of the Company; and (ii) such capitalization as adjusted to
reflect the issuance and sale by the Company of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, and the
application of the estimated net proceeds to the Company of the Offering. See
"Use of Proceeds." This table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, $.01 par value; Actual -- none authorized
or issued; As adjusted -- 50,000,000 shares authorized
and none issued........................................ $ -- $ --
Common stock, $.05 par value; Actual -- 50,000,000 shares
authorized, 15,649,350 shares issued; As
adjusted -- 100,000,000 shares authorized and
shares issued(1)....................................... 782
Retained earnings......................................... 7,054 7,054
Other comprehensive income (loss)......................... (186) (186)
------- -------
Total shareholders' equity........................ 7,650
------- -------
Total capitalization.............................. $ 7,650 $
======= =======
</TABLE>
- ---------------
(1) Excludes: (i) 3,000,000 shares of Common Stock reserved for issuance upon
the exercise of options granted under the Stock Incentive Plan, of which
options to purchase 898,919 shares were outstanding as of the date of this
Prospectus, at a weighted average exercise price of $10.00 per share; and
(ii) 148,354 shares of Common Stock presently reserved for issuance upon the
exercise of non-plan options outstanding as of the date of this Prospectus,
at a weighted average exercise price of $9.10 per share. See
"Management -- Stock Option and Other Compensation Plans."
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<PAGE> 18
DILUTION
As of March 31, 1998, the net tangible book value of the Company was
approximately $ , or $ per share of Common Stock. Net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of the
shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share and the application of the estimated
net proceeds therefrom, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, the net
tangible book value of the Company at March 31, 1998, would have been
approximately $ million, or $ per share of Common Stock. This
represents an immediate increase in such net tangible book value of $ per
share to existing shareholders and an immediate dilution of $ per share to
new investors. The following table illustrates this unaudited per share dilution
to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
-------
Net book value per share as of March 31, 1998............. $ 0.49
-------
Increase in net book value per share attributable to new
investors..............................................
-------
Adjusted net book value per share after the Offering........
=======
Dilution per share to new investors......................... $
-------
</TABLE>
The following table sets forth, as of March 31, 1998, the number of shares
of Common Stock previously issued by the Company, the total consideration paid
to the Company and the average price per share paid by the existing shareholders
and new investors, assuming the sale by the Company of shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, and before deducting the estimated underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
-------------------- ---------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)........... 15,649,350 % $4,118 % $ --
New investors......................
---------- ----- ------ -----
Total.................... 100.0% $ 100.0%
========== ===== ====== =====
</TABLE>
- ---------------
(1) Sales by the Selling Shareholders will reduce the number of shares held by
existing shareholders to , or % of the total shares of Common
Stock outstanding after the Offering, and will increase the number of shares
held by new investors to shares, or % of the total shares of
Common Stock outstanding after the Offering. Assuming full exercise of the
Underwriters' over-allotment option, the percentage of shares held by
existing shareholders would be % of the total number of shares of
Common Stock to be outstanding after the Offering, and the number of shares
held by new investors would be increased to shares, or % of
the total number of shares of Common Stock to be outstanding after the
Offering. See "Risk Factors -- Dilution," "Management" and "Principal and
Selling Shareholders."
Immediately following completion of the Offering, the Company will have (i)
898,919 shares of Common Stock issuable upon the exercise of outstanding options
granted under the Stock Incentive Plan at a weighted average exercise price of
$10.00 per share; and (ii) 148,354 shares of Common Stock issuable upon the
exercise of non-plan options outstanding at a weighted average exercise price of
$9.10 per share. The exercise of these options will result in further dilution
of new investors in the Offering.
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below is
qualified in its entirety by, and should be read in conjunction with, the
Consolidated Financial Statements of the Company, including the Notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The consolidated statement of
income data for the three months ended March 31, 1997 and the three months ended
March 31, 1998 and the consolidated balance sheet data as of March 31, 1998 are
derived from the Company's unaudited consolidated financial statements included
elsewhere in this Prospectus. The consolidated statement of income data for the
years ended December 31, 1995, 1996 and 1997, and the consolidated balance sheet
data as of December 31, 1996 and 1997, are derived from, and are qualified by
reference to, the consolidated financial statements included elsewhere in this
Prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The consolidated balance sheet data as of December 31, 1995 is derived from the
audited consolidated balance sheet not included herein. The consolidated
statements of income data for the years ended December 31, 1993 and 1994, and
the consolidated balance sheet data as of December 31, 1993 and 1994 are derived
from the Company's unaudited consolidated financial statements not included
herein. In the opinion of management, the unaudited consolidated financial
statements have been prepared on a basis consistent with the Consolidated
Financial Statements which appear elsewhere in the Prospectus, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial condition and results of operations of the
Company for the periods presented. Historical results are not necessarily
indicative of results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue:
Software license fees................... $ 4,827 $ 7,545 $ 11,199 $ 12,589 $ 14,519 $ 5,185 $ 4,107
Services and maintenance fees........... 2,340 3,576 5,044 7,200 10,342 2,351 3,392
------- ------- -------- -------- -------- ------- -------
Total revenue.................... 7,167 11,121 16,243 19,789 24,861 7,536 7,499
Expenses:
Cost of services and maintenance fees... 1,448 2,083 3,035 5,040 5,995 1,141 1,504
Sales and marketing..................... 2,124 3,283 3,684 4,862 7,469 1,711 2,291
General and administrative.............. 1,309 1,822 4,193 3,562 4,553 853 1,479
Product development..................... 1,171 1,760 2,414 2,587 3,171 678 718
------- ------- -------- -------- -------- ------- -------
Total expenses................... 6,052 8,948 13,326 16,051 21,188 4,383 5,992
------- ------- -------- -------- -------- ------- -------
Income from operations.................... 1,115 2,173 2,917 3,738 3,673 3,153 1,507
------- ------- -------- -------- -------- ------- -------
Interest income, net...................... 33 77 93 98 199 29 60
Other income (expense), net............... 11 59 23 7 (39) -- (53)
Provision for income taxes................ 302 1,060 975 1,582 1,575 1,308 621
------- ------- -------- -------- -------- ------- -------
Net income................................ $ 857 $ 1,249 $ 2,058 $ 2,261 $ 2,258 $ 1,874 $ 893
======= ======= ======== ======== ======== ======= =======
Net income per share -- basic and
diluted................................. $ 0.05 $ 0.08 $ 0.13 $ 0.14 $ 0.14 $ 0.12 $ 0.06
======= ======= ======== ======== ======== ======= =======
Shares used in computing net income per
share -- basic and diluted.............. 15,850 15,555 15,555 15,645 15,649 15,649 15,649
Cash dividends declared per common
share................................... $ -- $ 0.02 $ 0.04 $ 0.02 $ 0.02 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 1,484 $ 3,134 $ 3,453 $ 4,575 $ 7,318 $ 9,248
Working capital.................................... 629 1,529 2,404 3,911 5,573 6,318
Total assets....................................... 3,203 6,378 10,509 12,980 15,824 16,519
Long-term debt, net of current portion............. -- -- -- -- -- --
Shareholders' equity............................... 949 1,845 3,309 5,090 6,838 7,650
</TABLE>
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Certain statements in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements. Such forward-looking statements are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. For a more detailed discussion of these and other
business risks, see "Risk Factors."
OVERVIEW
E3 is a leading provider of inventory management software solutions
designed to help businesses make purchasing decisions that optimize inventory
levels and increase profitability. The Company's solutions are designed
primarily for businesses at the wholesale and retail segments of the supply
chain. The Company complements its software products with a range of services
that leverage its comprehensive buying process expertise. To date, substantially
all of the Company's revenue has been generated through its direct sales force
based in the United States and abroad. E3 has provided solutions to a broad
range of distributors, wholesalers and retail chains in the general retail;
pharmaceutical; general manufacturing; electrical, industrial and automotive
supply; food and food service; wine and spirits; and office supply industries,
among others. Founded in 1980, E3 has installed its systems at more than 600
customers in 16 countries. Customers include Ace Hardware, Best Buy, CVS
Pharmacy, Eckerd Drugs, Rubbermaid, Staples, The Sports Authority and Victoria's
Secret. In the United States, E3's customers include seven of the largest ten
drug wholesalers, five of the largest ten drug retailers, 22 of the largest 50
food service distributors, and eight of the largest 17 hardware wholesalers.
The Company was originally founded to provide consulting services in the
area of inventory management and introduced its first product, the forerunner to
E3TRIM, in 1984. In 1989, the Company founded the Inventory Management
Institute, Inc. ("IMI") to provide executives and professionals with education
and consulting services. In 1991, the Company introduced E3TRIM to address
replenishment and inventory management needs at the warehouse and distribution
center level. With the introduction of E3TRIM, the Company effectively
transformed its business from primarily a consulting-based company to that of a
software provider. In 1994, the Company introduced E3SLIM to address
replenishment and inventory management needs at the store level, and in 1995,
the Company introduced E3CRISP to provide a store-level replenishment and
inventory management system for manufacturers who offer inventory management
services to their customers. In 1997, the Company introduced ProfitTrack, an
Internet-based replenishment and inventory management system with functionality
similar to E3SLIM. Currently, the Company derives its revenue from the licensing
of its inventory management software and associated services. License revenue
consists primarily of sales of E3TRIM, E3SLIM and E3CRISP. In 1997, the Company
derived approximately 70% of its revenue from license fees and services
associated with E3TRIM. The Company's services revenue consists of maintenance
services, consulting, training and educational programs.
The Company licenses its software and provides maintenance under the terms
of a software license agreement. Accordingly, the Company recognizes license fee
revenue upon shipment of the software, and maintenance fee revenue is recognized
ratably over the term of the license. Typically, the Company's software license
agreements do not provide for any post-delivery obligations to be fulfilled by
the Company. Consulting, implementation and educational services are priced
separately and currently are provided under the terms of a separate agreement.
Revenue from consulting, implementation and educational services is recognized
at the time the services are provided. Through December 31, 1997, the Company
recognized revenue in accordance with AICPA Statement of Position 91-1.
Effective January 1, 1998, the Company has recognized revenue in accordance with
the provisions of the AICPA Statement of Position 97-2.
The Company's pricing model for its software licenses is value-based and,
in determining the initial license fee, takes into account factors such as: (i)
the customer's anticipated return on its investment in the product; and (ii) the
customer's vertical market, number of locations, dollar amount of inventory and
number
19
<PAGE> 21
of SKUs. In addition, all customers who license the Company's software are
required to pay an annual software maintenance fee typically equal to 15% of the
initial license fee and payable on a monthly basis. All customers are required
to pay this maintenance fee for as long as they continue to use the software.
All other service offerings are priced separately either by the day, event or
customer deliverable.
The Company's total revenue has increased every year since its inception.
As a percentage of total revenue, services and maintenance fees revenue
increased to 41.6% in 1997 from 36.4% in 1996. This primarily was due to a 49.7%
increase in recurring software maintenance fees and a 37.0% increase in other
services revenue, resulting primarily from the Company's recent focus on
increasing services revenue. Cost of revenue associated with the Company's
software revenue is immaterial and product development is treated as an
operating expense of the Company. Accordingly, the margins associated with
software license fee revenue are significantly higher than for services and
maintenance fees revenue. Although the mix between software license fee revenue
and services and maintenance fees revenue may change in the future depending
upon a number of factors, including the Company's planned continued expansion of
its services offerings, the Company believes that license fees will continue to
constitute the majority of its revenue for the foreseeable future.
In 1997, approximately 30% of the Company's total revenue was generated
from its international operations and the Company intends to continue to expand
its international operations. Accordingly, the percentage of international
revenue to total revenue may change in future periods depending upon a number of
factors, including the economic and political climate of the countries in which
the Company does business. The Company has experienced, and expects to continue
to experience, a high degree of seasonality with a disproportionate amount of
revenue and earnings being recognized in the first and fourth quarters. The
Company has in the past had a disproportionately low amount of its annual
revenue and earnings during its third quarter due, in large part, to the general
decline in business activity in Europe during the summer months. Because revenue
is typically greater in the fourth quarter, any shortfall from anticipated
fourth quarter revenue, particularly license fees, would have a
disproportionately large adverse effect on the Company's operating results for
the year.
The Company distributes its products and services primarily through its
direct sales force, although it plans to broaden its distribution channels in
the future. Currently, the Company has a presence, either through offices or
personnel, in ten countries, with seven offices and 55 personnel located in
these countries. The first international offices were established in Sweden and
Germany in 1991, and the Company has added offices in France, Italy, Norway and
the United Kingdom and also maintains a presence in Australia, the Netherlands
and Spain. The Company's international distribution strategy entails control by
the Company, through its wholly-owned subsidiaries, of the distribution for its
products rather than the use of third-party distributors. Sales to customers
located in Europe are generated through the Company's European offices and are
included in international revenues. Sales to customers located in Australia,
Canada and Latin America are generated through the Company's domestic operations
and are included in domestic revenues.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ -------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue:
Software license fees....................... 68.9% 63.6% 58.4% 68.8% 54.8%
Services and maintenance fees............... 31.1 36.4 41.6 31.2 45.2
----- ----- ----- ----- -----
Total revenue....................... 100.0 100.0 100.0 100.0 100.0
Expenses:
Cost of services and maintenance fees....... 18.7 25.5 24.1 15.1 20.0
Sales and marketing......................... 22.7 24.6 30.0 22.7 30.6
General and administrative.................. 25.8 18.0 18.3 11.3 19.7
Product development......................... 14.9 13.1 12.8 9.0 9.6
----- ----- ----- ----- -----
Total expenses...................... 82.1 81.2 85.2 58.1 79.9
----- ----- ----- ----- -----
Income from operations........................ 17.9 18.8 14.8 41.9 20.1
----- ----- ----- ----- -----
Interest income, net.......................... 0.6 0.5 0.8 0.4 0.8
Other income (expense), net................... 0.1 0.0 (0.2) -- (0.7)
Provision for income taxes.................... 6.0 8.0 6.3 17.4 8.3
----- ----- ----- ----- -----
Net income.................................... 12.6% 11.3% 9.1% 24.9% 11.9%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUE
Total revenue for the three months ended March 31, 1998 and the three
months ended March 31, 1997 was $7.5 million. Total revenue consists of software
license fees revenue and services and maintenance fees revenue. The Company's
international operations represented 22.7% and 25.9% of total revenue in the
three months ended March 31, 1998 and the three months ended March 31, 1997,
respectively.
Software license fee revenue was $4.1 million in the three months ended
March 31, 1998 as compared to $5.2 million in the three months ended March 31,
1997, representing a 20.8% decrease. Software license fee revenue consists of
revenue from the sale of the Company's software products. As a percentage of
total revenue, software license fee revenue was 54.8% of total revenue in the
first quarter of 1998 as compared to 68.8% of total revenue in the first quarter
of 1997. Software license fee revenue decreased primarily due to the Company
having a relatively higher license fee backlog at December 31, 1996 and a
substantial portion of such backlog not being recognized as revenue until the
first quarter of 1997. Conversely, the Company recognized a greater portion of
revenue during the fourth quarter of 1997, which reduced the amount of backlog
available for recognition in the first quarter of 1998.
Services and maintenance fees revenue consists of revenue from consulting,
implementation, customer education and recurring software maintenance fees, all
of which are associated with the licensing of the Company's software products.
Services and maintenance fees revenue increased 44.3% to $3.4 million in the
three months ended March 31, 1998 from $2.4 million in the three months ended
March 31, 1997. This increase in revenue resulted primarily from the Company's
level of service activity and a focused effort to increase billing for services.
As a percentage of total revenue, services and maintenance fees revenue
increased to 45.2% of total revenue in the first quarter of 1998 from 31.2% of
total revenue in the first quarter of 1997. Services and maintenance fees
revenue is primarily dependent upon the Company's ability to generate new
software licenses and is further affected by the size of such implementation
efforts and the rates charged for initial license fees and services rendered.
Recurring software maintenance revenue was $1.8 million in the first
21
<PAGE> 23
quarter of 1998 as compared to $1.3 million in the first quarter of 1997,
representing a 32.9% increase. Currently, all customers licensing software from
the Company are required to pay software maintenance fees for as long as they
use the software.
COST OF REVENUE
The Company's cost of license fees consists of the cost of printing the
software documentation and the tangible media used to deliver the software.
Accordingly, the cost of license fee revenue is not material. Cost of services
and maintenance fees revenue was $1.5 million in the first quarter of 1998 as
compared to $1.1 million in the first quarter of 1997, representing a 31.8%
increase. The Company's cost of services and maintenance fees revenue includes
the cost of personnel and related facility and equipment costs incurred in
providing consulting, implementation, customer education and software
maintenance and support to its customers. As a percentage of related services
and maintenance fees revenue, such costs represented 44.3% of the related
revenue in the first quarter of 1998 and 48.5% of the related revenue in the
comparable period in 1997, representing a 4.2% decrease. The resulting improved
margins principally were due to continued growth in recurring maintenance fees,
which have a disproportionately lower cost than that of implementation,
consulting and educational services.
SALES AND MARKETING
Sales and marketing expenses were $2.3 million in the three months ended
March 31, 1998 as compared to $1.7 million in the three months ended March 31,
1997, representing a 33.9% increase. Sales and marketing expenses include
personnel costs, sales commissions, facilities-related costs, travel,
promotional events such as trade shows and conferences, advertising and public
relations programs. The increase in sales and marketing expenses during the
first quarter of 1998 as compared to the first quarter of 1997 primarily was due
to an increase in marketing and direct sales personnel, including the
establishment of a full-time telemarketing staff and the expansion of a
comprehensive advertising and public relations program designed to increase the
Company's exposure in the marketplace. Expansion of the Company's sales and
marketing resources is intended to position the Company for planned growth. The
Company believes that the dollar amount of sales and marketing expenses will
continue to increase, but is not expected to vary significantly as a percentage
of total revenue as compared to the fiscal year 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.5 million in the three months
ended March 31, 1998 as compared to $853,000 in the three months ended March 31,
1997, representing a 73.4% increase. General and administrative expenses include
the personnel and other costs associated with the administrative, finance, human
resource, internal systems, professional fees and executive departments of the
Company. The increase in general and administrative expenses during the quarter
ended March 31, 1998 as compared to the same quarter of 1997 was principally
related to the increase in personnel and personnel-related costs associated with
the growth of the Company's business and increased legal and accounting
expenses.
PRODUCT DEVELOPMENT
Product development expenses were $718,000 in the three months ended March
31, 1998 as compared to $678,000 in the three months ended March 31, 1997,
representing a 5.9% increase. Product development expenses include the
personnel, personnel-related costs and development tools associated with the
research, development, testing and documentation of the Company's software
product research and development efforts, certain of which efforts have resulted
in software products that have been marketed by the Company. The Company expects
product development costs to increase as the Company continues to invest in
developing new and improved software products; however, as a percentage of total
revenue, such costs (including the costs associated with the porting of the
Company's products to additional platforms) are not expected to vary
significantly as compared to the fiscal year 1997.
22
<PAGE> 24
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized until
the product is available for general release. To date, the establishment of
technological feasibility and the general release of the Company's software
products have generally coincided. Accordingly, software development costs
qualifying for capitalization were insignificant, and therefore, not
capitalized.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $621,000 for the first quarter
of 1998 as compared to $1.3 million in the first quarter of 1997, representing
no change in the Company's effective tax rate of approximately 41%. The
Company's overall effective tax rate is generally higher than that of its
domestic operations principally due to higher tax rates being imposed on certain
of its foreign operations and the non-deductibility of certain domestic
expenses. The Company anticipates that its effective tax rate will continue to
be higher than that of a comparable domestic operation as a result of the tax
rates imposed by certain foreign tax authorities.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE
Total revenue increased to $24.9 million in 1997 from $19.8 million in
1996, representing a 25.6% increase. Total revenue increased primarily due to
continued growth in the number and size of software licenses entered into and
implemented and due to increased recurring maintenance fees and other services
revenue. The Company's international operations represented approximately 30%
and approximately 35% of total revenue in 1997 and 1996, respectively.
Software license fee revenue increased to $14.5 million in 1997 from $12.6
million in 1996, representing a 15.3% increase. Software license fee revenue
increased primarily due to increases in the amount and size of the Company's
domestic software licensing activities. As a percentage of total revenue,
software license fee revenue decreased to 58.4% in 1997 from 63.6% in 1996.
Services and maintenance fees revenue increased to $10.3 million in 1997
from $7.2 million in 1996, representing a 43.6% increase. This increase resulted
primarily from increased service activities related to the overall increase in
the number of customers and the Company's focus on increasing its services
revenue. Recurring maintenance fees also contributed to the increase in services
and maintenance fees revenue, increasing to $5.6 million in 1997 from $3.8
million in 1996, representing a 49.7% increase. Increased recurring maintenance
fees resulted from an increase in customer license installations in 1997. As a
percentage of total revenue, services and maintenance fees revenue increased to
41.6% of total revenue in 1997 from 36.4% in 1996.
COST OF REVENUE
Cost of revenue, which consists almost entirely of cost of services and
maintenance fees revenue, increased to $6.0 million in 1997 from $5.0 million in
1996, representing an 18.9% increase. As a percentage of related services and
maintenance fees revenue, such costs represented 58.0% of services and
maintenance fees revenue in 1997, decreasing from 70.0% in 1996. The resulting
improvement in margins was due principally to continued growth in revenue from
the Company's recurring software maintenance fees, which have a
disproportionately lower cost than that associated with implementation,
consulting and educational services.
SALES AND MARKETING
Sales and marketing expenses increased to $7.5 million in 1997 from $4.9
million in 1996, representing a 53.6% increase. Sales and marketing expenses
represented 30.0% of total revenue in 1997 and 24.6% in 1996. The increase in
sales and marketing expenses was primarily due to an increase in the number of
marketing and direct sales personnel from 15 as of December 31, 1996 to 33 as of
December 31, 1997, including the
23
<PAGE> 25
establishment of five full-time telemarketing positions and the continuation of
a comprehensive advertising and public relations program designed to increase
the Company's exposure in the marketplace.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4.6 million in 1997 from
$3.6 million in 1996, representing a 27.8% increase. General and administrative
expenses represented approximately 18% of total revenue in both 1997 and 1996.
The increase in general and administrative expenses during 1997 was principally
related to management incentive compensation earned in 1997 of approximately
$700,000 and an increase in personnel and personnel-related costs associated
with the growth of the Company's business.
PRODUCT DEVELOPMENT
Product development expenses increased to $3.2 million in 1997 from $2.6
million in 1996, representing a 22.6% increase. The Company's product
development expenses represented approximately 13% of total revenue in each such
year. The increase in product development expenses during 1997 was principally
related to increased personnel and personnel-related costs associated with the
Company's continuing efforts to improve and expand its software product
offerings.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of approximately $1.6 million for
each of 1997 and 1996, which represented an effective tax rate of 41% in each
year. The Company's overall effective tax rate is generally higher than that of
its domestic operations principally due to higher tax rates being imposed on
certain of its foreign operations and the non-deductibility of certain domestic
expenses. The Company anticipates that its effective tax rate will continue to
be higher than that of a comparable domestic operation.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
Total revenue increased to $19.8 million in 1996 from $16.2 million in
1995, representing a 21.8% increase. Total revenue increased primarily due to
growth in the number and size of software licenses. The Company's international
operations represented approximately 35% and approximately 27% of total revenue
in 1996 and 1995, respectively.
Software license fee revenue increased to $12.6 million in 1996 from $11.2
million in 1995, representing a 12.4% increase, primarily due to growth in the
Company's international operations. As a percentage of total revenue, software
license fee revenue decreased to 63.6% of total revenue in 1996 from 68.9% of
total revenue in 1995.
Services and maintenance fees revenue increased to $7.2 million in 1996
from $5.0 million in 1995, representing a 42.7% increase. Revenue from
consulting and implementation services increased to $3.4 million from $2.8
million, a 21.4% increase, while recurring software maintenance fees increased
to $3.8 million in 1996 from $2.2 million in 1995, representing a 67.5%
increase, which resulted primarily from the increase in the total number of
customers. As a percentage of total revenue, services and maintenance fees
revenue increased to 36.4% of total revenue in 1996 from 31.1% of total revenue
in 1995.
COST OF REVENUE
Cost of services and maintenance fee revenue increased to $5.0 million in
1996 from $3.0 million in 1995, representing a 66.1% increase. As a percentage
of related services and maintenance fees revenue, such costs represented 70.0%
of services and maintenance fees revenue in 1996 and 60.2% in 1995. The
decreased margin was generally related to the Company's hiring of additional
consulting and implementation personnel as part of the Company's planned growth
strategy.
24
<PAGE> 26
SALES AND MARKETING
Sales and marketing expenses increased to $4.9 million in 1996 from $3.7
million in 1995, representing a 32.0% increase. The increase in sales and
marketing expenses was primarily due to an increase in marketing and direct
sales personnel and the initiation of a comprehensive advertising and public
relations program designed to increase the Company's exposure in the
marketplace.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $3.6 million in 1996 from
$4.2 million in 1995, representing a 15.0% decrease. The decrease in general and
administrative expenses during 1996 was principally related to management
incentives earned in 1995 that were not offered in 1996, offset to some extent
by modest increases in other general and administrative expenses. As a
percentage of total revenue, general and administrative expenses decreased to
18.0% of revenue in 1996 from 25.8% in 1995.
PRODUCT DEVELOPMENT
Product development expenses increased to $2.6 million in 1996 from $2.4
million in 1995, representing an 7.2% increase. The Company's product
development expenses represented 13.1% and 14.9% of total revenue in 1996 and
1995, respectively. The increase in product development expenses during 1996 was
due to increased personnel and personnel-related costs associated with the
Company's continuing efforts to improve and expand its software product
offerings.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $1.6 million for 1996 and
$975,000 for 1995. The increase in income tax expense was the result of
increased earnings and an increase in the Company's effective tax rate to 41.2%
in 1996 from 32.1% in 1995. The Company's effective tax rate for 1996 was
substantially higher than 1995 primarily due to the Company recognizing the
benefit of foreign net operating loss carryforwards during 1995 and, to a lesser
extent, from the non-deductibility of certain domestic expenses and higher
effective tax rates in certain foreign countries.
25
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
income data for each of the Company's last nine fiscal quarters, as well as the
percentage of the Company's total revenue represented by each item. The
information has been derived from the Company's unaudited Consolidated Financial
Statements. The unaudited Consolidated Financial Statements have been prepared
on substantially the same basis as the audited Consolidated Financial Statements
contained herein and all adjustments, consisting only of normal recurring
adjustments, that the Company considers to be necessary to present fairly this
information when read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto appearing elsewhere herein. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software license fees...... $ 3,501 $ 3,261 $ 1,939 $ 3,888 $ 5,185 $ 2,533 $ 2,193 $ 4,608 $ 4,107
Services and maintenance
fees..................... 1,608 1,769 1,715 2,108 2,351 2,439 2,603 2,949 3,392
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 5,109 5,030 3,654 5,996 7,536 4,972 4,796 7,557 7,499
Expenses:
Cost of services and
maintenance fees......... 1,029 1,125 1,147 1,739 1,141 1,268 1,522 2,065 1,504
Sales and marketing........ 993 1,137 1,102 1,630 1,711 1,694 1,706 2,358 2,291
General and
administrative........... 609 785 792 1,376 853 698 898 2,104 1,479
Product development........ 534 589 583 881 678 677 829 987 718
------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses....... 3,165 3,636 3,624 5,626 4,383 4,337 4,955 7,514 5,992
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 1,944 1,394 30 370 3,153 635 (159) 43 1,507
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest income, net......... 17 18 26 37 29 45 53 74 60
Other income (expense),
net........................ 2 -- -- 5 -- -- -- (40) (53)
Provision for (benefit from)
income taxes............... 808 582 23 169 1,308 279 (44) 32 621
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $ 1,155 $ 830 $ 33 $ 243 $ 1,874 $ 401 $ (62) $ 45 $ 893
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share -- basic and
diluted.................... $ 0.07 $ 0.05 $ -- $ 0.02 $ 0.12 $ 0.03 $ -- $ -- $ 0.06
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software license fees...... 68.5% 64.8% 53.1% 64.8% 68.8% 50.9% 45.7% 61.0% 54.8%
Services and maintenance
fees..................... 31.5 35.2 46.9 35.2 31.2 49.1 54.3 39.0 45.2
------- ----- ----- ----- ----- ----- ----- ----- -----
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Expenses:
Cost of services and
maintenance fees......... 20.1 22.4 31.4 29.0 15.1 25.5 31.7 27.3 20.0
Sales and marketing........ 19.4 22.6 30.2 27.2 22.7 34.1 35.6 31.2 30.6
General and
administrative........... 11.9 15.6 21.7 23.0 11.3 14.0 18.7 27.8 19.7
Product development........ 10.5 11.7 16.0 14.7 9.0 13.6 17.3 13.1 9.6
------- ----- ----- ----- ----- ----- ----- ----- -----
Total expenses....... 61.9 72.3 99.2 93.9 58.1 87.2 103.3 99.4 79.9
------- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................. 38.1 27.7 0.8 6.1 41.9 12.8 (3.3) 0.6 20.1
------- ----- ----- ----- ----- ----- ----- ----- -----
Interest income, net......... 0.4 0.4 0.7 0.6 0.4 0.9 1.1 1.0 0.8
Other income (expense),
net........................ -- -- -- 0.1 -- -- -- (0.5) (0.7)
Provision for (benefit from)
income taxes............... 15.8 11.6 0.6 2.8 17.4 5.6 (0.9) 0.4 8.3
------- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............ 22.7% 16.5% 0.9% 4.0% 24.9% 8.1% (1.3)% 0.7% 11.9%
======= ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's operations, revenue and operating results have varied in the
past, and are expected to vary in the future, substantially from quarter to
quarter. Among the factors causing these potential variations are fluctuations
in the demand for the Company's products, the level of product and price
competition in the Company's markets, the length of the Company's sales cycle,
the size and timing of individual transactions, the mix of products and services
sold, delays in or cancellations of customer implementations, the timing of new
product introductions and enhancements by the Company or its competitors, the
Company's ability to
26
<PAGE> 28
attract and retain key technical, sales and managerial personnel, the ratio of
international to domestic sales, commercial strategies adopted by competitors,
changes in foreign currency exchange rates, customers' budget constraints, the
Company's ability to control costs and general economic conditions. In addition,
the Company has in the past, and may in the future, provide a customer with a
right to receive a full refund of the license fees paid if such customer is
dissatisfied with the Company's product in the period following installation
(typically up to 90 days). The grant of such a right may have the effect of
delaying the Company's recognition of revenue from such license fee. In
addition, in each year in which the Company paid bonuses to certain executive
officers, such bonuses were based on year-end operating results and were paid in
the fourth quarter, which has resulted in substantially increased general and
administrative expenses for such periods. As a result of the foregoing factors,
comparisons of future operating results with prior periods should not be relied
upon as indicators of actual performance in such periods. The Company
establishes its expenditure levels for consulting, product development, sales
and marketing and other operating expenses based, in large part, on its expected
future revenue. Furthermore, since software license sales are typically
accompanied by a significant amount of consulting, implementation and support
services, the Company's consulting and support resources must be managed to meet
anticipated software license fee revenue. As a result, any unexpected decline in
software license fee revenue is likely to adversely and disproportionately
affect operating results and net income because only a small portion of the
Company's expenses vary with its revenue. Based upon all of the foregoing, the
Company believes that its quarterly and annual revenue, expenses and operating
results are likely to vary significantly in the future and that period-to-period
comparisons of its operating results are not necessarily meaningful. As a
result, the Company's operating results for any particular quarter may be below
the expectations of securities analysts and investors, which could materially
and adversely affect the market price of the Company's Common Stock.
The Company's quarterly operating results are also subject to certain
seasonal fluctuations. The Company's revenue, particularly its software license
fee revenue, and operating results are typically strongest in the first and
fourth quarter and weakest in the third quarter. The Company's revenue and
operating results for the first quarter typically benefit from customers making
corporate IT purchasing decisions early in the budget year. The Company's
revenue and operating results for the fourth quarter typically benefit from the
efforts of the Company's sales force to meet year-end sales quotas and the
tendency for IT departments to spend the remaining portion of IT budgets prior
to year-end. The Company experiences lower sales levels in the third quarter,
due in large part to the general decline in business activity in Europe during
the summer months. See "Risk Factors -- Potential Variability of Quarterly
Operating Results and Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations using cash generated
entirely from operations. Cash provided from operations during the three months
ended March 31, 1998 and the years ended December 31, 1997 and 1996 was $2.2,
$3.8 and $2.0 million, respectively. The cash generated from operations in these
periods was used principally to provide working capital to support the Company's
operations. The Company also utilized cash to purchase furniture and equipment
during the three months ended March 31, 1998 and the years ended December 31,
1997 and 1996 of approximately $149,000, $635,000 and $612,000, respectively. In
addition, the Company paid dividends to its shareholders of approximately
$77,000, $300,000 and $300,000 during the three months ended March 31, 1998 and
the years ended December 31, 1997 and 1996, respectively. As a result of the
Company's continued profitable operations, cash reserves increased to $9.2
million as of March 31, 1998 from $7.3 million at December 31, 1997. The
provision for doubtful accounts for the year ended December 31, 1997 was
$400,000 as compared to $42,453 for the year ended December 31, 1996. The
increase in the provision for doubtful accounts in 1997 as compared to 1996 was
due to the increase in overall business volume during 1997 and the
identification of certain customer accounts for which the Company believed that
collection was doubtful. The Company does not have a debt facility.
Substantially all of the Company's international business is conducted in
functional currencies other than the U.S. dollar (the currency in which its
consolidated financial statements are stated). As a result, depreciation in the
value of the other currencies in which the Company generates revenue relative to
the U.S. dollar could adversely affect operating results. Historically currency
fluctuations have not materially affected the results of
27
<PAGE> 29
operations; however, due to constantly changing currency exposures there can be
no assurance that the Company will not experience currency losses in the future,
nor can the Company predict the effect of exchange rate fluctuations upon future
operating results. The Company does not currently undertake hedging transactions
to cover its currency exposure. At March 31, 1998, the total assets and net
assets of the Company which were denominated in currencies other than the U.S.
dollar were $6.4 million and $3.2 million, respectively, after elimination of
intercompany amounts. Such amounts were denominated principally in the
functional currencies of the United Kingdom, Germany, France and Sweden.
The Company believes that its existing liquidity and capital resources,
including the proceeds resulting from the sale of its Common Stock in the
Offering, together with cash generated from operations during 1998, will be
sufficient to satisfy its cash requirements for the next twelve months. To the
extent that such amounts are insufficient, the Company will be required to raise
additional funds through equity or debt financing. There can be no assurance
that the Company will be able to raise these additional funds on terms
acceptable to the Company, or at all.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 is designed
to improve the reporting of changes in equity from period to period. The Company
adopted SFAS No. 130, as applicable, effective for the quarter ended March 31,
1998. In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 requires that an enterprise disclose certain
information about operating segments. The Company intends to adopt SFAS No. 131
for its annual reporting period ending December 31, 1998. In October 1997, the
American Institute of Certified Public Accountants issued Statement of Position
97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 supersedes SOP 91-1,
and is effective for the Company beginning after December 15, 1997. The Company
adopted SOP 97-2 as required for transactions entered into beginning January 1,
1998.
The Company's management does not believe that the adoption of these
pronouncements has had or will have a material impact on the Company's financial
position or results of operations.
28
<PAGE> 30
BUSINESS
OVERVIEW
E3 is a leading provider of inventory management software solutions
designed to help businesses make purchasing decisions that optimize inventory
levels to maximize profitability and that are aimed predominantly at the
wholesale and retail segments of the supply chain. The Company complements its
software products with a range of services that leverage its comprehensive
buying process expertise. To date, substantially all of the Company's revenue
has been generated through its direct sales force based in the United States and
abroad. E3 has provided solutions to a broad range of distributors, wholesalers
and retail chains in the general retail; pharmaceutical; general manufacturing;
electrical, industrial and automotive supply; food and food service; wine and
spirits; and office supply, among others. Founded in 1980, E3 has installed its
systems at more than 600 customers in 16 countries. Customers include Ace
Hardware, Best Buy, CVS Pharmacy, Eckerd Drugs, Rubbermaid, Staples, The Sports
Authority and Victoria's Secret. In the United States, E3's customers include
seven of the largest ten drug wholesalers, five of the largest ten drug
retailers, 22 of the largest 50 food service distributors, and eight of the
largest 17 hardware wholesalers.
INDUSTRY BACKGROUND
The Need for Inventory Management
Today's increasingly competitive business environment has forced
manufacturers, distributors and retailers to change their business practices. In
the past, manufacturers were often able to dictate the flow of goods to market,
moderating how and when they produced goods in order to increase the efficiency
of their operations. Recently, however, there has been a fundamental shift in
market power from manufacturers to retailers and consumers. This shift has
resulted from the convergence of a number of trends, including the rapid
proliferation of product offerings, shorter product life cycles, the emergence
of more informed consumers demanding higher service levels, wider product
assortment with greater availability, and the evolution of the retail industry
from local stores to large national and regional chains. These trends have had a
profound effect on the supply chain, which consists of the flow of goods from
suppliers to manufacturers, then to wholesalers and warehouses, next to
distributors and retailers, and ultimately, to the consumer. The competitive
nature of today's end markets requires retailers and wholesalers to effectively
manage their supply chains in order to provide their customers with the right
products, at the right price, and at the precise time and place they are needed.
In today's volatile, customer-driven markets, businesses must reengineer
their supply chain processes to improve customer service and maximize
profitability. In particular, many retailers and wholesalers need to manage
their inventories more profitably in order to remain competitive. Inventory is
typically the largest asset on retailers' balance sheets and generally
represents over 70% of the assets in a distribution business. A business'
ability to manage the timing, cost and selection of its inventory assets has an
enormous impact on its profitability. As customers demand higher service levels
and greater responsiveness from retailers, purchasing and inventory
replenishment is increasingly becoming a core investment activity for
businesses. Poor inventory management places businesses at a competitive
disadvantage. Out-of-stock products result in lost sales, while excess inventory
levels increase operating costs and limit the ability of businesses to respond
to changing market demands. As a result of the need to optimally manage
inventory, businesses have increasingly turned to IT solutions to help them
achieve this objective.
A number of recent developments has further accelerated demand for
inventory management systems. Greater competitiveness among retailers has led to
significantly higher spending levels in their IT budgets. In addition, computing
power and database management technology have advanced sufficiently to permit
sophisticated analysis to be performed cost-effectively on large amounts of
data. Moreover, the proliferation of distributed public and private networks,
such as the Internet, has enabled organizations to easily and cost-effectively
link their IT environments with customers, suppliers and business partners.
29
<PAGE> 31
Inventory Management Challenges
Historically, retailers and distributors have lacked sufficient solutions
to optimally manage their inventories. The available options for inventory
management have included ERP systems, supply chain management ("SCM") software,
internal legacy systems and first generation inventory management software. ERP
systems traditionally have focused on controlling inventory levels, rather than
on optimally managing inventory and, as a result, generally do not possess the
forecasting, planning and scheduling functionality necessary to optimize
inventory management. The demand for SCM software initially came from
manufacturers. Consequently, most providers of SCM software have developed
products to address the needs of manufacturers, without focusing on the
particular needs of distributors, wholesalers and retailers. Legacy systems and
first generation inventory management software do not possess decision-support,
automation and "what-if" analysis capabilities. While legacy and first
generation systems may increase inventory turns, they generally do not optimize
inventory levels or maximize profitability and typically do not enable companies
to take advantage of special supplier discounts and promotions, forward-buying
opportunities, and economic buying cycles. Gartner Group estimates that the vast
majority of these legacy systems will need to be replaced by next-generation
inventory management systems.
As a result of these recent trends, a significant need has developed for
optimized inventory management solutions that: (i) not only track inventory
levels but also measure and improve inventory profitability; (ii) provide
sophisticated decision-support tools combined with simulation capabilities that
analyze numerous purchasing factors, such as demand patterns, purchasing costs,
the receipt and management of inventory, vendor pricing and discounts, and
forecasted demand; (iii) respond to changing business factors by automatically
recommending the optimal purchasing decisions; and (iv) enable companies to
manage millions of SKUs over broad geographic regions with many stores and
distributed users. Finally, the solutions should be easy to implement, use and
maintain.
E3 SOLUTIONS
E3 is a leading provider of inventory management software solutions
designed to help businesses make purchasing decisions that optimize inventory
levels and increase profitability. The Company's solutions are designed
primarily for businesses in the wholesale and retail levels of the supply chain.
The solutions address the complex requirements of inventory management by
factoring in forward-buying and alternate-buying opportunities, while minimizing
the required inventory levels needed to meet pre-established customer service
objectives. The Company's solutions are based on a comprehensive suite of
software modules, including demand forecasting, lead time forecasting, order
policy analysis, service level analysis, replenishment analysis, investment
analysis and order validity analysis. The Company complements its software
products with consulting and educational services that help customers maximize
profitability through the use of the Company's proprietary inventory management
software and techniques. Key features and benefits of the Company's solutions
include the following:
Advanced Decision-Making Capabilities. The Company's solutions employ
sophisticated inventory management techniques, such as forward buying,
scientific demand forecasting and economic analysis, to determine optimal
inventory levels. Advanced simulation capabilities allow the end-user to
perform "what-if" analyses to determine the impact of various purchasing
decisions on the bottom line. In addition, the end-user can factor in
certain external variables such as seasonality, pricing changes, competing
promotions, store locations and customer demographics to optimize inventory
management decisions, including inventory purchasing, allocation and
disbursement. These solutions are designed to simplify complex purchasing
and inventory management decisions in order to maximize profitability.
Automated Purchasing Process. The Company's solutions automatically
generate recommended order quantities that take into account lead times,
lead time variability, order cycles, demand forecasts, seasonality, vendor
price brackets and costs of acquiring and carrying inventory. By automating
routine order cycles and prompting users when purchasing should take place,
the Company's solutions permit buyers to work on more profit-oriented
activities such as trend analysis, supplier negotiation, product mix
review, inventory exception management and market research. With the
purchasing process more
30
<PAGE> 32
automated, buyers can allocate more time to the management of a greater
number of products and vendor relationships, which can further reduce costs
and bolster revenue.
Optimized Service Levels. The Company's solutions are designed to
reduce lost sales and improve customer service by minimizing out-of-stock
inventory, balancing inventory to deliver more consistent order fill rates
and enhancing an organization's ability to respond to rapidly changing
customer demands. The Company's solutions allow users to perform
sensitivity analyses on various service levels to determine the most
appropriate service level based on the resulting impact on profitability.
This enables users to maximize profitability by balancing the revenue
potential and carrying costs associated with the inventory needed to
maintain pre-established service levels.
Complementary Service Offerings. The Company believes that successful
inventory management involves more than just software solutions and the
mechanization of manual procedures. A core understanding of the principles
of inventory management is also important for realizing the maximum benefit
from the Company's solutions. As a result, the Company offers a series of
consulting and educational services that are designed to complement its
product offerings by training end users in "best-practices" for inventory
management. The Company has established an educational institution, the
Inventory Management Institute ("IMI"), that focuses on studying and
developing advanced techniques for inventory management, and communicating
these findings to its end-users through course work and seminars.
Rapid Implementation and Return on Investment. E3's products can be
implemented within a few months and are designed to integrate easily with
existing enterprise systems with minimal disruption to customers' existing
IT environments. The Company's software has been designed in a modular
manner, thereby allowing customers to purchase only their desired functions
and add more modules as their needs evolve and expand. In addition, E3's
products feature highly intuitive and easy-to-use graphical interfaces and
user screens, enabling users to rapidly and efficiently perform purchasing
activities with minimal training. Because customers typically are able to
rapidly implement the Company's software and to quickly affect overall
profitability, the Company believes that its customers are able to obtain
rapid payback and significant return on investment within a few months of
implementation.
STRATEGY
The Company intends to maintain its leadership position in the inventory
management market by continuing to provide comprehensive and advanced
applications that allow customers to optimize inventory management. Key elements
of the Company's strategy include:
Maintain and Enhance Technology Leadership. The Company seeks to
maintain its leadership position by continuing to provide innovative
inventory management solutions that encompass leading-edge technology,
proprietary methodologies and comprehensive services and education. The
Company believes that its knowledge and expertise in inventory management
systems aimed at optimizing profitability provides a significant
competitive advantage. The Company will seek to continue to enhance the
functionality of its existing products, introduce new products to meet
emerging market needs and expand the breadth of its services offerings.
Expand Product Offerings and Target New Market Opportunities. The
Company intends to leverage its significant experience in inventory
management and its expertise in advanced software technology to expand the
scope of its products to address the smaller retail markets as well as the
market needs of very large retail chains. In early 1998, the Company
introduced ProfitTrack, an Internet-based service that provides outsourced
inventory management for independent vendors and small retail chains. In
addition, E3 intends to develop industry-specific functionality and
features to address other vertical markets, such as hospitality, healthcare
and retail food, which the Company believes are characterized by a critical
need for inventory management solutions.
Maintain High Quality Customer Relationships through Consulting and
Education. The Company intends to expand the size of its services and
support staff, as well as the range of services it offers, in order
31
<PAGE> 33
to maintain high customer satisfaction and generate new customers through
referrals from existing customers. The Company believes that its
consulting, implementation, educational and support services allow
customers to realize the maximum benefit from the Company's solutions. In
addition, E3 intends to expand its educational programs in the area of
scientific inventory management to inform a greater number of potential
customers about the benefits of the Company's inventory management
products.
Broaden Distribution Channels and Strategic Relationships. The
Company's strategy is to expand its sales and marketing capabilities in
order to address the worldwide market opportunity for its products. The
Company increased its direct sales force from 15 sales personnel as of
January 1, 1997 to 38 sales personnel as of March 31, 1998. As a part of
this growth in 1997, the Company established a full-time telemarketing
staff which currently consists of five persons to support its direct sales
force. As a result of its increase in sales and marketing personnel, the
aggregate initial software license fee for licenses entered into in the
quarter ended March 31, 1998 was approximately $2.9 million, as compared to
approximately $1.9 million for the quarter ended March 31, 1997. In
addition to its direct sales and support organizations, the Company has
established and will continue to establish formal and informal
relationships with third parties to assist in developing customer
relationships and marketing its product offerings.
Increase Penetration of International Markets. E3 currently sells and
supports its products through direct sales and support organizations in
North America and Europe. The Company's products support multiple
currencies and languages, which the Company believes facilitates its
expansion into new international markets. E3 plans to continue to invest
significantly in expanding its global sales, marketing, and services
presence in the geographic regions where it already has a presence and in
new geographic regions. The Company currently has offices or
representatives in ten locations worldwide, including offices in Atlanta,
Frankfurt, London, Madrid, Melbourne, Oslo, Paris, Stockholm and Venice,
and is currently planning to expand into select countries in Latin America
and the Pacific Rim.
PRODUCTS
The Company's software solutions provide comprehensive and advanced
inventory management capabilities that enable organizations to reduce
inventories, increase profitability and meet customer service objectives. The
Company's product offerings are oriented toward four distinct markets: (i)
E3TRIM targets warehouse inventory management; (ii) E3SLIM targets store
inventory management; (iii) E3CRISP targets vendor-managed inventories; and (iv)
ProfitTrack focuses on shared services inventory management.
The Company's products are modular systems that allow customers to purchase
only the functionality they require. For instance, the Company offers E3TRIM as
a base system for an initial license fee of $28,000 with approximately 25
additional modules available at additional cost. Such additional modules include
investment buying, purchase order management, service level analysis, investment
tracking, alternate source and promotional event modules. The initial license
fee for a typical E3TRIM order is $100,000, the initial license fee for a
typical E3CRISP order is $150,000, and the initial license fee for a typical
E3SLIM order is $250,000. In addition to the initial license fee, the Company
charges customers an annual software maintenance fee, which typically equals 15%
of the initial license fee and is paid in monthly installments.
The Company's products currently support nine languages and multiple
currencies. The Company's products are client/server solutions that operate on
IBM AS/400 servers and support Windows 3.1, Windows 95 and Windows NT clients
and can be linked to virtually any hardware or software platforms with minimal
additional expense.
E3TRIM -- True Replenishment and Inventory Management
E3TRIM addresses the replenishment and inventory management needs of
wholesalers and retailers performing inventory management at the warehouse or
distribution center level. E3TRIM handles replenishment and inventory management
functions such as demand forecasting, lead time forecasting, order frequency
analysis, service level goals and minimum order quantity analysis. E3TRIM
assists the user in deciding when to buy goods, how much to buy and which
distribution center is appropriate to receive the product. The
32
<PAGE> 34
forecasting model considers factors such as historical demand data, promotional
events, and lost sales by item, SKU or both. E3TRIM is designed to enhance
profitability, decrease inventory levels, improve customer service levels,
increase buyer productivity and improve management control.
E3SLIM -- Store Level Inventory Management
E3SLIM is a system designed for store level replenishment. E3SLIM addresses
the same replenishment and inventory functions as E3TRIM; however, E3SLIM
utilizes data from individual stores and the replenishment data produced is
tailored to meet unique store level requirements. Orders produced through E3SLIM
may go straight to suppliers who will deliver products to the store directly or
through distribution centers. E3SLIM is designed to provide increased
merchandiser productivity at the store level, better customer service, lower
inventory levels and reduced inventory costs, and higher revenue per store.
E3CRISP -- Customer Replenishment for Improved Service and Profit
E3CRISP is a store level replenishment and inventory management solution
aimed at manufacturers who wish to offer inventory management services to their
customers. E3CRISP allows a vendor to manage its inventory in the individual
stores or distribution centers of a retailer. Dealing directly with retailers
saves manufacturers significant time and expense and provides accuracy and
efficiency in replenishment. E3CRISP provides the following benefits: marketing
advantages for wholesalers and manufacturers, increased merchandiser
productivity, improved customer service and reduced lost sales at the consumer
level.
ProfitTrack
ProfitTrack is an Internet-based replenishment and inventory management
system similar to E3SLIM that makes available E3's inventory management
solutions to businesses worldwide. ProfitTrack provides independent retailers
and small chains with cost-effective and easy access to the Company's proven
inventory management solutions and provides larger retailers with a means to
decentralize their purchasing operations. Through ProfitTrack, the Company acts
as a service bureau whereby the customer provides data to the Company through
the Internet and the Company provides replenishment and inventory
recommendations on a next-day basis. For larger customers, the Company provides
the software to run decentralized purchasing operations over a corporate
intranet.
Executive ScoreBoard
Executive ScoreBoard is an executive information system that generates
user-friendly summary graphs allowing managers to easily access more in-depth
information. Executive ScoreBoard provides the user with more than 150 graphical
views of data, such as inventory breakdowns, historical trending, drill down and
drill back, and sorting and comparisons. Executive ScoreBoard operates in
conjunction with the customer's E3TRIM, E3SLIM or E3CRISP system.
33
<PAGE> 35
SALES AND MARKETING
To date, substantially all of the Company's revenue has been generated
through its direct sales force. The Company maintains a sales force with direct
sales representatives based in ten countries. The Company's salespersons are
compensated through quarterly and annual commission programs.
The Company increased its sales force from 15 sales personnel as of January
1, 1997 to 38 sales personnel as of March 31, 1998. A substantial portion of
this increase occurred in the first half of 1997. As part of this growth in
1997, the Company established a full-time telemarketing staff, which currently
consists of five persons, to support its direct sales force. A newly hired
salesperson generally spends three months in training and is not expected to
meet a full sales quota for another three months. Consequently, the Company
typically does not begin to realize full production from a newly hired
salesperson until approximately six months after hiring. As a result of its
increase in sales and marketing personnel since January 1, 1997, the Company has
begun to realize substantial year-to-year growth in the sales of its products.
The following table sets forth the number of salespersons as of the end of each
quarter since January 1, 1997 and the aggregate amount of initial license fees
for licenses entered into in each such quarter. The initial license fees shown
below relate to the licenses sold in the indicated period without regard to the
Company's recognition of revenue from such licenses.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales Personnel................. 23 27 30 33 38
Aggregate Initial Software
License Fee Amount........... $1,878,900 $3,611,660 $2,026,897 $4,247,367 $2,893,274
</TABLE>
The Company plans to continue to invest significantly in expanding its
sales, support, services and marketing organizations within the United States
and abroad.
The Company relies on its existing customer relationships as a source for
new business. In addition, the Company intends to leverage both formal and
informal relationships with a number of consulting and systems integration firms
to enhance its marketing, sales and customer support efforts, particularly with
respect to implementation and support of its products as well as lead generation
and assistance in the sales process.
The Company conducts comprehensive marketing programs that include
advertising, public relations, trade shows, joint programs with vendors and
consultants and ongoing customer communication programs. The sales cycle
typically begins with the generation of a sales lead or the receipt of a request
for proposal from a prospective customer. The sales lead or request for proposal
is followed by the qualification of the lead or prospect, an assessment of the
customer's requirements, a formal response to the request for proposal,
presentations and product demonstrations, site visits to an existing customer
utilizing the Company's products and contract negotiation. The sales cycle can
vary substantially from customer to customer but typically requires three to
nine months. As of May 15, 1998, the sales and marketing organization consisted
of 45 employees.
CUSTOMERS
The Company's target customers are primarily wholesalers and retailers, as
well as manufacturers who provide inventory management services to wholesalers
and retailers, in a variety of product sectors, including general retail;
pharmaceutical; general manufacturing; electrical, industrial and automotive
supply; food and food service; wine and spirits; and office supply. The Company
has licensed its products to over 600 customers. No single customer accounted
for 10% or more of the Company's revenues in 1995, 1996 or 1997.
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<PAGE> 36
The following table sets forth selected customers in each of its targeted
industry segments. Except as otherwise noted, all such customers are located in
the United States.
<TABLE>
<S> <C>
GENERAL RETAIL ELECTRICAL, INDUSTRIAL AND AUTOMOTIVE SUPPLY
Ace Hardware Corporation Advance Auto Parts
Best Buy Co., Inc. Graybar Electric Co., Inc.
DFS Group, Ltd. (Duty Free Stores) Northern Hydraulics, Inc.
The Sports Authority, Inc. Rexel Management, S.A. (France)
Victoria's Secret Stores XPEDEX (International Paper Company)
Woolworth's plc (United Kingdom) FOOD & FOOD SERVICE
PHARMACEUTICAL Associated Food Stores, Inc.
CVS Corporation Coop Schweiz (Switzerland)
Eckerd Corporation Iceland Foods plc (United Kingdom)
Hoechts Marion Roussell (Canada) NKL (Norway)
Rite Aid Corporation PYA/Monarch, Inc.
Sigma Company Ltd. (Australia) WINE & SPIRITS
GENERAL MANUFACTURING Eber Brothers Wine & Liquor Corp.
General Nutrition Incorporated (GNC) Glazer's Wholesale Distributors, Inc.
OKI Bering Southern Wine & Spirits of America, Inc.
Oneida Ltd. Whitbread plc (United Kingdom)
Rubbermaid, Inc. OFFICE SUPPLY
SKF Dataservice AB (Sweden) BT Office Products International, Inc.
Universal City Studios, Inc. Kaiser & Kraft GmbH (Germany)
Staples, Inc. (US/Europe)
Viking Office Products, Inc. (US/Europe/Australia)
</TABLE>
CUSTOMER CASE STUDIES
The following case studies illustrate the utilization and benefits of the
Company's products as experienced by certain of its customers:
ACE HARDWARE CORPORATION
Ace Hardware Corporation ("Ace"), a cooperative distributor of hardware,
paint and do-it-yourself products to a dealer network of over 5,000 retail
business outlets, was utilizing an inventory management system that failed to
meet many of its business needs. In particular, Ace desired to increase its
in-stock rates in order to provide better service to its dealers and to better
manage its inventory in order to increase its profits, which, as a cooperative,
are ultimately distributed to its dealers. After implementing E3TRIM, Ace
reported to the Company a $50 million reduction in inventory, a 25% reduction in
lost sales and an in-stock rate of 95% in its first year of use.
THE SPORTS AUTHORITY, INC.
The Sports Authority, Inc. ("Sports Authority"), an operator of large
sporting goods stores in the United States with over 185 locations, initially
installed E3SLIM at a time when it had only six locations and many of its
replenishment functions were performed manually. Sports Authority sought a
replenishment and inventory management system that could automate and optimize
its replenishment functions and accommodate its rapid growth plan. In
particular, Sports Authority noted the following benefits of E3SLIM: (i)
centralized replenishment functions allowing store level employees to focus on
customer service functions; (ii) simple and rapid implementation of the system
into new stores; and (iii) scalability to support the growth in the number of
store locations from six to more than 185. After installing E3SLIM, as well as
implementing the Company's approach to the buying process, Sports Authority
reported a 20% reduction in inventory levels while increasing inventory turns
and maintaining a 92% service level in the first year after implementation. The
Sports Authority's E3SLIM system actively manages over 1.7 million SKUs.
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<PAGE> 37
OKI BERING
OKI Bering, a leading wholesale distributor of industrial, safety and
welding supplies in North America, operated in an industry that historically had
not utilized advanced inventory management systems. OKI Bering chose E3TRIM as
part of its strategy to increase market share by improving its service levels
above industry norms. After implementing E3TRIM, OKI Bering reported to the
Company an increase in customer service levels from 92% to 98% and a 22%
decrease in inventory levels in the first year after implementation. After four
months of utilizing E3TRIM, OKI Bering installed E3CRISP in order to assist its
distributors in improving productivity and optimizing inventory levels. OKI
Bering is currently using E3CRISP as a marketing tool to attract new customers
and improve service to existing customers.
The benefits reported above are based upon information provided to the
Company by such customers, and factors unrelated to the Company's products may
have contributed to such benefits. There can be no assurance that new or
existing customers will achieve any of the benefits described above.
SERVICES AND SUPPORT
E3 provides consulting services to customers in the following areas: sales,
technical installation, implementation planning, customer training, project
management and performance analysis. All of the Company's consultants are
specialists in their fields. For example, customer training consultants are
primarily former users of the Company's products, and customer training
consultants assigned to a food wholesale implementation are typically food
wholesale specialists. The Company has recognized a growing need among its
customers for support and consulting services. The Company plans to continue to
hire additional support and service personnel to meet this need. Accordingly,
the Company anticipates that revenue from services will increase as a percentage
of total revenue in the future.
In 1989, the Company established IMI to provide executives and
professionals in the retail and wholesale segments of the supply chain with
educational and consulting services. The Company believes that IMI is the only
educational facility in the world that is dedicated to scientific inventory
management. IMI offers business school-type curriculum covering both E3
product-specific seminars and inventory management seminars. IMI's courses are
aimed at both potential users as well as senior executives of potential
customers. To date, IMI has trained over 5,000 professionals and executives.
While IMI was originally conceived as an educational resource for E3 customers,
increasingly IMI's programs are being attended by non-customers. E3 intends to
continue to utilize IMI as an educational resource for companies that do not
currently utilize E3 software, thereby creating an additional revenue source for
the Company and a means to educate prospective customers about the benefits
associated with the use of the Company's software products.
PRODUCT DEVELOPMENT AND TECHNOLOGY
The Company's product development efforts are focused on adding new
functionality to existing products and enhancing the operability of its products
across distributed and changing heterogeneous hardware platforms, operating
systems and relational database systems. The Company believes that its future
success depends in part upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce
new or enhanced products that incorporate new technological developments and
emerging industry standards.
The Company's product development organization is structured to
consistently provide a steady flow of products and enhancements to assure that
the Company has the product offerings needed to meet its strategic objectives.
The Company's focus is on balancing the development of new offerings with the
development of enhancements to existing offerings so the Company can: (i)
penetrate new markets; (ii) capture new customers within existing markets; (iii)
provide useful add-ons for existing customers; and (iv) maintain a strong
reference base.
The Company's development organization is structured into four teams: (i)
technology development, which develops product architecture and new
technologies; (ii) strategic development, which develops next-generation
products; (iii) production development, which delivers add-ons and enhancements
of current
36
<PAGE> 38
products; and (iv) product support, which helps end users maximize the products'
benefits and features. The development organization works very closely with
customers during the prototyping, development and testing phases of product
development. A rapid prototyping methodology is used to assure that the correct
functional requirements are addressed during the early stages of new
development. At the end of the development cycle, beta customers are identified
to perform true field tests before the products are released for general
availability.
The Company's primary technology initiative is to convert the server
portion of its code to C++ and SQL so that a common code base can be run on the
AS/400, UNIX/AIX, and Windows NT platforms to provide multi-platform support. As
part of this effort, the Company is examining whether database providers such as
Oracle and Informix, with the recent inclusion of parallel processing
functionality in their products, can deliver the performance needed to run the
server portion of the Company's products on UNIX/AIX and Windows NT platforms.
The architecture of the Company's inventory management products has been
designed for simplified integration into any legacy or ERP system running on any
platform. Implementation of the Company's products requires no specialized
skills on the customer's part. A simple flat file architecture (similar to the
widely adapted standard used for EDI) affords an efficient path to quick
implementation and integration into any ERP system.
The client portion of the Company's software systems runs on the Windows
3.1, Windows 95 and Windows NT platforms. The Company chose the IBM AS/400 as
its primary server platform because of its performance, scalability, operational
reliability, operational design and database robustness. A scientific inventory
management system must evaluate every item, in every location, every night,
resulting in database tables with potentially millions of rows. To date, the
Company believes that in a transaction-based environment, the AS/400 is one of
the few platforms that can deliver the performance needed to meet this very
challenging requirement. In addition, because IBM delivers the AS/400 as a
complete system with no additional software or tools that need to be installed
after implementation, it can be easily integrated into any IT hardware
environment with little or no additional requirements.
The Company's product development expenditures for the years ended December
31, 1995, 1996 and 1997 were approximately $2.4 million, $2.6 million and $3.2
million, respectively. The Company intends to continue to increase its
investment in product development in the future.
COMPETITION
The market for the Company's products is intensely competitive, highly
fragmented and subject to rapid change. Competitors include: (i) ERP software
vendors such as SAP AG, PeopleSoft, Inc., Oracle Corporation and Baan Company
N.V., each of which currently offers ERP solutions that may incorporate supply
chain management modules or advanced planning and scheduling software; (ii)
other suppliers of advanced planning and scheduling software, including i2
Technologies Inc., Manugistics Group, Inc. and Logility Inc.; (iii) other
business application software vendors who may broaden their product offerings by
internally developing, or by acquiring or partnering with independent developers
of, advanced planning and scheduling software; (iv) internal development efforts
by corporate IT departments; and (v) companies offering standardized or
customized products for mainframe and/or mid-range computer systems. Increased
competition may result in reduced operating margins and loss of market share,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many of the Company's competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and larger installed customer bases
than the Company. In order to be successful in the future, the Company must
continue to respond promptly and effectively to technological change and
competitors' innovations. There can be no assurance that current or potential
competitors of the Company will not develop products comparable or superior in
terms of price and performance to those developed by the Company. In addition,
no assurance can be given that the Company will not be required to make
substantial additional investments in connection with its product development,
sales and marketing, and customer service efforts in order to meet any
competitive threat, or that the Company will be able to compete successfully in
the future. Increased
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<PAGE> 39
competition will result in reductions in market share, pressure for price
reductions and related reductions in gross margins, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. There can be no assurance that in the future the Company
will be able to successfully compete against current and future competitors and
the failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk
Factors -- Competition."
The principal competitive factors affecting the market for the Company's
products include vendor and product reputation, architecture, functionality and
features, speed, costs and ease of implementation, quality of support and
product quality, price and performance. Based on these factors, the Company
believes that it has competed effectively to date, particularly in the wholesale
and retail markets. The Company believes that its products have a competitive
advantage over ERP and legacy systems due to the advanced functionality offered
by the Company's products. Also, because they are specifically designed for the
wholesale and retail markets, the Company further believes that its products
have a competitive advantage in these markets over most other SCM systems, which
have been designed primarily for manufacturers. The Company also believes that
its knowledge and expertise in inventory management systems aimed at optimizing
profitability provide a significant competitive advantage.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of copyright, trade secret, trademark
and trade dress laws, confidentiality procedures and contractual provisions to
protect its proprietary rights in its products and technology. The Company
generally enters into confidentiality agreements with its employees,
consultants, clients and potential clients and limits access to, and
distribution of, its proprietary information. The Company maintains trademarks
to identify the source of its products, development tools and service offerings
and relies upon trademark and trade dress laws to protect its proprietary rights
in these marks. The Company licenses its products to its customers in object
code format and restricts the customer's use for internal purposes without the
right to sublicense its products. However, the Company believes that the
foregoing measures afford only limited protection. In connection with certain of
its license agreements, the Company has established in the past, and may
continue to establish, escrows of the source code for its licensed products with
third parties for the benefit of its customers. There can be no assurance that
unauthorized use of the Company's source code for its products will not occur as
a result of these escrow arrangements. Despite the Company's efforts to
safeguard and maintain its proprietary rights both in the United States and
abroad, there can be no assurance that the Company will be successful in doing
so or that the steps taken by the Company in this regard will be adequate to
deter misappropriation or independent third-party development of the Company's
technology or to prevent an unauthorized third party from copying or otherwise
obtaining and using the Company's products or technology. In addition, 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 may currently be or could become a problem.
As the number of supply chain management applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time consuming, result in costly litigation, diversion of
management's attention and cause product shipment delays or require the Company
to enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to the
Company, if at all, which could have a material adverse effect on the Company's
business, operating results and financial condition. Adverse determinations in
such claims or litigation could also have a material adverse effect on the
Company's business, operating results and financial condition.
The Company may be subject to additional risks as it enters into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of the Company's rights may
be ineffective in such countries. Litigation to defend and enforce the Company's
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse
38
<PAGE> 40
effect on the Company's business, operating results and financial condition,
regardless of the final outcome of such litigation. Despite the Company's
efforts to safeguard and maintain its proprietary rights both in the United
States and abroad, there can be no assurance that the Company will be successful
in doing so, or that the steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of the
Company's technology or to prevent an unauthorized third party from copying or
otherwise obtaining and using the Company's products or technology. Any such
events could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors -- Intellectual Property
Rights."
EMPLOYEES
As of May 15, 1998, the Company had 175 full-time employees. Of that
number, 45 were employed in sales and marketing, 25 in product development, 35
in administration and finance and 70 in implementation, education and customer
support services. None of the employees of the Company are covered by a
collective bargaining agreement. The Company considers its relations with its
employees to be good.
The Company believes its future success will depend in large part on its
ability to recruit and retain qualified employees, especially experienced
software engineering personnel. The competition for such personnel is intense,
and there can be no assurance that the Company will be successful in retaining
or recruiting key personnel.
FACILITIES
The Company's principal administrative, sales, marketing, support, and
product development facility is located in approximately 57,000 square feet of
leased office space in Atlanta, Georgia. The Company also maintains a small
office in Mahwah, New Jersey. In addition, the Company leases space in France,
Germany, Italy, Norway, Sweden and the United Kingdom. Management believes its
current facilities are adequate for its present requirements.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
39
<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Anders H. Herlitz...................... 59 Chairman and Chief Executive Officer
Frank K. Schuster...................... 52 President, Chief Operating Officer and
Director
William H. Huther...................... 65 Vice Chairman and Senior Vice
President -- Sales and Marketing
Daniel J. Craddock..................... 38 Senior Vice President -- Consulting
Services and President of IMI
Carl H. Herlitz........................ 31 Senior Vice President -- Business
Planning and IT Services
R. Lee Morris.......................... 52 Chief Financial Officer
David J. Johnston...................... 36 Vice President -- Product Development
Thomas J. O'Haren...................... 64 Director (1)(2)
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Anders H. Herlitz founded the Company in 1980 and has served as Chairman
and Chief Executive Officer since its founding. From 1960 to 1980, Mr. Herlitz
served in a variety of development and management roles for IBM. Mr. Herlitz was
the architect behind IBM's INVEN/3 and INVEN/34 products, which were among the
earliest inventory management products introduced in the marketplace, and was
instrumental in the design of DMAS Inventory Management, a successor product to
INVEN/34.
Frank K. Schuster has served as President, Chief Operating Officer and as a
director of the Company since 1993. From 1987 to 1993, Mr. Schuster served as
Executive Vice President and Chief Financial Officer of the Company. Mr.
Schuster joined the Company in 1985 as Vice President -- Marketing. From 1973 to
1985, Mr. Schuster served as Executive Vice President and General Manager of
Lynch Foods, Inc., a food distributor. From 1969 to 1973, Mr. Schuster served as
a marketing representative and systems engineer for IBM. Mr. Schuster holds a
BBA from Ohio University and an MBA from the University of Alabama.
William H. Huther has served as Vice Chairman and Senior Vice
President -- Sales and Marketing of the Company since 1996 and is responsible
for worldwide sales planning, third-party alliances and marketing
communications. Mr. Huther joined the Company in 1986 as Vice President of the
Company's subsidiary, E3 North America, Inc., and served as President of that
subsidiary from 1992 until 1996. From 1968 to 1986, Mr. Huther served in sales
and management positions with a variety of software companies, including co-
founding Cambridge Computer, Inc. ("Cambridge") in 1968, which provided sales
and distribution-related information systems to organizations, and serving as a
Vice President of Cambridge until 1972. From 1959 to 1968, Mr. Huther served in
numerous sales and sales management positions with IBM.
Daniel J. Craddock has served as the Company's Senior Vice
President -- Consulting Services and President of IMI since 1997. From 1996 to
1997, Mr. Craddock served as President of the Company's subsidiary, E3 North
America Inc., and from 1990 to 1996, Mr. Craddock served as the Company's Vice
President of Consulting. Mr. Craddock joined the Company in 1987 and served in
various sales, marketing, consulting and education functions within the Company
until 1990. Mr. Craddock is a graduate of Pennsylvania State University's
business logistics and physical distribution program.
Carl H. Herlitz has served as Senior Vice President -- Business Planning
and IT Services since 1997. From 1991 to 1997, Mr. Herlitz was responsible for
the establishment of four of the Company's European offices. Mr. Herlitz was a
programmer and co-developer of the original E3TRIM release from 1989 to 1991.
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<PAGE> 42
Mr. Herlitz joined the Company in 1986 as a programmer. Mr. Herlitz is a
graduate of the University of Georgia with a BBA in International Business.
R. Lee Morris joined the Company as its Chief Financial Officer in July
1997. From 1997 until joining the Company, Mr. Morris served as Senior Vice
President of DocuCorp International Inc. ("DocuCorp"), and from 1989 to 1997,
Mr. Morris served as Senior Vice President, Chief Financial Officer and
Secretary of FormMaker Software, Inc., the predecessor of DocuCorp, which
provides enterprise document automation software and services. Mr. Morris also
served as a Director of FormMaker Software, Inc. from 1995 to 1996. From 1981 to
1989, Mr. Morris served as Senior Vice President and Chief Financial Officer of
American Technical Services Group, Inc. ("ATS"), an instrumentation control
systems company. From 1970 to 1981, Mr. Morris was with Coopers & Lybrand. Mr.
Morris is a CPA and a graduate of Florida State University.
David J. Johnston has served as Vice President -- Product Development since
1997. From 1996 to 1997, Mr. Johnston served as the Company's Director of
Development and was responsible for all product enhancements and new product
development. Mr. Johnston joined the Company in 1995 as a product manager. From
1989 to 1995, Mr. Johnston served as a development manager at IBM, working on
inventory management product solutions. From 1985 to 1989, Mr. Johnston served
as an applications developer for Federated Department Stores. Mr. Johnston
graduated from Louisiana State University with a B.S. in computer science and
business management.
Thomas J. O'Haren has served as a director of the Company since 1993. Mr.
O'Haren has served as a consultant to Cigna Financial Advisors, Inc. ("Cigna"),
an insurance company, since 1992. From 1957 to 1992, Mr. O'Haren served in a
variety of management positions with Cigna, including Regional Vice President.
Mr. O'Haren holds a B.S. degree from Pennsylvania State University and has
received Chartered Life Underwriter and Chartered Financial Consultant
designations from the American College in Bryn Mawr, Pennsylvania. Mr. O'Haren
is also a director of Jameson Inns, Inc., a hotel company.
Anders H. Herlitz, the Company's Chairman and Chief Executive Officer, is
the father of Carl H. Herlitz, the Company's Senior Vice President -- Business
Planning and IT Services.
ELECTION OF DIRECTORS
The Company intends to add one or more independent directors to its Board
of Directors within 90 days after the date of this Prospectus. It will be
necessary for the Company to appoint at least one independent director within
the 90-day time period in order to maintain its Nasdaq National Market listing.
Failure to appoint such a director could result in a delisting of the Common
Stock from the Nasdaq National Market.
TERMS OF DIRECTORS
Upon consummation of the Offering, the Board of Directors will be divided
into three classes, each of whose members will serve for a staggered three-year
term. The Board will be comprised of two Class I directors (Mr. Huther and Mr.
O'Haren), one Class II director (Mr. Schuster) and one Class III director (Mr.
Herlitz). Following the proposed election of an additional independent director
to the Board of Directors, such person is expected to be a Class II director. At
each annual meeting of shareholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring. The terms of the initial Class I directors, Class II directors and
Class III directors will expire upon the election and qualification of successor
directors at the 1999, 2000 and 2001 annual meetings of shareholders,
respectively. See "Description of Capital Stock -- Certain Articles of
Incorporation and Bylaw Provisions."
COMMITTEES OF THE BOARD OF DIRECTORS
Mr. O'Haren currently serves as the sole member of the Compensation
Committee and the Audit Committee. Upon the election of an additional outside
director, such person is expected to be appointed to the Compensation Committee
and Audit Committee. The Compensation Committee is responsible for reviewing and
recommending salaries, bonuses and other compensation for the Company's
executive officers. The Compensation Committee also is responsible for
administering the Company's stock option plan and for
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<PAGE> 43
establishing the terms and conditions of all stock options granted under the
plan. The Audit Committee is responsible for recommending independent auditors,
reviewing with the independent auditors the scope and results of the audit
engagement, monitoring the Company's financial policies and control procedures
and reviewing and monitoring the provisions of nonaudit services by the
Company's auditors.
COMPENSATION OF DIRECTORS
Mr. O'Haren received $10,000 in exchange for his services as a member of
the Board of Directors during 1997. Directors who are employees of the Company
do not receive any compensation for services performed in their capacity as
directors. The Company reimburses each director for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors and any of its
committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. O'Haren, currently the sole member of the Compensation Committee, was
not at any time during the year ended December 31, 1997 or at any other time an
officer or employee of the Company. No executive officer of the Company serves
as a member of the board of directors or compensation committee of another
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation earned by the
Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers who were serving as executive officers at the end
of 1997 (collectively, the "Named Executive Officers") for services rendered to
the Company in 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION(1) --------------------
-------------------- NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(2) UNDERLYING OPTIONS COMPENSATION(3)
- --------------------------- -------- --------- -------------------- ---------------
<S> <C> <C> <C> <C>
Anders H. Herlitz................................ $ 48,000 $ 918,095 150,000 $ 2,850
Chairman and Chief
Executive Officer
Frank K. Schuster................................ 48,000 308,320 65,000 2,850
President and Chief Operating Officer
William H. Huther................................ 48,000 308,320 65,000 2,850
Vice Chairman and Senior Vice
President -- Sales
and Marketing
Daniel J. Craddock............................... 65,323 205,248 35,000 2,850
Senior Vice President -- Consulting Services
and President of IMI
Carl H. Herlitz.................................. 113,522 116,188 30,000 --
Senior Vice President -- Business Planning
and IT Services
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include compensation in the
form of perquisites or other personal benefits because such perquisites and
other personal benefits constituted less than the lesser of $50,000 or 10%
of the total annual salary and bonus for the Named Executive Officer for
such year.
(2) Represents bonuses and sales commissions.
(3) Consists of amounts paid under the Company's 401(k) plan.
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<PAGE> 44
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all individual grants of stock options
during the year ended December 31, 1997, to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ---------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anders H. Herlitz........ 150,000 20.7% $9.25 1/15/07 $872,591 $2,211,318
Frank K. Schuster........ 65,000 9.0 9.25 1/15/07 378,123 958,238
William H. Huther........ 65,000 9.0 9.25 1/15/07 378,123 958,238
Daniel J. Craddock....... 35,000 4.8 9.25 1/15/07 203,605 515,974
Carl H. Herlitz.......... 30,000 4.1 9.25 1/15/07 174,518 442,264
</TABLE>
- ---------------
(1) All options were granted at exercise prices equal to or in excess of the
fair market value of the Common Stock on the date of grant as determined by
the Board of Directors. The options are nonqualified stock options, vest
over four years and have a 10-year term.
(2) The potential realizable value is calculated based on the 10-year term of
the option at the time of its grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate,
compounded annually over the term of the option. These numbers are
calculated based upon rules promulgated by the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future value of the Common Stock. The actual realizable value of the options
based on the price to public in the Offering will exceed the potential
realizable value shown in the table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table summarizes the value of the outstanding options held by
the Named Executive Officers as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END(1)
---------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Anders H. Herlitz.................... -- 150,000 -- --
Frank K. Schuster.................... -- 65,000 -- --
William H. Huther.................... -- 65,000 -- --
Daniel J. Craddock................... -- 35,000 -- --
Carl H. Herlitz...................... -- 30,000 -- --
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. All options held by the Named Executive Officers have an exercise
price per share of $9.25, which exceeds the estimated fair market value of
the Company's Common Stock underlying the options as of December 31, 1997 as
determined by the Company's Board of Directors. In determining the fair
market value of the Company's Common Stock, the Board of Directors
considered various factors, including the Company's financial condition and
business prospects, its operating results, the absence of a market for its
Common Stock and the risks normally associated with technology companies.
STOCK OPTION AND OTHER COMPENSATION PLANS
Stock Incentive Plan. The Stock Incentive Plan became effective on January
1, 1997. The aggregate number of shares reserved for issuance under the Stock
Incentive Plan is 3,000,000 shares. The purpose of the Stock Incentive Plan is
to provide incentives for key employees, officers, consultants and directors to
promote the success of the Company and to enhance the Company's ability to
attract and retain the services of such persons. Options granted under the Stock
Incentive Plan may be either options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified stock options.
43
<PAGE> 45
As of May 31, 1998, options to purchase 898,919 shares of Common Stock were
outstanding under the Stock Incentive Plan at a weighted average exercise price
of $10.00 per share, and no shares of Common Stock have been issued upon
exercise of options granted under the Stock Incentive Plan.
Other Incentives. In addition to options issued under the Stock Incentive
Plan, as of May 31, 1998, the Company has outstanding options to purchase an
aggregate of 148,354 shares of Common Stock granted to employees separate from
and outside of the Stock Incentive Plan with a weighted average exercise price
of $9.10 per share.
401(k) Profit Sharing Plan. The Company maintains a 401(k) Profit Sharing
Plan (the "401(k) Plan") which is intended to be a tax-qualified defined
contribution plan under Section 401(k) of the Code. In general, all employees of
the Company who have attained age 21 and completed 30 days of service are
eligible to make salary deferrals under the 401(k) Plan. Employees must complete
one year of service in order to be eligible for matching contributions. The
40l(k) Plan includes a salary deferral arrangement pursuant to which
participants may contribute, subject to certain limitations prescribed by the
Code, a maximum of 15% of their salary on a pre-tax basis. The Company may make
matching contributions under the 401(k) Plan equal to a percentage (determined
by the Company) of participants' salary deferrals. The Company may also make an
additional contribution to the 401(k) Plan each year at the discretion of the
Board of Directors. In 1997, the Company contributed and aggregate of $85,100 to
the 401(k) Plan. Participants are always fully vested in their accounts.
Distributions from the 401(k) Plan may be made in the form of a lump-sum cash
payment, in installment payments or annuity payments.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Articles of Incorporation (the "Restated
Articles") provide that the directors shall not be liable for monetary damages
except for (i) any appropriation, in violation of his or her duties, of any
business opportunity of the Company, (ii) acts or omissions which involve
intentional misconduct or a knowing violation of laws, (iii) any liability under
Section 14-2-832 of the Georgia Business Corporations Code (the "GBCC"), which
relates to unlawful payments of dividends and unlawful stock repurchases and
redemptions or (iv) any transaction from which he or she derived an improper
personal benefit. This limitation of liability does not affect the availability
of injunctive relief or other equitable remedies.
The Company's Amended and Restated Bylaws (the "Restated Bylaws") provide
that the Company will indemnify each of its directors and may indemnify each of
its officers, employees and agents to the extent that he or she is or was a
party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with such action, suit or proceeding; provided, however, that no indemnification
of directors shall be made for (i) any appropriation, in violation of his or her
duties, of any business opportunity of the Company, (ii) acts or omissions which
involve intentional misconduct or a knowing violation of laws, (iii) any
liability under Section 14-2-832 of the GBCC which relates to unlawful payments
of dividends and unlawful stock repurchases and redemptions or (iv) any
transaction from which he or she derived an improper personal benefit.
The Company intends to obtain a directors and officers liability insurance
policy.
CERTAIN TRANSACTIONS
In 1996, the Company paid a $500,000 fee for consulting services to a
corporation that is wholly owned by Anders H. Herlitz. The services were unique
in nature and not otherwise available to the Company; therefore, the fee was as
favorable as could have been obtained from unaffiliated third parties. The
services were provided on a one-time basis and have since been discontinued.
On July 22, 1998, the Company entered into a Promissory Note (the "Bridge
Loan") with Jan W. Herlitz, who is the son of Anders H. Herlitz and an employee
of the Company. Pursuant to the Bridge Loan, the
44
<PAGE> 46
Company loaned Jan W. Herlitz $500,000 at an interest rate of 6% per year. The
Bridge Loan is payable at the earliest to occur of either the completion of the
initial public offering or six months from the date of the Promissory Note.
Proceeds received by Jan W. Herlitz as a Selling Shareholder will be used to
repay the Bridge Loan.
The Board of Directors of the Company has adopted a resolution whereby all
future transactions, including any loans from the Company to its officers,
directors, principal shareholders or affiliates, will require the approval of a
majority of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors, if required by law, or a
majority of the disinterested shareholders and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
45
<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale by the Company of the Common Stock being offered
hereby by: (i) each director of the Company; (ii) each of the Named Executive
Officers; (iii) each shareholder known by the Company to be beneficial owners of
more than 5% of the outstanding shares of Common Stock; (iv) the Selling
Shareholders; and (v) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED SHARES TO OWNED AFTER THE
PRIOR TO THE OFFERING(2) BE SOLD IN OFFERING(2)
------------------------ THE ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENTAGE OFFERING SHARES PERCENTAGE
- --------------------------------------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Anders H. Herlitz(3)....................... 5,885,725 37.6% %
Christina R. Herlitz(4).................... 5,885,725 37.6
Carl H. Herlitz............................ 2,926,950 18.7
Jan W. Herlitz............................. 2,926,950 18.7
Frank K. Schuster.......................... 1,691,000 10.8
William H. Huther.......................... 1,691,000 10.8
Daniel J. Craddock......................... 338,200 2.2
Kenneth Axelsson........................... 79,800 *
Oue Andre.................................. 31,825 *
Bjorn Walsinger............................ 31,825 *
Fritz-Lenmart Egnell....................... 31,825 *
Bjorn Uttergard............................ 14,250 *
Thomas J. O'Haren.......................... -- *
All directors and executive officers as a
group (9 persons)........................ 12,532,875 80.1% %
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise set forth herein, the street address of the named
beneficial owner is c/o E3 Corporation, 1800 Parkway Place, Suite 600,
Marietta, Georgia 30067.
(2) For purposes of calculating the percentage beneficially owned, the number of
shares of Common Stock deemed outstanding prior to the Offering includes
15,649,350 shares outstanding as of May 31, 1998. The number of shares of
Common Stock deemed outstanding after the Offering includes an additional
shares that are being offered for sale by the Company in the
Offering. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission that deem shares to be beneficially
owned by any person or group who has or shares voting and investment power
with respect to such shares.
(3) Includes 2,926,950 shares of Common Stock owned by Mr. Herlitz's spouse,
Christina R. Herlitz. Mr. Herlitz disclaims beneficial ownership of the
shares owned by Ms. Herlitz.
(4) Includes 2,958,775 shares of Common Stock owned by Ms. Herlitz's spouse,
Anders H. Herlitz. Ms. Herlitz disclaims beneficial ownership of the shares
owned by Mr. Herlitz.
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 100,000,000
shares of Common Stock, $.05 par value per share, and (ii) 50,000,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"). As of May 31,
1998, the Company had issued and outstanding 15,649,350 shares of Common Stock.
The following description of the capital stock of the Company is a summary and
is qualified in its entirety by the provisions of the Restated Articles and
Restated Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and all matters to be submitted to a vote of the
Company's shareholders. Subject to the rights of any holders of Preferred Stock
which may be issued in the future, the holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the Board of
Directors and paid by the Company out of funds legally available therefor. In
the event of a dissolution, liquidation or winding up of the Company, holders of
shares of Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities and liquidation preferences, if any. Holders of
shares of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by the Company in connection with the Offering will
be, duly authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law and without further shareholder approval, to issue from time
to time up to an aggregate of 50,000,000 shares of Preferred Stock in one or
more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. There are no outstanding shares of Preferred
Stock and no series have been designated.
CERTAIN ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
The Company's Restated Articles provide that special meetings of
shareholders may be called only by: (i) the Board of Directors; (ii) the
Chairman of the Board of Directors (if one is so appointed); (iii) the Chief
Executive Officer of the Company; (iv) the President of the Company; or (v)
holders of not less than 35% of all votes entitled to be cast on any issue
proposed to be considered at the proposed special meeting. The Restated Articles
and Restated Bylaws also provide for a classified Board of Directors and permit
removal of directors only for cause. See "Management -- Directors and Executive
Officers."
The Company's Restated Articles establish an advance notice procedure for
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors, as well as for other
proposals to be considered at shareholders' meetings. Notice of shareholder
proposals and director nominations must be given timely in writing to the
Secretary of the Company before the meeting at which such matters are to be
acted upon or directors are to be elected. Such notice, to be timely, must be
received at the principal executive offices of the Company with respect to
shareholder proposals and elections to be held at the annual meeting, not less
than 60 days before the date of the meeting; however, if less than 70 days
notice or prior public disclosure of the date of the scheduled meeting is given
or made, notice by the shareholder, to be timely, must be delivered or received
not later than the close of business on the tenth day following the earlier of
the day on which notice of the date of the meeting is mailed to shareholders or
public disclosure of the date of such meeting is made.
47
<PAGE> 49
Notice to the Company from a shareholder who intends to present a proposal
or to nominate a person for election as a director at a shareholders' meeting
must contain certain information about the shareholder giving such notice and,
in the case of director nominations, all information that would be required to
be included in a proxy statement soliciting proxies for the election of the
proposed nominee (including such person's written consent to serve as a director
if so elected). If the presiding officer at the meeting determines that a
shareholder's proposal or nomination is not made in accordance with the
procedures set forth in the Restated Articles, such proposal or nomination, at
the direction of such presiding officer, may be disregarded. The notice
requirement for shareholder proposals contained in the Restated Bylaws does not
restrict a shareholder's right to include proposals in the Company's annual
proxy materials pursuant to rules promulgated under the Securities Exchange Act
of 1934, as amended.
The Restated Articles provide for a staggered Board of Directors as
described under "Management -- Terms of Directors." Therefore, under the GBCC,
directors may be removed only for cause. "For cause" shall mean (i) misconduct
as a director of the Corporation or any subsidiary of the Corporation which
involves dishonesty with respect to a material corporate activity or material
corporate asset, or (ii) conviction of an offense punishable by one or more
years of imprisonment (other than minor regulatory infractions and traffic
violations which do not materially and adversely affect the Company).
The Board of Directors shall have the power to increase or decrease the
authorized number of directors, with or without shareholder approval. Newly
created directorships resulting from any increase in the number of directors or
any vacancy on the Board of Directors may be filled by the affirmative vote of a
majority of the remaining directors then in office or, if not filled by the
directors, by the shareholders.
The Restated Articles provide that in discharging the duties of their
respective positions and in determining what is believed to be in the best
interest of the Company, the Board of Directors, any committee of the Board of
Directors and any individual director, in addition to considering the effects of
any action on the Company or its shareholders, may, to the extent permitted by
applicable Georgia law, in his or her sole discretion, consider the interests of
the employees, customers, suppliers and creditors of the Company and its
subsidiaries, the communities in which offices or other establishments of the
Company and its subsidiaries are located and all other factors such director(s)
may consider pertinent; provided, however, that this provision of the Restated
Articles solely grants discretionary authority to the directors, and no
constituency shall be deemed to have been given any right to consideration
thereby.
The preceding provisions of the Restated Articles may be changed only upon
the affirmative vote of holders of at least 66 2/3% of the total number of the
then outstanding shares of capital stock of the Company that are entitled to
vote generally in the election of directors, voting together as a single class.
The provisions of the Restated Articles and Restated Bylaws summarized in
the preceding seven paragraphs and the provisions of the GBCC described under
"Certain Provisions of Georgia Law," contain provisions that may have the effect
of delaying, deferring or preventing a non-negotiated merger or other business
combination involving the Company. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with and obtain the
approval of the Board of Directors in connection with the transaction. Certain
of these provisions may, however, discourage a future acquisition of the Company
not approved by the Board of Directors in which shareholders might receive an
attractive value for their shares or that a substantial number or even a
majority of the Company's shareholders might believe to be in their best
interest. As a result, shareholders who desire to participate in such a
transaction may not have the opportunity to do so. Such provisions could also
discourage bids for the Common Stock at a premium, as well as create a
depressive effect on the market price of the Common Stock.
CERTAIN PROVISIONS OF GEORGIA LAW
Georgia Business Combination Statute. The Company has elected in its
Restated Bylaws to be subject to provisions of the GBCC prohibiting various
"business combinations" involving "interested shareholders" for a period of five
years after the shareholder becomes an interested shareholder of the Company.
Such provisions prohibit any business combination with an interested shareholder
unless either (i) prior to such time, the Board of Directors approves either the
business combination or the transaction by which such
48
<PAGE> 50
shareholder became an interested shareholder, (ii) in the transaction that
resulted in the shareholder becoming an interested shareholder, the interested
shareholder became the beneficial owner of at least 90% of the outstanding
voting stock of the Company that was not held by directors, officers, affiliates
thereof, subsidiaries or certain employee stock option plans of the Company, or
(iii) subsequent to becoming an interested shareholder, such shareholder
acquired additional shares resulting in such shareholder owning at least 90% of
the outstanding voting stock of the Company and the business combination is
approved by a majority of the disinterested shareholders' shares not held by
directors, officers, affiliates thereof, subsidiaries or certain employee stock
option plans of the Company. Under the relevant provisions of the GBCC, a
"business combination" is defined to include, among other things, (i) any
merger, consolidation, share exchange or any sale, transfer or other disposition
(or series of related sales or transfers) of assets of the Company having an
aggregate book value of 10% or more of the Company's net assets (measured as of
the end of the most recent fiscal quarter), with an interested shareholder of
the Company or any other corporation which is or, after giving effect to such
business combination, becomes an affiliate of any such interested shareholder,
(ii) the liquidation or dissolution of the Company, (iii) the receipt by an
interested shareholder of any benefit from any loan, advance, guarantee, pledge,
tax credit or other financial benefit from the Company, other than in the
ordinary course of business, and (iv) certain other transactions involving the
issuance or reclassification of securities of the Company which produce the
result that 5% or more of the total equity shares of the Company, or of any
class or series thereof, is owned by an interested shareholder. An "interested
shareholder" is defined by the GBCC to include any person or entity that,
together with its affiliates, beneficially owns or has the right to own 10% or
more of the outstanding voting shares of the Company, or any person that is an
affiliate of the Company and has, at any time within the preceding two-year
period, been the beneficial owner of 10% or more of the outstanding voting
shares of the Company. The restrictions on business combinations shall not apply
to any person who was an interested shareholder before the adoption of the bylaw
provision that made the provisions applicable to the Company nor to any persons
who subsequently become interested shareholders inadvertently, subsequently
divest sufficient shares so that the shareholder ceases to be an interested
shareholder and would not, at any time within the five-year period immediately
before a business combination involving the shareholder, have been an interested
shareholder but for the inadvertent acquisition.
Georgia Fair Price Statute. The Company has elected in its Restated Bylaws
to be subject to the "Fair Price" provisions of the GBCC. These provisions
require that a "business combination" with an "interested shareholder" be (a)
unanimously approved by "continuing directors" who must constitute at least
three members of the Board of Directors at the time of such approval, or (b)
recommended by at least two-thirds of the "continuing directors" and approved by
a majority of the shareholders excluding the "interested shareholder," unless
certain standards regarding the consideration paid to shareholders in the
transaction are met. Subject to certain exceptions, a "business combination"
includes (i) any merger or consolidation of the corporation or a subsidiary of
the Company, (ii) any share exchange, (iii) any sale, lease, transfer, or other
disposition of assets of the Company or its subsidiary occurring within a
12-month period and having an aggregate book value equal to 10% or more of the
net assets of the Company, (iv) any transaction that results in the issuance or
transfer by the Company of any stock of the Company or the subsidiary
representing 5% or more of the total market value of the outstanding stock of
the Company to any interested shareholder within a 12-month period, except
pursuant to a transaction that effects a pro rata distribution to all
shareholders of the Company, (v) the adoption of any plan or proposal for the
liquidation or dissolution of the corporation in which anything other than cash
will be received by an interested shareholder, and (vi) any transaction
occurring within a 12-month period involving the Company or a subsidiary of the
Company that has the effect of increasing by 5% or more the proportionate share
of the stock of any class or series of the Company or the subsidiary that is
directly or beneficially owned by the interested shareholder. An "interested
shareholder" is defined the same as it is defined in the Georgia Business
Combination Statute. A "continuing director" includes any director who is not an
affiliate or associate of an interested shareholder or any Board-approved
successor of such a director who is not an affiliate or associate of an
interested shareholder.
The Fair Price provisions do not restrict a business combination if: (a)
the aggregate amount of the cash, and fair market value of any non-cash
property, measured five days before the consummation date, to be received per
share by the shareholders is at least equal to the highest of: (i) the highest
per share price,
49
<PAGE> 51
including brokerage commissions, transfer taxes, and soliciting dealers' fees,
paid by the interested shareholder for any shares of the same class or series
acquired by it within two years preceding the announcement date or in the
transaction in which it became an interested shareholder, (ii) the higher of the
fair market value per share as determined on the announcement date or the
determination date, or (iii) in the case of shares other than Common Stock, the
highest amount per share to which preferred shareholders are entitled in the
event of liquidation, dissolution, or winding up of the corporation, provided
that subparagraph (iii) shall only be applicable if the interested shareholder
acquired the shares within the two-year period immediately preceding the
announcement date; and (b) shareholders receive cash or the form of
consideration used in the past by the interested shareholder to purchase the
largest number of shares of such class or series. Further, subject to
exceptions, prior to the time the business combination with the interested
shareholder takes place, without the approval of the Board of Directors, there
must have been: (i) no failure to declare and pay full dividends on the
Company's outstanding Preferred Stock, (ii) no reduction in the annual rate of
dividends paid on common shares except as to reflect any subdivision of the
shares, (iii) an increase in the annual rate of dividends to reflect any
reclassification of shares, and (iv) not more than a 1% increase in the
interested shareholder's ownership of any of the Company's capital stock in any
12-month period. An interested shareholder may not receive a direct or indirect
benefit, except proportionately as a shareholder, of any loans, advances,
guarantees, pledges, or other financial assistance or any tax credits or other
tax advantages provided by the corporation or its subsidiaries, either in
anticipation of or in connection with such business combination or otherwise.
LISTING
Application has been made to include the Company's Common Stock on the
Nasdaq National Market under the trading symbol "EIII."
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Company's Common Stock is SunTrust Bank,
Atlanta, located in Atlanta, Georgia.
50
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the securities
of the Company.
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option or options currently outstanding). Of these shares, the
shares sold in the Offering will be freely tradable without
restriction or further registration under the Securities Act, unless they are
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act (which sales would be subject to certain limitations
and restrictions described below). The remaining shares of Common
Stock may be sold in the public market only if registered or pursuant to an
exemption from registration, such as Rule 144 promulgated under the Securities
Act. The holders of all remaining shares have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of, or agree to dispose of, any shares of Common Stock until 180 days after the
date of this Prospectus without the prior written consent of UBS Securities LLC.
See "Underwriting." UBS Securities LLC, in its sole discretion and without
notice, may earlier release for sale in the public market all or any portion of
the shares subject to the lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period, a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (approximately shares
immediately after the Offering) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks preceding the required filing of a
Form 144 with respect to such sale. Sales under Rule 144 are subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice filing provisions of Rule 144 and, unless otherwise
restricted, may therefore sell such shares immediately upon the completion of
the Offering. Under Rule 701 under the Securities Act, persons who purchase
shares upon exercise of options granted prior to the Offering are entitled to
sell such shares 90 days after the Offering in reliance on Rule 144, without
having to comply with the holding period requirements of Rule 144 and, in the
case of non-affiliates, without having to comply with the volume limitation or
notice filing provisions of Rule 144.
After the expiration of the 180-day lock-up period, shares,
including the shares offered hereby or the shares which may be purchased upon
the exercise of options then exercisable, will be eligible for sale in the
public market subject, in some cases, to compliance with Rule 144 or Rule 701.
The Company is unable to estimate accurately the number of "restricted" shares
that will be sold under Rule 144 since this will depend in part on the market
price for the Common Stock, the personal circumstances of the seller and other
factors. See "Risk Factors -- Shares Eligible for Future Sale."
After the completion of the Offering, the Company intends to file
Registration Statements on Form S-8 under the Securities Act to register the
3,000,000 shares of Common Stock reserved for issuance under the Company's Stock
Incentive Plan, as well as the shares reserved for issuance upon exercise of
options to purchase an additional 148,354 shares of Common Stock granted other
than pursuant to such plan. After the date of such filing (if not otherwise
subject to a lock-up agreement), shares purchased pursuant to such options
generally would be available for resale in the public market. The Company has
granted options to purchase an aggregate of 1,047,273 shares, of which no
options are currently exercisable. See "Management -- Stock Option and Other
Compensation Plans."
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<PAGE> 53
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
to be entered into in connection with the Offering, the Underwriters named below
(the "Underwriters"), for whom Warburg Dillon Read LLC and SoundView Financial
Group, Inc. are acting as Representatives (the "Representatives"), have agreed
to purchase from the Company and the Selling Shareholders the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Warburg Dillon Read LLC.....................................
SoundView Financial Group, Inc..............................
-------
Total.............................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any such shares are
purchased. The Underwriting Agreement contains certain provisions whereby, if
any Underwriter defaults in its obligation to purchase shares, and the aggregate
obligations of the Underwriters so defaulting do not exceed 10% of the shares
offered hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers, at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to other Underwriters or
to certain other dealers. After the public offering of the shares of Common
Stock, the offering price and other selling terms may be changed by the
Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable no later than 30 days after the date of this Prospectus,
to purchase up to a total of additional shares of Common Stock to
cover over-allotments, if any, at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
To the extent that the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered
hereby. The Company and the Selling Shareholders will be obligated, pursuant to
the option, to sell such shares to the Underwriters to the extent the option is
exercised.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The executive officers, directors, Selling Shareholders and certain other
shareholders of the Company have agreed that they will not, without the prior
written consent of Warburg Dillon Read LLC, offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
for a period of 180 days after the date of the Underwriting Agreement. The
Company has agreed that it will not, without the prior written consent of
Warburg Dillon Read LLC, offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the date of this Prospectus, except that the
Company may issue shares
52
<PAGE> 54
upon the exercise of options granted prior to the date hereof, and may grant
additional options under its Stock Incentive Plan, provided that, without the
prior written consent of Warburg Dillon Read LLC, such additional options shall
not be exercisable during such period. See "Shares Eligible for Future Sale."
In connection with the Offering and in compliance with applicable law
including Regulation M, the Underwriters may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the Common
Stock at levels above those which might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid, or the effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of a security. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the Offering.
A penalty bid means an arrangement that permits Warburg Dillon Read LLC, as
managing underwriter, to reclaim a selling concession from a syndicate member in
connection with the Offering when the shares of Common Stock originally sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
In connection with the Offering, certain Underwriters, who are qualified
registered market makers on the Nasdaq National Market, may engage in passive
market making on Nasdaq in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for such security; if all
independent bids are lowered before the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded. Passive
market making may stabilize the market price of the Common Stock above
independent market level and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of five percent of the number of shares of Common Stock
offered hereby.
53
<PAGE> 55
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company and the Selling Shareholders by
Morris, Manning & Martin, L.L.P., Atlanta, Georgia. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, Austin, Texas.
EXPERTS
The Consolidated Financial Statements of E3 Corporation as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, 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 Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with 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.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N. W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, Room 1400, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at
prescribed rates. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commissions'
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The
Commission maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Information concerning
the Company is also available for inspection at the offices of the Nasdaq
National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish to its shareholders annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited consolidated financial information.
54
<PAGE> 56
E3 CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997
and March 31, 1998 (Unaudited)............................ F-3
Consolidated Statements of Income for years ended December
31, 1995, 1996 and 1997 and the Three-Month Periods ended
March 31, 1997 and 1998 (Unaudited)....................... F-4
Consolidated Statements of Shareholders' Equity for years
ended December 31, 1995, 1996 and 1997 and the Three-Month
Period ended March 31, 1998 (Unaudited)................... F-5
Consolidated Statements of Cash Flows for years ended
December 31, 1995, 1996 and 1997 and the Three-Month
Periods ended March 31, 1997 and 1998 (Unaudited)......... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
E3 Corporation
We have audited the accompanying consolidated balance sheets of E3
Corporation as of December 31, 1996 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ending December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of E3 Corporation
at December 31, 1996 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
February 13, 1998, except for Note 9,
as to which the date is May 14, 1998
F-2
<PAGE> 58
E3 CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 4,575,424 $ 7,318,181 $ 9,247,629
Accounts receivable, net of allowances of $190,000
and $590,000 in 1996 and 1997, respectively....... 6,545,720 6,486,129 5,285,808
Accounts receivable from employees................... 76,815 16,378 --
Prepaid expenses and other current assets............ 262,780 212,180 128,115
Deferred income taxes................................ 307,542 495,692 495,692
----------- ----------- -----------
Total current assets......................... 11,768,281 14,528,560 15,157,244
Property and equipment:
Furniture and equipment.............................. 1,679,757 2,157,940 2,289,122
Purchased software................................... 235,100 212,856 217,295
Leasehold improvements............................... 351,624 412,489 425,399
----------- ----------- -----------
2,266,481 2,783,285 2,931,816
Less accumulated depreciation and amortization....... (1,092,819) (1,524,883) (1,659,647)
----------- ----------- -----------
1,173,662 1,258,402 1,272,169
Other assets........................................... 37,599 37,256 89,876
----------- ----------- -----------
Total assets................................. $12,979,542 $15,824,218 $16,519,289
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 983,206 $ 299,338 $ 368,227
Accrued expenses..................................... 1,267,446 1,555,960 1,674,385
Accrued bonuses...................................... -- 680,000 --
Accrued commissions.................................. 424,808 553,649 172,248
Income taxes payable................................. 578,437 515,769 1,049,271
Deferred revenue..................................... 4,603,032 5,350,677 5,574,727
----------- ----------- -----------
Total current liabilities.................... 7,856,929 8,955,393 8,838,858
Deferred income taxes.................................. 32,343 30,400 30,400
Commitments
Shareholders' equity:
Common stock, par value $.05 per share, authorized
50,000,000 shares, issued 15,987,550 at December
31, 1996 and 15,649,350 shares at December 31,
1997 and March 31, 1998 (unaudited)............... 799,378 782,468 782,468
Retained earnings.................................... 4,343,169 6,236,676 7,053,506
Foreign currency translation adjustments............. 24,866 (180,719) (185,943)
----------- ----------- -----------
5,167,413 6,838,425 7,650,031
Less: Treasury stock -- 338,200 shares at December
31, 1996.......................................... (77,143) -- --
----------- ----------- -----------
Total shareholders' equity................... 5,090,270 6,838,425 7,650,031
----------- ----------- -----------
Total liabilities and shareholders' equity... $12,979,542 $15,824,218 $16,519,289
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 59
E3 CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license fees.......... $11,199,140 $12,588,646 $14,518,779 $5,185,274 $4,107,170
Services and maintenance
fees........................ 5,044,295 7,200,332 10,342,595 2,350,715 3,392,265
----------- ----------- ----------- ---------- ----------
Total revenue.......... 16,243,435 19,788,978 24,861,374 7,535,989 7,499,435
Expenses:
Cost of services and
maintenance fees............ 3,035,540 5,039,624 5,995,554 1,141,055 1,503,943
Sales and marketing............ 3,684,206 4,862,333 7,468,710 1,711,013 2,291,211
General and administrative..... 4,192,920 3,562,370 4,553,113 852,540 1,478,932
Product development............ 2,413,721 2,586,411 3,171,316 678,505 718,122
----------- ----------- ----------- ---------- ----------
Total expenses......... 13,326,387 16,050,738 21,188,693 4,383,113 5,992,208
----------- ----------- ----------- ---------- ----------
Income from operations........... 2,917,048 3,738,240 3,672,681 3,152,876 1,507,227
Interest income, net............. 92,633 97,642 200,000 28,619 59,697
Other income (expense), net...... 23,749 6,383 (39,310) -- (52,776)
----------- ----------- ----------- ---------- ----------
116,382 104,025 160,690 28,619 6,921
----------- ----------- ----------- ---------- ----------
Income before income taxes....... 3,033,430 3,842,265 3,833,371 3,181,495 1,514,148
Provision for income taxes....... 974,978 1,581,680 1,575,307 1,307,431 620,802
----------- ----------- ----------- ---------- ----------
Net income....................... $ 2,058,452 $ 2,260,585 $ 2,258,064 $1,874,064 $ 893,346
=========== =========== =========== ========== ==========
Net income per common
share -- basic and diluted..... $ 0.13 $ 0.14 $ 0.14 $ 0.12 $ 0.06
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 60
E3 CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN CURRENCY TOTAL
COMMON RETAINED TRANSLATION TREASURY SHAREHOLDERS'
STOCK EARNINGS ADJUSTMENTS STOCK EQUITY
-------- ---------- ---------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994....... $794,675 $ 917,310 $ (6,535) $(77,143) $1,628,307
Comprehensive income:
Net income..................... -- 2,058,452 -- -- 2,058,452
Other comprehensive income..... -- -- 10,153 -- 10,153
----------
Comprehensive income......... -- -- 2,086,605
Dividends -- $.039 per share...... -- (605,092) -- -- (605,092)
-------- ---------- --------- -------- ----------
Balances at December 31, 1995....... 794,675 2,370,670 3,618 (77,143) 3,091,820
Comprehensive income:
Net income..................... -- 2,260,585 -- -- 2,260,585
Other comprehensive income..... -- -- 21,248 -- 21,248
----------
Comprehensive income......... 2,281,833
Dividends -- $.019 per share...... -- (303,858) -- -- (303,858)
Issuance of common stock.......... 4,703 15,772 -- -- 20,475
-------- ---------- --------- -------- ----------
Balances at December 31, 1996....... 799,378 4,343,169 24,866 (77,143) 5,090,270
Comprehensive income:
Net income..................... -- 2,258,064 -- -- 2,258,064
Other comprehensive income..... -- -- (205,585) -- (205,585)
----------
Comprehensive income......... 2,052,479
Dividends -- $.019 per share...... -- (304,324) -- -- (304,324)
Retirement of treasury stock...... (16,910) (60,233) -- 77,143 --
-------- ---------- --------- -------- ----------
Balances at December 31, 1997....... 782,468 6,236,676 (180,719) -- 6,838,425
Comprehensive income:
Net income (unaudited)......... -- 843,346 -- -- 893,346
Other comprehensive income
(unaudited).................. -- -- (5,224) -- (5,224)
----------
Comprehensive income
(unaudited)............... 888,122
Dividends -- $.005 per share
(unaudited).................... -- (76,516) -- -- (76,516)
-------- ---------- --------- -------- ----------
Balances at March 31, 1998
(unaudited)....................... $782,468 $7,053,506 $(185,943) $ -- $7,650,031
======== ========== ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 61
E3 CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................ $ 2,058,452 $ 2,260,585 $ 2,258,064 $ 1,874,064 $ 893,346
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization............... 268,888 361,775 460,864 99,419 134,764
Provision for doubtful
accounts................... 2,010 42,453 400,000 19,439 --
Provision for deferred
taxes...................... (409,842) 249,432 (190,093) -- --
Changes in operating assets
and liabilities:
Accounts receivable........ (2,661,350) (1,342,082) (380,897) 287,033 1,200,321
Accounts receivable from
employees............... (7,434) (37,247) 41,730 (7,950) 16,378
Prepaid expenses and other
current assets.......... (133,614) (278,926) 264,045 106,568 84,065
Other assets............... (52,634) 15,044 342 (59,110) (52,620)
Accounts payable........... 1,274,423 (172,485) (684,018) (29,971) 68,889
Accrued expenses........... 134,108 452,766 266,630 (846,882) 118,425
Accrued bonuses............ -- -- 680,000 280,000 (680,000)
Accrued commissions........ 77,930 (179,106) 128,841 153,020 (381,401)
Income taxes payable....... (466,064) 435,247 (209,089) 816,353 533,502
Deferred revenue........... 1,618,556 206,918 754,078 (1,449,291) 224,050
Deferred rent.............. (125,115) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating
activities............ 1,578,314 2,014,374 3,790,497 1,242,692 2,159,719
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of equipment............ (709,923) (612,070) (634,906) (124,493) (148,531)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities............ (709,923) (612,070) (634,906) (124,493) (148,531)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Payments of dividends............. (605,092) (303,858) (304,324) (75,637) (76,516)
Issuance of common stock.......... -- 20,475 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
financing
activities............ (605,092) (283,383) (304,324) (75,637) (76,516)
----------- ----------- ----------- ----------- -----------
Effect of exchange rate
fluctuations on cash............ 55,717 3,232 (108,510) (4,362) (5,224)
----------- ----------- ----------- ----------- -----------
Increase in cash.................. 319,016 1,122,153 2,742,757 1,038,200 1,929,448
Cash at beginning of period....... 3,134,255 3,453,271 4,575,424 4,575,424 7,318,181
----------- ----------- ----------- ----------- -----------
Cash at end of period............. $ 3,453,271 $ 4,575,424 $ 7,318,181 $ 5,613,624 $ 9,247,629
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the period for
income taxes.................... $ 1,859,710 $ 1,217,800 $ 1,340,621 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 62
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
E3 Corporation (the "Company") develops and markets inventory management
software and provides related consulting, education and maintenance services
principally in the United States and in western Europe through its subsidiaries
in France, Germany, Sweden, the United Kingdom and Italy. In January 1998, the
Company changed its name to E3 Corporation from Technology Investment Leasing &
Loan, Inc. and changed the name of its United States subsidiary to E3 North
America, Inc. from E3 Associates, Ltd.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of E3 Corporation include the
accounts of E3 Corporation and its subsidiaries, E3 North America, Inc., E3
Norden AB, E3 (Deutschland) GmbH, E3 France S.A., E3 United Kingdom, Ltd. and E3
Italia S.R.L., collectively "E3", and the accounts of Inventory Management
Institute, Inc. ("IMI"), all collectively referred to as the "Company." All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the 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 inevitably will differ from those estimates,
and such differences may be material to the financial statements.
EARNINGS PER SHARE
Earnings per share has been calculated following Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic earnings
per share is computed by dividing net income by weighted average shares
outstanding and does not include potentially dilutive securities. Diluted
earnings per share is computed by dividing net income by weighted average shares
outstanding, including potentially dilutive securities using the treasury stock
method based on the average stock price for the period. Outstanding stock
purchase options had no impact for any of the periods reported as the exercise
price of the options exceeded management's estimate of the average fair value
per share for each period.
In February 1998 the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the guidance of SAB 98 the
Company had no "nominal issuances." Therefore, application of SAB 98 had no
impact on the earnings per share calculation.
F-7
<PAGE> 63
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator -- net income available
to common shareholders.......... $ 2,058,452 $ 2,260,585 $ 2,258,064 $ 1,874,064 $ 893,346
=========== =========== =========== =========== ===========
Denominator for basic net income
per share -- weighted average
shares outstanding.............. 15,555,300 15,645,170 15,649,350 15,649,350 15,649,350
Effect of dilutive
securities -- employee stock
options......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Denominator for diluted net income
per share -- adjusted weighted
average shares outstanding and
assumed conversion of dilutive
securities...................... 15,555,300 15,645,170 15,649,350 15,649,350 15,649,350
=========== =========== =========== =========== ===========
Net income per share -- basic..... $ 0.13 $ 0.14 $ 0.14 $ 0.12 $ 0.06
=========== =========== =========== =========== ===========
Net income per share -- diluted... $ 0.13 $ 0.14 $ 0.14 $ 0.12 $ 0.06
=========== =========== =========== =========== ===========
</TABLE>
REVENUE RECOGNITION
During 1995, 1996 and 1997, the Company recognized revenue in accordance
with AICPA Statement of Position 91-1, "Software Revenue Recognition." Revenue
from the licensing of computer software is recognized when collectibility is
assessed as probable, there are no significant remaining obligations, and the
software has been delivered. Revenue from certain license agreements which give
the customer a short-term right of return is reduced by an estimate of future
returns. Revenue from consulting and education services is recognized at the
time services are performed. Revenue from customer use fees (maintenance fees)
is recognized ratably over the period of the agreements.
In October 1997 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2 "Software Revenue
Recognition," as amended by SOP 98-4, which supersedes SOP 91-1 and is effective
for transactions entered into for fiscal years beginning after December 31,
1997. While some principles remain the same, there are several key differences
between the two pronouncements, including accounting for multiple element
arrangements. The Company adopted SOP 97-2 effective January 1, 1998 for
transactions entered into during the first quarter ended March 31, 1998. There
was no material financial impact due to the adoption of 97-2 as the separate
elements of multiple element contracts have been separately priced; contracts
generally have not required significant production, modification or
customization of software; and service elements have not been considered
essential to the functionality of software delivered and are recognized
separately as services are performed.
Deferred revenue represents payments received prior to delivery of the
related products or services.
COMPUTER SOFTWARE
Research and development costs are expensed as incurred. Capitalization of
software development costs does not commence until technological feasibility of
the product is established and ceases when the product is available for general
release to customers. The Company did not capitalize any software development
costs in 1995, 1996 or 1997.
F-8
<PAGE> 64
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided over the
estimated useful lives of the related assets (furniture and equipment -- 5
years, purchased software -- 3 years, leasehold improvements -- life of lease)
using the straight-line method for financial reporting purposes.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
approximately $161,000, $291,000 and $661,000 in advertising costs during 1995,
1996 and 1997, respectively.
STOCK BASED COMPENSATION
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and, accordingly,
recognizes no compensation expense for stock options with fixed terms and
exercise prices equal to or greater than fair value at the date of grant.
Compensation expense is recognized for increases in the estimated fair value of
common stock for stock options with variable terms. In October 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which provides an alternative to APB 25
in accounting for stock-based compensation issued to employees. However, the
Company continues to account for stock-based compensation in accordance with APB
25.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS 130 as of January 1, 1998 and all prior periods have been
restated to conform with the requirements of SFAS 130. There was no impact on
previously reported net income, total assets or shareholders' equity as a result
of adopting SFAS 130.
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 requires reporting segment profit or loss, certain specific
revenue and expense items, and segment assets. It requires reconciliations of
total segment revenues, total segment profit or loss, total segment assets, and
other amounts disclosed for segments to corresponding amounts in the
enterprise's general-purpose financial statements. It requires that all public
business enterprises report information about the revenues derived from the
enterprise's products or services (or groups of similar products and services),
about the countries in which the enterprise earns revenues and holds assets, and
about major customers regardless of
F-9
<PAGE> 65
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
whether that information is used in making operating decisions. SFAS 131 is
effective for financial statements for annual periods beginning after December
15, 1997. In the initial year of application, comparative information for
earlier years is to be restated. The Company intends to adopt the provisions of
SFAS 131 in 1998 and does not expect their application to have a material impact
on the financial position or results of operations of the Company.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements include all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for fair presentation of the financial position of the Company as of
March 31, 1998 and the results of operation for the quarters ended March 31,
1997 and 1998, as presented in the accompanying unaudited interim financial
statements.
RECLASSIFICATIONS
Certain amounts within the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
2. FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable.
At December 31, 1997, approximately $4,600,000 of cash is deposited in two
United States financial institutions. Credit risk is subject to the financial
security of the institutions. In addition, approximately $2,700,000 of the
December 31, 1997 cash and cash equivalents balance is held in financial
institutions in western Europe and is subject to the financial security of the
institutions.
Accounts receivable are unsecured and due under stated terms. Credit risk
with respect to trade accounts receivable is subject to the financial security
of each customer. The Company does not require collateral. Receivables generally
are due within 30 days, and management records estimates of expected credit
losses and returns of products sold. The Company did not record any writeoffs of
accounts receivable against the allowance for doubtful accounts in 1995, 1996 or
1997.
In addition, the foreign subsidiaries carry their cash, accounts receivable
and accounts payable in foreign currencies. Net assets, excluding intercompany
balances, of the Company's foreign subsidiaries included in the Company's
consolidated financial statements totaled approximately $3,300,000 at December
31, 1997. Revenue of the foreign subsidiaries totaled approximately $7,400,000
in 1997.
FAIR VALUE
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, accounts receivable and accounts payable.
3. LEASES
The Company leases certain office space and certain office equipment under
noncancellable operating leases with initial or remaining terms of one year or
more. Rent expense under all operating leases was approximately $1,258,000,
$1,264,000 and $1,023,000 in 1995, 1996 and 1997, respectively.
F-10
<PAGE> 66
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual rental payments at December 31, 1997 under these
noncancelable leases are as follows:
<TABLE>
<CAPTION>
U.S. EUROPE TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1998............................................... $ 793,253 $ 246,601 $1,039,854
1999............................................... 714,998 209,762 924,760
2000............................................... 586,435 272,553 858,988
2001............................................... 96,622 148,310 244,932
2002............................................... -- 145,854 145,854
Thereafter......................................... -- 158,723 158,723
---------- ---------- ----------
$2,191,308 $1,181,803 $3,373,111
========== ========== ==========
</TABLE>
4. INCOME TAXES
The Company accounts for income taxes using the liability method required
by FASB Statement No. 109. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The components of the provision for (benefit from) income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Foreign expense.................................. $ 32,656 $ 151,353 $ 194,204
Domestic expense................................. 1,352,164 1,180,895 1,571,196
---------- ---------- ----------
1,384,820 1,332,248 1,765,400
Deferred:
Domestic (benefit) expense....................... (409,842) 249,432 (190,093)
---------- ---------- ----------
$ 974,978 $1,581,680 $1,575,307
========== ========== ==========
</TABLE>
Deferred income taxes reflect 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. Undistributed earnings of
the Company's foreign subsidiaries amounted to approximately $68,000 at December
31, 1997. Those earnings are considered to be permanently reinvested and,
accordingly, no provision for deferred U.S. federal and state income taxes has
been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to adjustment for foreign tax credits) and withholding taxes payable to
the various foreign countries.
F-11
<PAGE> 67
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Assets:
Foreign net operating loss carryforwards........ $ 84,000 $ 42,000 $ --
Allowance for doubtful accounts................. 55,996 55,996 224,200
Accrued liabilities............................. 514,398 251,546 271,492
Valuation allowance............................... (84,000) (42,000) --
-------- -------- --------
Total deferred tax assets............... 570,394 307,542 495,692
Liabilities:
Depreciation.................................... (71,318) (32,343) (30,400)
-------- -------- --------
Net deferred tax assets................. $499,076 $275,199 $465,292
======== ======== ========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax at U.S. statutory rates........................ $1,031,400 $1,306,400 $1,303,346
State taxes........................................ 119,337 153,691 154,606
Nondeductible expenses............................. 23,800 73,803 105,271
Change in valuation allowance...................... (68,287) 42,000 (42,000)
R&D credit......................................... (66,767) (20,081) (50,000)
Foreign tax rate differences....................... 17,851 54,132 91,624
Foreign tax credit................................. (20,298) (4,115) --
Other.............................................. (62,058) (24,150) 12,460
---------- ---------- ----------
Total tax expense........................ $ 974,978 $1,581,680 $1,575,307
========== ========== ==========
</TABLE>
During 1995, 1996 and 1997, the Company utilized approximately $207,000,
$159,000 and $111,000, respectively, of foreign net operating loss carryforwards
to reduce taxable income in the respective tax jurisdictions. At December 31,
1997, the Company had no remaining foreign net operating loss carryforwards.
The income (loss) before income taxes for each of the foreign locations is
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
E3 Norden AB...................................... $ 76,725 $ (27,988) $(149,206)
E3 GmbH........................................... (13,276) 216,033 224,128
E3 France S.A. ................................... 193,983 60,785 45,809
E3 United Kingdom, Ltd............................ 27,290 93,329 122,352
E3 Italia S.R.L. ................................. -- (933) 21,601
</TABLE>
5. SHAREHOLDERS' EQUITY
On November 5, 1997, the Company's directors approved a stock dividend for
shareholders of record at such date, increasing the number of shares outstanding
from 82,365 shares to 15,649,350 shares, effective January 1, 1998. All share
and per share amounts related to Common Stock have been retroactively restated
to reflect the stock split for all periods presented.
All shareholders are subject to a Shareholders' Agreement which, among
other things, give the Company and the shareholders of the Company the right of
first refusal to purchase their shares at one and one-half times book value,
subject to certain adjustments, per share. The Shareholders' Agreement expires
upon the registration of any of the Company's shares with the Securities and
Exchange Commission.
F-12
<PAGE> 68
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
The Company adopted a Stock Incentive Plan, effective on January 1, 1997.
The aggregate number of shares reserved for issuance under the Stock Incentive
Plan is 3,000,000 shares. The purpose of the Stock Incentive Plan is to provide
incentives for key employees, officers, consultants and directors to promote the
success of the Company and to enhance the Company's ability to attract and
retain the services of such persons.
Options granted under the Stock Incentive Plan may be either options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended, or nonqualified stock options.
As of December 31, 1997 options to purchase 707,419 shares of Common Stock
were outstanding under the Stock Incentive Plan and no shares of Common Stock
have been issued upon exercise of options granted under the Stock Incentive
Plan. In addition to options issued under the Stock Incentive Plan, at December
31, 1997, the Company has outstanding options to purchase an aggregate of
148,354 shares of Common Stock granted to employees outside of the Stock
Incentive Plan. Options outstanding vest over the second, third, and fourth
anniversaries of the grant date and have a term of ten years.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options rather than the alternative fair value
accounting provided for under SFAS 123. Under APB 25, when the exercise price of
the company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 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 of that Statement. The fair
value for these options was estimated at the date of grant using the "minimum
value" option pricing model with the following weighted-average assumptions for
1996 and 1997, respectively; risk-free interest rates of 6%; dividend yield of
0%, no weighted average volatility factor and a weighted-average expected life
of the options of 4 years. Calculated under SFAS 123, the options granted in
1996 and 1997 were estimated to have no value and pro forma net income and net
income per share for 1996 and 1997 are the same as reported in the consolidated
statements of income.
A summary of the Company's option activity and related information follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995............................ -- N/A
Granted................................................... 148,354 $9.10
-------
Outstanding at December 31, 1996............................ 148,354 $9.10
Granted................................................... 707,419 $9.70
-------
Outstanding at December 31, 1997............................ 855,773 $9.59
=======
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 range from
$9.10 to $11.05 per share, all of which exceeded the Company's estimate of fair
value of Common Stock on the grant date. Options outstanding at December 31,
1997 had a weighted average remaining life of 9.15 years. There were no options
exercisable at December 31, 1996 or December 31, 1997.
At December 31, 1997, the Company had 2,292,581 shares available for future
grant under the Stock Incentive Plan.
F-13
<PAGE> 69
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BENEFIT PLAN
The Company has a defined contribution plan covering substantially all
employees. Under the provisions of the plan, which qualifies under Section
401(k) of the Internal Revenue Code, participating employees may elect to
contribute specified amounts of their salaries to a trust for investment. The
Company contributes an amount which is determined on an annual basis depending
on profits. In 1995, 1996 and 1997, approximately $53,000, $78,000 and $85,000,
respectively, was charged to expense under the plan.
7. GEOGRAPHIC INFORMATION
Sales, operating expenses and identifiable assets, classified by the major
geographic areas in which the Company operates are as follows:
<TABLE>
<CAPTION>
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
1995
Revenue:
Customers -- non-export............. $10,710,949 $4,307,486 $ -- $15,018,435
Customers -- export................. 1,225,000 -- -- 1,225,000
Intercompany........................ 667,498 -- (667,498) --
----------- ---------- --------- -----------
Total....................... $12,603,447 $4,307,486 $(667,498) $16,243,435
=========== ========== ========= ===========
Operating income...................... $ 2,007,740 $ 909,308 $ -- $ 2,917,048
=========== ========== ========= ===========
Identifiable assets(1)................ $ 9,617,018 $ 891,717 $ -- $10,508,735
=========== ========== ========= ===========
1996
Revenue:
Customers -- non-export............. $11,552,429 $6,991,549 $ -- $18,543,978
Customers -- export................. 1,245,000 -- -- 1,245,000
Intercompany........................ 982,744 -- (982,744) --
----------- ---------- --------- -----------
Total....................... $13,780,173 $6,991,549 $(982,744) $19,788,978
=========== ========== ========= ===========
Operating income...................... $ 2,425,420 $1,312,828 $ -- $ 3,738,248
=========== ========== ========= ===========
Identifiable assets(1)................ $10,700,251 $2,279,291 $ -- $12,979,542
=========== ========== ========= ===========
1997
Revenue:
Customers -- non-export............. $17,175,151 $7,401,223 $ -- $24,576,374
Customers -- export................. 285,000 -- -- 285,000
Intercompany........................ 701,061 -- (701,061) --
----------- ---------- --------- -----------
Total....................... $18,161,212 $7,401,223 $(701,061) $24,861,374
=========== ========== ========= ===========
Operating income...................... $ 3,364,427 $ 308,254 $ -- $ 3,672,681
=========== ========== ========= ===========
Identifiable assets(1)................ $12,529,869 $3,294,349 $ -- $15,824,218
=========== ========== ========= ===========
</TABLE>
- ---------------
(1) Identifiable assets are net of intercompany investment.
Export sales from the United States are principally to Australia, Canada
and Latin America. Intercompany sales between geographic areas are at amounts
above cost and in accordance with the rules and regulations of the respective
governing tax authorities. Operating income is total revenue less operating
expenses. United States operating income is net of corporate expenses.
F-14
<PAGE> 70
E3 CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
In 1996, the Company paid a $500,000 fee for consulting services to a
corporation that is wholly-owned by Anders H. Herlitz, the Company's Chairman
and Chief Executive Officer.
9. SUBSEQUENT EVENTS
The Company amended its Articles of Incorporation, effective January 1,
1998, changing the name of the Company to E3 Corporation and authorizing the
total shares of Common Stock available for issuance to 50,000,000 shares.
On February 1, 1998, the Company granted to employees options to purchase
191,500 shares of Common Stock for an exercise price of $11.25 per share.
On May 14, 1998, the Company's Board of Directors approved an amendment,
subject to and contingent upon completion of an initial public offering, of its
Articles of Incorporation to increase the authorized shares of $.05 par value
Common Stock to 100,000,000 shares and to authorize 50,000,000 shares of $.01
par value Preferred Stock.
F-15
<PAGE> 71
No dealer, salesperson or any person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer made by this Prospectus, and if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby to any one in any jurisdiction in which such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date of
this Prospectus.
---------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Consolidated Financial Data....... 18
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................. 19
Business................................... 29
Management................................. 40
Certain Transactions....................... 44
Principal and Selling Shareholders......... 46
Description of Capital Stock............... 47
Shares Eligible for Future Sale............ 51
Underwriting............................... 52
Legal Matters.............................. 54
Experts.................................... 54
Additional Information..................... 54
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
Until , 1998 (25 days after the date of this
Prospectus), all dealers effecting transactions in the Common Stock, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This 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.
SHARES
[E3 LOGO]
E3 CORPORATION
COMMON STOCK
---------------------------
PROSPECTUS
, 1998
---------------------------
WARBURG DILLON READ LLC
SOUNDVIEW FINANCIAL
GROUP, INC.
<PAGE> 72
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $11,800
National Association of Securities Dealers, Inc. fee........ 4,500
Nasdaq National Market listing fee.......................... *
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
Transfer Agent's fees and expenses.......................... *
Printing and engraving expenses............................. *
Insurance policy............................................ *
Miscellaneous............................................... *
-------
Total Expenses.............................................. $ *
=======
</TABLE>
- ---------------
* To be completed by amendment.
All fees other than the SEC registration fee, the NASD fee and the Nasdaq
National Market listing fee are estimated. None of the expenses of the issuance
and distribution of the Common Stock being offered will be borne by the Selling
Shareholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Articles provide that the liability of the directors
for monetary damages shall be limited to the fullest extent permissible under
Georgia law. This limitation of liability does not affect the availability of
injunctive relief or other equitable remedies.
The Company's Restated Bylaws provide that the Company shall indemnify each
of its officers, directors, employees and agents to the extent that he or she is
or was a party, or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with such action, suit or proceeding; provided, however, that no indemnification
shall be made for (i) any appropriation, in violation of his duties, of any
business opportunity of the Company, (ii) acts or omissions which involve
intentional misconduct or a knowing violation of laws, (iii) any liability under
Section 14-2-832 of the GBCC, which relates to unlawful payments of dividends
and unlawful stock repurchases and redemptions, or (iv) any transaction from
which he derived an improper personal benefit.
Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued stock options to purchase an aggregate of 898,919
shares of Common Stock under its Stock Incentive Plan at a weighted average
exercise price of $10 per share. In addition, the Company has issued stock
options to purchase an aggregate of 148,354 shares of Common Stock at a weighted
average exercise price of $9.10 per share. No shares of Common Stock have been
issued pursuant to the exercise of such options.
II-1
<PAGE> 73
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1** -- Form of Underwriting Agreement.
3.1* -- Form of Amended and Restated Articles of Incorporation of
the Registrant.
3.2* -- Form of Amended and Restated Bylaws of the Registrant.
4.1* -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Common Stock of the Registrant.
4.2** -- Specimen Stock Certificate.
5.1** -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1* -- Lease Agreement by and between Two Park, Inc., having
LaSalle Partners Asset Management Limited, as its Agent and
E3 Associates, Ltd., dated November 8, 1990.
10.2* -- Amendment to Lease Agreement by and between Two Park, Inc.,
having LaSalle Partners Asset Management Limited, as its
Agent and E3 Associates, Ltd., dated August 14, 1995.
10.3* -- Second Amendment to Lease Agreement by and between Two Park,
Inc., having LaSalle Partners Asset Management Limited, as
its Agent and E3 Associates, Ltd., dated April 22, 1996.
10.4** -- Third Amendment to Lease Agreement by and between Alaska
Parkway Investment Group, Inc., as its duly authorized agent
and E3 North America, Inc. (f/k/a E3 Associates, Ltd.),
dated June , 1998.
10.5* -- Stock Incentive Plan of the Registrant.
10.6* -- Form of Stock Option Grant Certificate under the Stock
Incentive Plan of the Registrant.
10.7* -- E3 Associates, Ltd. 401(k) Employee Savings Plan Adoption
Agreement.
10.8 -- Promissory Note between Jan W. Herlitz and the Registrant,
dated July 23, 1998.
21.1* -- List of Subsidiaries.
23.1 -- Consent of Ernst & Young LLP.
23.2** -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
24.1* -- Powers of Attorney (included on signature page).
27.1* -- Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-2
<PAGE> 74
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant 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 Marietta, State of
Georgia on the 29th day of July, 1998.
E3 CORPORATION
By: /s/ R. LEE MORRIS
------------------------------------
R. Lee Morris
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and Chief July 29, 1998
- --------------------------------------------------- Executive Officer (Principal
Anders H. Herlitz Executive Officer)
* President, Chief Operating Officer July 29, 1998
- --------------------------------------------------- and Director
Frank K. Schuster
* Vice Chairman of the Board and July 29, 1998
- --------------------------------------------------- Senior Vice President -- Sales and
William H. Huther Marketing
/s/ R. LEE MORRIS Chief Financial Officer (Principal July 29, 1998
- --------------------------------------------------- Financial and Accounting Officer)
R. Lee Morris
* Director July 29, 1998
- ---------------------------------------------------
Thomas J. O'Haren
*By: /s/ R. LEE MORRIS
---------------------------------------------
R. Lee Morris,
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 1
EXHIBIT 10.8
E3 CORPORATION
PROMISSORY NOTE
$500,000 Marietta, Georgia
July 23, 1998
FOR VALUE RECEIVED, the undersigned, Jan W. Herlitz ("Maker"), hereby
promises to pay to E3 Corporation, a Georgia corporation or its registered
assigns (the "Holder"), at such place as the Holder shall from time to time
designate to the Maker in writing, a total of Five Hundred Thousand Dollars
($500,000) with interest from the date hereof to and including the maturity
hereof at the rate set forth in SECTION 1 of this Note, said principal and
interest being payable in installments, in accordance with SECTION 1, to the
person in whose name this Note is registered at the close of business on the
fifteenth day prior to the payment date, and at the stated or any accelerated
maturity hereof or, if any such date is not a day on which banks are open for
business in the State of Georgia (a "Business Day"), on the next day which is a
Business Day.
1. PRINCIPAL AND INTEREST.
(a) The principal balance of this Note shall be due and payable at the
earlier to occur of (i) consummation of the Holder's initial public offering of
common stock registered under the Securities Act of 1933, as amended (the "IPO")
and (ii) the six-month anniversary of the date of this Note (the "Payment
Date"). The Maker consents that proceeds from his sale of shares of Holder's
common stock in the IPO, equal to the principal balance, will be paid directly
to the Company. Interest on the principal amount hereof shall begin to accrue as
of the date hereof at a rate per annum equal to six percent (6%). Interest
shall be computed on the basis of a 360-day year. Accrued interest shall be
payable in arrears on the Payment Date until the principal amount hereof, and
all interest accrued thereon, is paid in full.
2. METHOD OF PAYMENT. The Maker will pay principal and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts. The Maker may pay principal and interest by
its check payable in such money, but until the Holder has received cash proceeds
equal to the amount of principal or interest so payable, the Holder shall not
have been deemed to have received such payment of principal and/or interest.
3. PREPAYMENT. This Note may be prepaid in part or in full at any time
without penalty or yield maintenance premium.
4. EVENT OF DEFAULT. An "Event of Default" shall occur if:
(a) Maker defaults in the payment of principal or interest on
this Note when the same becomes due and payable and such default continues for a
period of fifteen (15) days after notice of such default is delivered to Maker;
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(b) Maker pursuant to or within the meaning of Title 11, U.S.
Code or any other federal or state law for the relief of debtors, as any such
laws may be amended from time to time ("Bankruptcy Law"): (i) commences a
voluntary case, (ii) consents to the entry of an order for relief against him in
an involuntary case, (iii) consents to the appointment of a custodian or
receiver for all or substantially all of his property, or (iv) makes a general
assignment for the benefit of his creditors; or
(c) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that: (i) is for relief against the Maker in an
involuntary case, or (ii) appoints a custodian or receiver for all or
substantially all of his property and the order or decree remains unstayed and
in effect for 60 days.
5. ACCELERATION. If an Event of Default occurs and is continuing, the
Holder by notice to the Maker may declare the principal of and accrued but
unpaid interest on this Note to be due and payable immediately. Upon such
declaration such principal and interest shall be due and payable immediately.
6. OTHER REMEDIES. If an Event of Default occurs and is continuing, the
Holder may pursue any available remedy by proceeding at law or in equity to
collect the payment of principal of or interest on this Note. Except as
otherwise provided by law, a delay or omission by the Holder in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
7. WAIVER OF EXISTING DEFAULTS. The Holder may waive an existing Event
of Default and its consequences, provided that such waiver must be in a writing
delivered to the Maker. When an Event of Default is waived, it is deemed cured,
but no such waiver shall extend to any subsequent or other Event of Default or
impair any subsequent right.
8. MAXIMUM INTEREST RATE. In no event shall the amount of interest due
or payable hereunder exceed the maximum rate of interest allowed by applicable
law, and in the event any such payment is inadvertently paid by the Maker or
inadvertently received by the Holder, then such excess sum shall be credited as
a payment of principal, unless the Maker shall notify the Holder, in writing,
that the Maker elects to have such excess sum returned to it forthwith. It is
the express intent hereof that the Maker not pay and the Holder not receive,
directly or indirectly, in any manner whatsoever, interest in excess of that
which may be lawfully paid by the Maker under applicable law.
9. WAIVER. The Maker and each surety, endorser, guarantor, and other
party now or hereafter liable for payment of this Note, severally waive demand,
presentment for payment, notice of dishonor, protest, notice of protest,
diligence in collecting or bringing suit against any party liable hereon, and
further agree to any and all extensions, renewals, modifications, partial
payments, substitutions of evidence of indebtedness, and the taking or release
of any collateral with or without notice before or after demand by the Holder
for payment hereunder.
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10. COSTS AND ATTORNEYS' FEES. In the case of an Event of Default and
the same is placed in the hands of an attorney for collection, or suit is filed
hereon, or proceedings are had in bankruptcy, probate, receivership,
reorganization, arrangement, or other judicial proceedings for the establishment
or collection of any amount called for hereunder, or any amount payable or to be
payable hereunder is collected through any such proceedings, the Maker agrees to
pay to the Holder reasonable attorneys' fees and costs, including the fees and
costs incurred in any appeals, and any collection fees incurred in collection of
this Note.
11. TIME OF ESSENCE. Time is of the essence with respect to all of the
Maker's obligations and agreements under this Note.
12. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the internal laws of the State of Georgia without regard to
principles of conflicts of law.
/s/ Jan W. Herlitz
-------------------------------
Jan W. Herlitz
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report, dated
February 13, 1998, except for Note 9, as to which the date is May 14, 1998, in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-56427) and
related Prospectus of E3 Corporation.
/s/ Ernst & Young LLP
Ernst & Young LLP
Atlanta, Georgia
July 24, 1998
