<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1999
REGISTRATION NO. 333-81443
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TELEMATE.NET SOFTWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
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GEORGIA 7372 58-1656726
<S> <C> <C>
(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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4250 PERIMETER PARK SOUTH, SUITE 200
ATLANTA, GEORGIA 30341
(770) 936-3700
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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RICHARD L. MAURO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TELEMATE.NET SOFTWARE, INC.
4250 PERIMETER PARK SOUTH, SUITE 200
ATLANTA, GEORGIA 30341
(770) 936-3700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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COPIES TO:
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JOHN C. YATES, ESQ.
LAUREN Z. BURNHAM, ESQ. IRA A. GREENSTEIN, ESQ.
JOHN A. EARLES, ESQ. JERROLD M. RAPAPORT, ESQ.
MORRIS, MANNING & MARTIN, L.L.P. MORRISON & FOERSTER LLP
1600 ATLANTA FINANCIAL CENTER 1290 AVENUE OF THE AMERICAS
3343 PEACHTREE ROAD, N.E. NEW YORK, NEW YORK 10104
ATLANTA, GEORGIA 30326 (212) 468-8000
(404) 233-7000
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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. [ ]
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 COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1999
3,500,000 SHARES
TELEMATE.NET LOGO
COMMON STOCK
This is an initial public offering of common stock by Telemate.Net
Software, Inc. Of the 3,500,000 shares of common stock being sold in this
offering, we are selling 3,284,000 shares and the selling shareholders are
selling 216,000 shares. We will not receive any of the proceeds from the sale of
shares by the selling shareholders. The estimated initial public offering price
is between $12.00 and $14.00 per share.
We have applied to have the common stock approved for quotation on the
Nasdaq Stock Market under the symbol "TMNT."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 4.
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PER
SHARE TOTAL
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Initial public offering price.......................... $ $
Underwriting discounts................................. $ $
Proceeds to us, before expenses........................ $ $
Proceeds to the selling shareholders................... $ $
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The underwriters have an option for a period of 30 days to purchase a
maximum of 525,000 additional shares to cover over-allotments of shares. If this
option is exercised, the first 100,000 shares will be sold by selling
shareholders and the remainder will be sold by us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
SOUNDVIEW TECHNOLOGY GROUP
J.C. BRADFORD & CO.
THE ROBINSON-HUMPHREY COMPANY
Prospectus dated , 1999
<PAGE> 3
[ARTWORK DEPICTED IN PROSPECTUS]
1. Inside front page portrays the following:
Graphic with heading "Challenges of Internet Integration" includes a globe
labeled "An Internet Enabled Enterprise" The globe is surrounded by five
circles and connected with lines to each of the circles. The top circle is
labeled "Chief Executive Officer" and includes the questions "How are my
employees using the Internet and our voice network?," "How can I assure its
productive use?" and "What are my legal exposures?" The circle at the upper
right is labeled "Marketing" and includes the questions "Who is going to my
web site" and "How do I maximize payback from my web site?" The circle at
the lower right is labeled "Sales" and includes the questions "How many
sales calls are being made?" and "How productive is my sales force?" The
circle at the lower left is labeled "Finance" and includes the questions
"How can I allocate costs or bill users?" and "How do I manage spiraling
network expenses?" The circle at the upper right is labeled "Information
Technology" and includes the questions "Who is using up all our
bandwidth?," "Who is entering my network?," "Where are they going?" and "Is
my network secure?"
2. Inside front page gate-fold portrays the following:
Graphic with heading "Providing network intelligence for the Internet
economy" features the Telemate.Net Software logo. To the left of the logo
is a half circle labeled "Data Sources" that includes graphics depicting
and subheadings labeling "Firewalls/Proxy Server," "Intrusion Detection,"
"Web Server," "PBX/VoIP," and "VPN." An arrow labeled "Retrieve Data" leads
from the "Data Sources" half circle to the Telemate.Net logo. An arrow
labeled "Network Intelligence" leads from the Telemate.Net logo to five
sets of data reports. The set of reports at the top right is labeled
"Optimize Bandwidth Resources" and features reports labeled "Protocol
Summary" and "Access Frequency Analysis by Hour." The set of reports at the
top left is labeled "Control and Recover Network Costs" and features a
report labeled "Internet Utilization Cost Summary by User." The set of
reports at the center left is labeled "Improve Employee Productivity" and
features reports labeled "Internet Activity Overview by Department," and
"Total Volume Internet Activity by Destination Category." The set of
reports at the bottom left is labeled "Enhance Network Security" and
features a report labeled "Internet Security Violations by Hour." The set
of reports labeled "Integrated Network Intelligence" features reports
labeled "Integrated Most Frequent Outbound Activities" and "Integrated
Activity Overview by User." An arrow labeled "Refine Strategies and
Policies" leads from the five sets of data reports back to the "Data
Sources" half circle. A list at the right is headed "Management Information
Users" and includes bullet points labeled "Chief Executive Officer," "Chief
Financial Officer," "Information Technology," "Human Resources," "Sales,"
"Marketing," and "Webmaster."
3. Inside back page portrays the following:
Graphic with heading "Telemate.Net" and text stating "Telemate.Net
Software, Inc. provides software that enables businesses to monitor,
analyze and manage the use of both their Internet and voice networks. Our
Telemate.Net products enable businesses to optimize network utilization;
increase employee productivity; improve network security, enhance
electronic commerce; and control, allocate and recover network costs by
translating network usage data into meaningful management reports." The
text appears on a background featuring a globe overlayed with report data.
Another globe overlayed with report data is in the foreground. The globe in
the foreground also features several rings of light connecting locations on
the globe.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 4
Forward-looking Statements............ 10
Use of Proceeds....................... 11
Dividend Policy....................... 11
Dilution.............................. 12
Capitalization........................ 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
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PAGE
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Business.............................. 26
Management............................ 36
Related Party Transactions............ 43
Principal and Selling Shareholders.... 44
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
---------------------------
Telemate(R) and Telemate.Net(R) are registered trademarks of Telemate.Net
Software, Inc. This prospectus also includes registered and unregistered
trademarks, service marks, trade names and references to intellectual property
owned by other companies. All trademarks, service marks and trade names
appearing herein that do not relate to our products and services are the
property of their respective holders. Without limiting the foregoing,
Microsoft(R) and SQL Server(TM) are trademarks of Microsoft Corporation.
---------------------
DEALER PROSPECTUS DELIVERY REQUIREMENT
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights only selected information contained elsewhere in
this prospectus. Before making an investment decision, you should read the
entire prospectus and the attached financial statements and related notes.
Unless otherwise noted, all information in this prospectus, including share and
per share information, reflects a three-for-one stock split, in the form of a
stock dividend paid to the shareholders of record on September 2, 1999. Also
unless otherwise noted, the information in this prospectus assumes the
conversion of all outstanding shares of our Series A Preferred Stock into
900,000 shares of common stock concurrently with the completion of this offering
and assumes the underwriters will not exercise their over-allotment option.
OUR BUSINESS
Telemate.Net Software, Inc. provides software that enables businesses to
monitor, analyze and manage the use of both their Internet and voice networks.
Our Telemate.Net products enable businesses to rapidly extract the large amount
of network usage data collected by devices within their communications networks
and translate this data into meaningful management reports. We believe our
patent-pending Telemate.Net software is the first product to integrate both
Internet usage management and call accounting capabilities.
Our Telemate.Net integrated network usage management product combines call
accounting and Internet usage management. Our call accounting products collect,
analyze and report on usage data from Private Branch Exchanges, or PBXs, which
are telephone systems within a company that switch calls between company users
on local telephone lines while allowing users to share a certain number of
external telephone lines. Our Internet usage management products collect,
analyze and report on usage data from a variety of network devices including:
- firewalls, which control the flow of data between an internal network and
outside networks or the Internet;
- proxy servers, which act as an intermediary between a workstation user
and the Internet; and
- intrusion detection software and devices, which monitor external access
of a company's network.
We are currently developing products for additional network devices including:
- web servers, which connect users to the Internet's worldwide web and
deliver the files that form web pages;
- e-mail servers;
- VoIP devices, which manage the delivery of voice communications over the
Internet; and
- devices used in Virtual Private Networks, or VPNs, which are private data
networks that make use of the public telecommunication infrastructure.
Our products enable businesses to optimize network utilization; increase
employee productivity; improve network security; enhance electronic commerce;
and control, allocate and recover network costs. By using our products:
- information technology managers can monitor network usage, resolve
network bottlenecks and be alerted to security breaches
- financial officers can manage and allocate network costs
- human resources managers can monitor compliance with network use policies
and detect improper use of the network
- sales managers can measure productivity of Internet and telephone-based
sales activities
- marketing managers can analyze the effectiveness of Internet marketing
campaigns
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We sell our products through a combination of direct sales, resellers and
distributors. We have installed our products in over 14,000 customer sites. Our
customers represent most major commercial, industrial and service categories,
and include Arthur Andersen, AT&T Wireless Services, BellSouth Business Systems,
Cox Communications, Eastman Kodak, Ericsson, Georgia-Pacific, Merck, Philip
Morris, PricewaterhouseCoopers, Sears Roebuck, Tommy Hilfiger and the U.S. Army.
Prior to 1997, our products only addressed businesses' call accounting
requirements. In 1996, our management decided to invest the cash flow from our
call accounting business in the development of an integrated network usage
management solution. In mid-1997, we introduced our Internet usage management
solution, and in November 1998, we introduced our integrated network usage
management product. In the year ended December 31, 1998 and the six months ended
June 30, 1999, our call accounting revenue was $9.3 million and $4.4 million,
respectively, and our Internet/integrated revenue was $1.1 million and $1.0
million, respectively. The refocusing of our business on our Internet/integrated
product line resulted in operating losses of $1.2 million in the year ended
December 31, 1998 and $464,000 in the six months ended June 30, 1999. We
anticipate that we will incur additional losses in the near term due to planned
expenditures on sales, marketing and product development.
We incorporated in Georgia as Complementary Solutions, Inc. in 1986 and
changed our name to Telemate Software, Inc. in 1995. We changed our name to
Telemate.Net Software, Inc. in 1999. Our executive offices are located at 4250
Perimeter Park South, Suite 200, Atlanta, Georgia 30341, and our telephone
number is (770) 936-3700.
THE OFFERING
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Common stock offered by us................... 3,284,000 shares
Common stock offered by selling
shareholders............................... 216,000 shares
Common stock to be outstanding
after the offering......................... 7,075,844 shares
Use of proceeds.............................. For the repayment of indebtedness, working
capital and other general corporate purposes,
including increasing our sales and marketing
and product development activities.
Proposed Nasdaq Stock Market symbol.......... TMNT
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SUMMARY FINANCIAL DATA
This table summarizes our financial data for the periods indicated. The
financial information as of June 30, 1999 and for the six months ended June 30,
1998 and 1999 has been derived from our unaudited financial information. The
June 30, 1999 financial statements exclude 3,609,770 shares of common stock
issuable upon the exercise of options outstanding at August 31, 1999 under the
Telemate.Net Stock Incentive Plan and 1999 Stock Incentive Plan at a weighted
average exercise price of $2.67 per share, the exercise of redeemable stock
purchase warrants and the conversion of Series A redeemable convertible
preferred stock. Pro forma net income (loss) is actual net income adjusted for
pro forma income taxes as though we were a C corporation.
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................. $ 3,785 $ 4,890 $ 5,450 $ 2,566 $ 2,807
Service revenue................. 3,114 4,058 4,932 2,458 2,616
---------- ---------- ---------- ---------- ----------
Total revenue...................... 6,899 8,948 10,382 5,024 5,423
Gross profit....................... 5,564 7,159 8,185 3,965 4,160
Operating income (loss)............ 121 19 (1,199) (674) (464)
Net income (loss).................. $ 136 $ 38 $ (1,306) $ (716) $ (1,276)
========== ========== ========== ========== ==========
Basic net income (loss) per
share........................... $ 0.04 $ 0.01 $ (0.40) $ (0.22) $ (0.40)
========== ========== ========== ========== ==========
Diluted net income (loss) per
share........................... $ 0.04 $ 0.01 $ (0.40) $ (0.22) $ (0.40)
========== ========== ========== ========== ==========
Basic weighted average shares
outstanding..................... 3,201,744 3,261,813 3,261,813 3,261,813 3,218,520
========== ========== ========== ========== ==========
Diluted weighted average shares
outstanding..................... 3,434,403 3,732,768 3,261,813 3,261,813 3,218,520
========== ========== ========== ========== ==========
Pro forma net income (loss)........ $ 38 $ 42 $ (1,319) $ (723) $ (1,263)
========== ========== ========== ========== ==========
Pro forma net income (loss) per
share:
Basic.............................. $ 0.01 $ 0.01 $ (0.40) $ (0.22) $ (0.39)
========== ========== ========== ========== ==========
Diluted............................ $ 0.01 $ 0.01 $ (0.40) $ (0.22) $ (0.39)
========== ========== ========== ========== ==========
</TABLE>
The following table is a summary of our balance sheet data. Pro forma
information is presented to give effect to:
- the issuance of 900,000 shares of common stock issuable upon conversion
of Series A Preferred Stock concurrently with the completion of the
offering; and
- the reclassification of the redeemable stock purchase warrant to
additional paid-in capital upon completion of the offering.
Pro forma as adjusted information is presented to give effect to the sale by us
of the 3,284,000 shares of common stock offered hereby at an assumed initial
public offering price of $13.00 per share and the application of the estimated
net proceeds.
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AS OF JUNE 30, 1999
------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,351 $2,351 $40,305
Working capital (deficit)................................. (133) (133) 37,821
Total assets.............................................. 6,416 6,416 44,370
Long-term liabilities..................................... 1,787 929 --
Total shareholders' equity (deficit)...................... (6,737) 70 38,953
</TABLE>
3
<PAGE> 8
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, you should carefully read
and consider the following risk factors before investing in our common stock.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE, WHICH COULD ADVERSELY AFFECT OUR
STOCK PRICE.
During our operating history, we have experienced quarterly fluctuations in
our operating results, and we expect this trend to continue. These fluctuations
are caused by several factors described below and elsewhere in this "Risk
Factors" section, many of which are beyond our control. Factors that affect our
operating results include:
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- - the timing and release of new products or - the timing of shipment and installation of
enhancements products ordered
- - unexpected delays in introducing new - delays of purchases of our products by
products or enhancements customers who anticipate the release of a new
product or enhancement
- - delays of purchases of new technology by - the amount and timing of our sales and
customers who are directing their resources marketing, product development, or
to resolve year 2000 issues administrative expenses
</TABLE>
Due to these factors, we believe that quarter to quarter comparisons of our
operating results may not be meaningful. Therefore, you should not rely on the
results of one quarter as an indication of our future performance. Furthermore,
we plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support, and improve
operational and financial systems. Failure of our revenue to increase along with
these expenses could create fluctuations in our quarterly results of operations.
WE HAVE RECENTLY EXPERIENCED LOSSES, AND WE EXPECT TO INCUR LOSSES IN THE NEAR
TERM.
We experienced a net loss of approximately $1.3 million, or 12.6% of our
total revenue, in the year ended December 31, 1998. At June 30, 1999, we had an
accumulated deficit of $7.1 million. Our recent history of losses began as a
result of our shift from developing and marketing call accounting products only
to also developing and marketing an Internet usage management solution. We
anticipate that planned expenditures on sales, marketing and product development
will result in additional losses in the near term. Future expenditures on sales,
marketing and product development will be driven primarily by our ability to
achieve our targeted revenue goals, and such expenditures could range from $6.0
million to $23.0 million within the next 18 months. We are not certain when we
will regain profitability. Even if we do regain profitability, we may not
sustain or increase profitability on a quarterly or annual basis.
WE HAVE DERIVED LIMITED REVENUES FROM OUR INTERNET AND INTEGRATED PRODUCTS TO
DATE, AND WE MAY NOT BE SUCCESSFUL IN ACHIEVING SUBSTANTIAL REVENUE FROM THESE
PRODUCTS.
We released the initial version of our Internet usage management product in
May 1997. Our initial Internet usage management product extracted usage data
from a limited number of Internet devices. In November 1998 we released our
integrated product that extracts usage data from multiple Internet devices and
voice network devices. For the year ended December 31, 1998 and the six months
ended June 30, 1999, we derived revenue of $1.1 million and $987,000,
respectively, from sales of our Internet and integrated products. However, we
also incurred significant costs in the development of these products and expect
to incur significant costs related to further sales, distribution and
development of our Internet and integrated products in the near term. We cannot
guarantee that our Internet and integrated products will achieve broad market
acceptance and generate substantial revenue.
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<PAGE> 9
OUR SUCCESS DEPENDS ON CONTINUED ACCEPTANCE AND GROWTH OF THE INTERNET.
Sales of our Internet usage management solutions depend on the continued
acceptance and growth of the Internet. Because the Internet has only recently
become a viable medium for commerce and communications, demand and market
acceptance for Internet-related products are subject to high levels of
uncertainty and risk. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
The Internet infrastructure may not be able to support the demands placed on it
by this continued growth. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and such outages and delays could adversely affect the Internet
usage of organizations utilizing our solutions. Additionally, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols to handle increased levels of Internet activity or due to
increased governmental regulation. Moreover, critical issues concerning the
commercial use of the Internet remain unresolved and may negatively affect the
growth of Internet use and the attractiveness of commerce and communication on
the Internet. If critical issues concerning the commercial use of the Internet
are not resolved in our favor, if the necessary infrastructure and complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the demand for our Internet usage management solutions
could be significantly reduced, which would have a material adverse effect on
our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES THAT
PROVIDE SIMILAR PRODUCTS.
We currently compete with providers of Internet management software,
including WebTrends, the SecureIT division of VeriSign, Elron Software, Talley
Systems and Sequel Technology and providers of call accounting software,
including IntegraTrak, ISI, MicroTel, Switchview, Telco Research, Verimark, Xiox
and Xtend. The market in which we compete is intensely competitive, increasingly
subject to rapid changes, and significantly affected by new product
introductions and other activities of market participants. In addition, the
market is highly fragmented, and our competitors vary depending upon the segment
of the market that our network usage management solutions address.
In addition to current competition from producers of network usage
management solutions, in the future we may experience competition from vendors
of network devices, such as AXENT Technologies, Inc., Check Point Software
Technologies Ltd., Cisco Systems, Inc., Lucent Technologies, Inc., Microsoft
Corporation, Netscape Communications Corp., Nortel Networks Corporation, Siemens
Corporation and others, that could bundle network usage management solutions
with their network products. The bundling of competing products with network
devices could make it more difficult for us to market our products or render our
products obsolete. Even if the functionality, ease of use, and performance of
the products included with network devices is inferior to that of our products,
a significant number of customers may elect to accept these products instead of
purchasing additional software from us. In addition, we believe that additional
competitors will continue to enter the market as the size and visibility of the
market opportunity increases. These new market entrants may include traditional
system and network management software developers.
We also face competition from Internet management service providers, such
as consulting firms, web design firms, Internet audit firms, site management
vendors, Internet service providers and independent software vendors. These
service providers may use our solutions, our competitors' solutions or custom-
developed solutions to provide network usage management for their customers who
otherwise would have been sale opportunities for us. In addition, certain larger
potential customers may rely on their IT departments to internally develop
Internet usage management solutions.
Many of our current and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases, and
substantially greater financial, technical, marketing, distribution, service,
support and other resources than we have. As a result, they may be able to
respond more quickly than we can to new or changing opportunities, technologies,
standards or customer
5
<PAGE> 10
requirements. Our inability to develop products that are technologically
competitive, responsive to customer needs and competitively priced could have a
material adverse effect on our business, results of operations and financial
condition.
WE MUST INCREASE BRAND AWARENESS OF OUR PRODUCT TO REMAIN COMPETITIVE.
Due in part to the emerging nature of the market for Internet usage
management solutions and the substantial resources available to many of our
competitors, we may have limited time to achieve and maintain a significant
market share. Developing and maintaining awareness of the Telemate.Net brand
name is critical to achieving widespread acceptance of our network usage
management and reporting solutions. Furthermore, the importance of brand
recognition will increase as competition in the market for our products
increases. Successfully promoting and positioning the Telemate.Net brand will
depend largely on the effectiveness of our marketing efforts and our ability to
develop reliable and useful products at competitive prices. Therefore, we plan
to increase our financial commitment to create and maintain brand awareness
among potential customers. If we fail to successfully promote our brand name or
if we incur significantly greater expenses than planned in promoting and
maintaining our brand name, it could have a material adverse effect on our
business, results of operations, and financial condition.
IF WE DO NOT CONTINUE TO EXPAND THE DISTRIBUTION OF OUR PRODUCTS THROUGH DIRECT
AND INDIRECT SALES CHANNELS, OUR OPERATING RESULTS WILL SUFFER.
In order to increase our market share and revenue, we will need to expand
our direct and indirect sales operations and channels of distribution. We have a
broad base of customers, most of whom license a limited number of our products.
To improve our results of operations, we must increase our base of customers and
the number of products that each customer licenses. This may require an
increasingly sophisticated sales effort. In order to achieve increased sales, we
plan to hire additional sales personnel. Any new hires will require training and
take time to achieve full productivity. We may not be able to hire enough
qualified individuals when needed, or at all. Failure to do so could have a
material adverse effect on our business, results of operations, and financial
condition.
Our future success also depends upon our ability to expand our
relationships with domestic and international distributors, value-added
resellers, systems integrators, on-line and other resellers, Internet service
providers and original equipment manufacturers to build our indirect sales
channels. We currently maintain non-exclusive relationships with leading
networking and network security vendors that help market and distribute our
products, but we do not have written agreements with most of these companies. We
must also continue to expand and maintain our non-exclusive relationships with
key hardware and software vendors, distributors and resellers. We may not be
successful in these efforts. Moreover, because we do not have written agreements
with most of these parties, we cannot guarantee that these relationships will
continue at all or on terms acceptable to us.
IF OUR SOFTWARE CONTAINS DEFECTS, OUR SALES ARE LIKELY TO SUFFER AND WE MAY BE
EXPOSED TO LEGAL CLAIMS.
Our products and product enhancements are very complex and may from time to
time contain defects or result in failures that we did not detect or anticipate
when introducing such products or enhancements to the market. In addition, the
computer and Internet environments in which our products are used are
characterized by a wide variety of standard and non-standard configurations and
by errors, failures and bugs in third-party platforms that can impede proper
operation of our products. Despite our testing, defects may still be discovered
in some new products or enhancements after the products or enhancements are
delivered to customers. The occurrence of these defects could result in:
- product returns;
- adverse publicity;
- loss of or delays in market acceptance of our products;
- delays or cessation of service to our customers; or
- legal claims by customers against us.
6
<PAGE> 11
Our end-user licenses contain provisions that limit our exposure to legal
claims, but these provisions may not be enforceable in all jurisdictions.
Additionally, we maintain limited products liability insurance. To the extent
that our contractual limitations are unenforceable or such claims are not
covered by insurance, a successful products liability claim could have a
material adverse effect on our business, results of operations and financial
condition.
OUR BUSINESS IS DEPENDENT ON OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT.
Our success depends largely upon the continued services of our Chief
Executive Officer and President, Richard L. Mauro. We cannot guarantee that Mr.
Mauro will continue to remain an employee. We are in the process of acquiring
insurance on the life of Mr. Mauro, but there can be no assurance that the
proceeds of this insurance would be adequate to compensate us for the loss of
his services.
IF WE FAIL TO HIRE AND RETAIN ADDITIONAL PERSONNEL, WE WILL BE UNABLE TO GROW
OUR BUSINESS.
We intend to hire a significant number of additional sales, support,
marketing and development personnel. Our future success depends on our ability
to attract and retain highly qualified personnel in these areas. In the past
three years, our employee turnover rate has been between 20% and 30%. Moreover,
the competition for qualified personnel in the computer software and Internet
markets is intense, and we may be unable to attract, assimilate or retain
additional highly qualified personnel in the future. This could have a material
adverse effect on our business, results of operations and financial condition.
WE MUST EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS TO BE SUCCESSFUL.
We are rapidly expanding our operations. In particular, we have expanded
our sales and marketing departments by 15 persons, or 37%, since 1998 in an
effort to increase revenue growth. We have also expanded our services and
support staff by 8 persons, or 21%, since 1998. We expect this expansion to
continue at an accelerated rate. This expansion has placed a significant strain
on our management and on our operational and financial resources, which we
expect will continue. If we are unable to manage our growth effectively, our
business could be materially and adversely affected. To successfully manage our
future growth, we will need to upgrade our resources and systems as well as
expand our employee base. Our future performance will depend, in part, on our
ability to effectively integrate our newly-hired executive officers into our
management team. We cannot be certain that our management, operational and
financial resources will be adequate to support our future operations.
INFRINGEMENT OR DUPLICATION OF OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
BUSINESS.
We currently rely on a combination of patent, trademark, service mark,
trade dress, copyright and trade secret laws, as well as confidentiality
provisions and contractual provisions to protect our proprietary technology.
However, we cannot guarantee that third parties will not infringe or duplicate
this technology and offer competing products that are substantially similar to
ours.
We currently have registered trademarks in Telemate and Telemate.Net and
one patent application pending on our Telemate.Net integrated network usage
management product. We cannot guarantee that this application or any future
applications to protect our intellectual property will not be rejected. Even if
they are not rejected, trademark, patent, copyright and trade secret protection
may not be effective or available in every country in which our products are
distributed or made available through the Internet. Despite taking steps to
protect our rights, third parties could infringe or misappropriate our
proprietary rights. Also, most protections do not preclude competitors from
independently developing products with functionality or features substantially
equivalent or superior to our products. Any infringement, misappropriation or
third-party development could have a material adverse effect on our business,
results of operations and financial condition.
In the future, litigation may be necessary to enforce and protect our trade
secrets, copyrights and other intellectual property rights. Legal standards
relating to the validity, enforceability and scope of
7
<PAGE> 12
protection of intellectual property rights in Internet-related industries are
uncertain and still evolving, and the future viability or value of any of our
intellectual property rights is uncertain. Litigation, regardless of its
outcome, would divert management resources, be expensive and may not effectively
protect our intellectual property.
OUR BUSINESS COULD BE HARMED IF WE ARE SUBJECTED TO INFRINGEMENT CLAIMS BROUGHT
BY THIRD PARTIES.
In addition to the technology we have developed internally, we also use
code libraries developed and maintained by Greenleaf Software, Stingray Software
and Microsoft and have acquired or licensed technologies from other companies.
Our integrated network management solutions are built around an embedded
Microsoft SQL 7.0 database and Seagate Software, Inc.'s custom report writing
tool. Our internally developed technology, the code libraries or the technology
we acquired or licensed may infringe on a third party's intellectual property
rights, and such third parties may bring claims against us. Such claims and any
resulting litigation could subject us to significant liability for damages and
invalidate our proprietary rights. Any infringement claims against us could also
force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms or at all; or
- redesign those products or services that incorporate the disputed
technology.
Any of these results could have a material adverse effect on our business,
results of operations and financial condition.
OUR PRODUCTS COULD BE TAMPERED WITH AND RENDERED INEFFECTIVE BY COMPUTER
HACKERS.
Because our products access a wide range of information relating to our
customers' businesses, computer hackers may attempt to infiltrate our software
systems to obtain sensitive data and information regarding our customers. In
addition, some of our products monitor network security. There is a risk that
those products will be targets of attacks by computer hackers who create bugs or
viruses or otherwise breach the security of those products in an attempt to
sabotage their functionality. Although we know of no material infiltration of
our products by hackers to date, our Internet usage products are new and we
cannot guarantee that we will be able to respond to such attacks in a timely or
effective manner. Any failure to do so could result in claims against us and
make it difficult for us to market and sell our products.
GOVERNMENT REGULATION COULD INCREASE THE COSTS OF DOING BUSINESS ON THE INTERNET
AND NEGATIVELY AFFECT SALES OF OUR PRODUCTS.
As Internet commerce continues to evolve, increasing regulation by federal,
state or foreign agencies becomes more likely. Such laws and regulations could
affect the network usage management activities of our customers. Regulation, if
imposed, is likely to be in the areas of user privacy, pricing, content, and
quality of products and services. Taxation of Internet use, or other charges
imposed by government agencies or by private organizations for accessing the
Internet, may also be imposed. Furthermore, any regulation imposing fees for
Internet use could result in a decline in the use of the Internet and the
viability of Internet commerce, which could have a material adverse effect on
our business, results of operations and financial condition.
WE MAY FACE CLAIMS AND A DECLINE IN MARKET ACCEPTANCE FOR OUR PRODUCTS AS A
RESULT OF YEAR 2000 PROBLEMS.
Many installed computer systems and software products are designed to
accept and process year codes with only two digits in their date fields. These
systems and products may not operate properly when
8
<PAGE> 13
required to distinguish dates occurring on or after January 1, 2000 from dates
in the 1900's. We believe our currently marketed network usage management
products will function properly with respect to dates in the year 2000 and
thereafter. Nonetheless, we have not tested our products in every possible
computer environment, and therefore some of our products may not be fully year
2000 compliant in every environment due to interaction with third-party
products. The DOS versions of our products, some of which remain in use, are not
year 2000 compliant. We do not currently sell these products, and we will not
provide maintenance support for these products after December 31, 1999. We are
attempting to notify the approximately 4,800 known users of older products that
we no longer sell or support that these products generally are not year 2000
compliant and that we have no plans to make them year 2000 compliant. We cannot
guarantee that we will be able to contact all such users. In addition, there can
be no guarantee that these customers will not singly or as a group attempt to
force modification of our software or take other action against us. Although we
do not believe any such action would be successful, the body of law governing
year 2000 compliance is unsettled. We have identified a number of customers
whose maintenance contracts on some of our discontinued products run past the
year 2000. Although these products are not year 2000 compliant, we are currently
working with these customers to provide alternate arrangements for the continued
operation of their systems.
Failure of our products to be year 2000 compliant could result in
significant decreases in market acceptance of our products and legal liability.
We are aware of one reseller that has continued to support products containing
an older, non-compliant version of one of our products. To the extent that other
resellers have embedded older versions of our products in their products, we
cannot guarantee that such resellers are taking measures to replace their older
products with newer versions that are year 2000 compliant. Any failure by
resellers to replace their older products with year 2000 compliant products
could result in claims being brought against us. Moreover, any claims brought
against us, regardless of their success, would likely be time-consuming and
expensive to defend, would divert management time and attention and could result
in adverse publicity. As a result, any such decline in market acceptance for our
products or litigation relating to our products caused by year 2000 problems
could have a material adverse effect on our business, results of operations, and
financial condition.
In addition to our software products, we have completed our review of our
internal computer programs and systems and believe that our computer systems are
or will be year 2000 compliant in a timely manner. However, if we or our
suppliers, vendors, or major distributors and partners fail to correct year 2000
problems, such failure could result in an interruption in, or a failure of, any
of our business activities or operations. However, we cannot guarantee year 2000
compliance of third parties, and we have no contingency plan for critical
failures of third-party products that we use in our internal operations and
business. In addition, aside from the possibility of establishing relationships
with alternative suppliers or vendors, we do not currently anticipate having to
develop a contingency plan for handling any year 2000 problems that are not
detected or corrected prior to their occurrence. Any failure to correct year
2000 problems could have a material adverse effect on our business, results of
operations and financial condition.
OUR CHARTER DOCUMENTS AND GEORGIA LAW MAY PREVENT OR DELAY A FUTURE MERGER OR
ACQUISITION, THUS LOWERING OUR STOCK PRICE OR PREVENTING OUR SHAREHOLDERS FROM
REALIZING A PREMIUM OVER OUR STOCK PRICE.
Our Articles of Incorporation and Bylaws may have the effect of delaying,
preventing or making a merger or acquisition less desirable to a potential
acquirer, even where shareholders may consider the acquisition or merger
favorable. In addition, the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control without further action by
the shareholders. Any such issuance may materially adversely affect the market
price of our common stock and the voting rights of the holders of our common
stock. The issuance of our preferred stock may also result in the loss of voting
control by the holders of our common stock to the holders of our preferred
stock. In addition, provisions of the Georgia Business Corporation Code also may
delay, prevent or discourage someone from acquiring or merging with us. The
prevention or delay of a merger or acquisition could reduce our stock price or
prevent our shareholders from realizing a premium over our stock price.
9
<PAGE> 14
FUTURE SALES OF COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of our
common stock. After this offering, 7,075,844 shares of our common stock will be
outstanding. All 3,500,000 shares sold in this offering will be freely tradable
unless held by our affiliates or by persons subject to other contractual or
legal restrictions on resale. The remaining shares of common stock outstanding
after this offering will be restricted as a result of securities laws or lock-up
agreements signed by the holder and will be available for sale in the public
market as follows:
- no restricted shares will be eligible for sale as of the date of this
prospectus;
- approximately 2,463,813 restricted shares will be eligible for sale 180
days after the date of this prospectus upon the expiration of lock-up
agreements with the underwriters; and
- approximately 1,112,031 restricted shares will become eligible for sale
thereafter at various times upon the expiration of their respective
holding periods and if otherwise in accordance with the provisions of
Rule 144 of the Securities Act of 1933.
SoundView Technology Group, Inc. may, in its sole discretion and at any
time without prior notice, release all or any portion of the common stock
subject to lock-up agreements. See "Shares Eligible for Future Sale" and
"Underwriting" on pages 48 and 50, respectively, for a more detailed discussion.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus contain forward-looking
information. These statements are found in the sections entitled "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "Business." They
include statements concerning:
<TABLE>
<S> <C>
- our growth and operating strategy - our financing plans
- liquidity and capital expenditures - trends in our industry
- use of proceeds of the offering - trends in government regulation
</TABLE>
You can identify these statements by forward-looking words such as "may,"
"will," "plans," "expects," "intends," "anticipates," "estimates" or similar
words. You should be aware that these statements are subject to known and
unknown risks, uncertainties and other factors, including those discussed in the
section entitled "Risk Factors," that could cause the actual results to differ
materially from those suggested by the forward-looking statements.
10
<PAGE> 15
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 3,284,000 shares of
common stock offered by us in this offering will be approximately $39.0 million,
assuming an initial public offering price of $13.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
expenses payable by us in connection with this offering. We will not receive any
proceeds from the sale of common stock by the selling shareholders. We will use
the proceeds from this offering as follows:
<TABLE>
<CAPTION>
ESTIMATED AMOUNT
----------------
(IN MILLIONS)
<S> <C>
Payments on our outstanding indebtedness.................... $ 1.0
Working capital and other general corporate purposes........ 38.0
-----
Total............................................. $39.0
</TABLE>
On March 27, 1998, we borrowed $1.0 million, primarily to fund product
development, under a Loan Agreement with Sirrom Investments, Inc. The interest
rate on the loan is 14.0% per year. As of July 15, 1999, the aggregate
outstanding balance under the loan was $1,000,000, which includes an unaccreted
discount of $70,528. The loan must be paid in full not later than March 27,
2003.
Net proceeds from the sale of the common stock that are added to our
working capital may be used in a variety of ways, including:
- increasing our sales and marketing activities;
- increasing our product development activities; and
- pursuing strategic acquisitions and relationships.
We currently have no specific agreements, commitments or understandings
with respect to any acquisition. Management will have broad discretion in the
allocation of net proceeds from the offering. The amounts we actually use for
each purpose may vary significantly depending upon various factors, including
economic or industry conditions, changes in the competitive environment and
strategic opportunities that may arise. Pending application of the net proceeds
as described above, we intend to invest the net proceeds of the offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have historically made distributions to our shareholders related to our
S corporation status and the resulting tax payment obligations imposed on our
shareholders, including a total of $270,000 since January 1, 1997. Effective
June 16, 1999, we converted from an S corporation into a C corporation. We do
not intend to declare or pay cash dividends in the foreseeable future. Our
management anticipates that all our earnings and other cash resources, if any,
will be retained by us for investment in our business.
11
<PAGE> 16
DILUTION
As of June 30, 1999, our pro forma net tangible book value was
approximately $70,000, or $0.02 per share of common stock. Our pro forma net
tangible book value per share represents the amount of our total pro forma
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding after giving effect to (a) the automatic conversion of
Series A Preferred Stock outstanding at June 30, 1999 to 900,000 shares of
common stock upon completion of the offering and (b) the reclassification of a
warrant to purchase common stock to additional paid in capital upon completion
of the offering. After giving effect to the sale by us of the 3,284,000 shares
of common stock offered hereby at an assumed initial public offering price of
$13.00 per share and the application of the estimated net proceeds therefrom,
after deducting the underwriting discount and estimated offering expenses, our
pro forma adjusted net tangible book value at June 30, 1999 would have been
approximately $39.0 million, or $5.61 per share of common stock. This represents
an immediate increase in such net tangible book value of $5.59 per share to
existing shareholders and an immediate decrease in net tangible book value of
$7.39 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............. $13.00
Pro forma net book value per share as of June 30, 1999.... $0.02
Increase in net book value per share attributable to new
investors.............................................. 5.59
Adjusted net book value per share after the offering........ 5.61
------
Dilution per share to new investors......................... $ 7.39
======
</TABLE>
The following table sets forth on a pro forma basis, as of June 30, 1999,
the number of shares of common stock previously issued by us, the total
consideration reflected in our accounts, net of amounts paid to redeem shares of
common stock, and the average price per share to the existing shareholders and
new investors, assuming the sale by us of 3,284,000 shares of common stock at an
assumed initial public offering price of $13.00 per share, and before deducting
the estimated underwriting discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 3,654,813 52.7% $ 2,822,866 6.2% $ 0.77
New investors................. 3,284,000 47.3 42,692,000 93.8 13.00
--------- ----- ----------- -----
Total............... 6,938,813 100.0% $45,514,866 100.0%
========= ===== =========== =====
</TABLE>
Sales by the selling shareholders in the offering will cause the pro forma
percentage of shares held by the existing shareholders, as of June 30, 1999, to
be approximately 49.6% of the common stock to be outstanding after the offering
and will increase the number of shares to be purchased by new shareholders to
approximately 50.4% of the total number of shares of common stock to be
outstanding after the offering. Assuming full exercise of the underwriters'
over-allotment option, the pro forma percentage of shares held by existing
shareholders, as of June 30, 1999, would be 45.3% of the total number of shares
of common stock to be outstanding after the offering, and the number of shares
held by new shareholders would be increased to 4,025,000 shares, or 54.7% of the
total number of shares of common stock to be outstanding after the offering.
As of August 31, 1999, there were outstanding options to acquire
approximately 3,609,770 shares of common stock at exercise prices ranging from
$0.73 to $11.50 per share and a weighted average exercise price of $2.67 per
share and a warrant to purchase approximately 122,000 shares (subject to
increase) of common stock at an exercise price of $0.003 per share. The exercise
of these options and the warrant will have the effect of increasing the net
tangible book value dilution of new investors in this offering.
12
<PAGE> 17
CAPITALIZATION
The following table sets forth at June 30, 1999:
(a) our actual capitalization;
(b) our pro forma capitalization reflecting:
- the conversion of the Series A Preferred Stock to 900,000 shares of
common stock; and
- the reclassification of a redeemable stock purchase warrant to additional
paid-in capital, which will occur concurrently with this offering,
including an additional charge for interest expense of $(775,000) that
would have been recognized if the offering had been consummated at June
30, 1999 at an assumed offering price of $13.00 due to changes in the
fair market values used in computing the warrant valuation; and
(c) our pro forma as adjusted capitalization reflects our pro forma
capitalization as adjusted to give effect to:
- the issuance and sale by us of the 3,284,000 shares of common stock
offered hereby at an assumed offering price of $13.00 per share, after
deducting estimated underwriting discounts and commissions and offering
expenses; and
- the application of the estimated net proceeds.
This table should be read in conjunction with our financial statements and
related notes appearing elsewhere in this prospectus.
The actual share numbers as presented exclude:
- 3,900,000 shares of common stock presently reserved for issuance upon
exercise of options granted under the Telemate Software, Inc. Stock
Incentive Plan, of which options to purchase 3,364,770 shares were
outstanding as of August 31, 1999 at a weighted average exercise price of
$2.03 per share;
- 1,000,000 shares of common stock reserved for issuance upon exercise of
options granted under the Telemate.Net Software, Inc. 1999 Stock
Incentive Plan, of which 245,000 options were outstanding as of August
31, 1999 at a weighted average exercise price of $11.50 per share; and
- The exercise of a warrant to purchase approximately 122,000 shares
(subject to increase) of common stock at an exercise price of $0.003 per
share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Long-term debt.......................................... $ 929,472 $ 929,472 $ --
Redeemable stock purchase warrant....................... 857,428 -- --
Series A Preferred Stock, par value $.01 per share,
liquidation value $6,030,000, stated at current
redemption value, 300,000 shares designated, issued
and outstanding, no shares issued and outstanding pro
forma and pro forma as adjusted....................... 5,950,000 -- --
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 19,700,000 shares
authorized and undesignated, none issued........... -- -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, 2,754,813 shares issued and 3,654,813
shares issued, pro forma; and 6,938,813 shares
issued pro forma as adjusted....................... 27,548 36,548 69,388
Additional paid-in capital............................ 499,250 8,072,678 46,993,398
Retained earnings (accumulated deficit)............... (7,134,438) (7,909,438) (7,979,966)
Notes receivable and accrued interest from
shareholders....................................... (129,665) (129,665) (129,665)
----------- ----------- -----------
Total shareholders' equity (deficit).......... (6,737,305) 70,123 38,953,155
----------- ----------- -----------
Total capitalization..................... $ 999,595 $ 999,595 $38,953,155
=========== =========== ===========
</TABLE>
13
<PAGE> 18
SELECTED FINANCIAL DATA
The selected financial data of Telemate.Net set forth below for each of the
three years ended December 31, 1996, 1997 and 1998, and the balance sheet data
as of December 31, 1996, 1997 and 1998, are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in the
prospectus. The financial information for the years ended December 31, 1994 and
1995 are derived from our unaudited financial statements. The financial
information as of June 30, 1999 and for the six months ended June 30, 1998 and
1999 has been derived from our unaudited financial information. In the opinion
of management, the unaudited financial information has been prepared on a basis
consistent with the annual audited financial statements that appear elsewhere in
this prospectus, and include all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations for these unaudited years. Historical results are not
necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................... $ 3,196 $ 3,750 $ 3,785 $ 4,890 $ 5,450 $ 2,566 $ 2,807
Service revenue................... 1,858 2,549 3,114 4,058 4,932 2,458 2,616
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue............... 5,054 6,299 6,899 8,948 10,382 5,024 5,423
Cost of revenue:
Product costs..................... 532 609 574 736 923 432 555
Service costs..................... 395 514 761 1,053 1,274 627 708
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue....... 927 1,123 1,335 1,789 2,197 1,059 1,263
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........................ 4,127 5,176 5,564 7,159 8,185 3,965 4,160
Operating expenses:
Research and development.......... 351 480 603 1,387 1,845 881 759
Sales and marketing............... 1,535 2,120 2,979 3,522 4,613 2,235 2,175
General and administrative........ 1,330 1,526 1,861 2,231 2,926 1,523 1,690
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses.... 3,216 4,126 5,443 7,140 9,384 4,639 4,624
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)............. 911 1,050 121 19 (1,199) (674) (464)
Interest income (expense):
Increase in redeemable stock
purchase warrant................ -- -- -- -- -- -- (734)
Other interest income (expense)... 15 26 15 19 (107) (42) (78)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest income
(expense)................. 15 26 15 19 (107) (42) (812)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ 926 $ 1,076 $ 136 $ 38 $ (1,306) $ (716) $ (1,276)
========== ========== ========== ========== ========== ========== ==========
Basic net income (loss) per share... $ 0.31 $ 0.34 $ 0.04 $ 0.01 $ (.40) $ (0.22) $ (0.40)
========== ========== ========== ========== ========== ========== ==========
Diluted net income (loss) per
share............................. $ 0.31 $ 0.34 $ 0.04 $ 0.01 $ (.40) $ (0.22) $ (0.40)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares outstanding
Basic............................. 3,000,000 3,156,150 3,201,744 3,261,813 3,261,813 3,261,813 3,218,520
========== ========== ========== ========== ========== ========== ==========
Diluted........................... 3,000,000 3,156,150 3,434,403 3,732,768 3,261,813 3,261,813 3,218,520
========== ========== ========== ========== ========== ========== ==========
Pro forma provision for (benefit
from) income taxes................ 364 412 98 (4) 13 7 (13)
Pro forma net income (loss)......... $ 562 $ 664 $ 38 $ 42 $ (1,319) $ (723) $ (1,263)
========== ========== ========== ========== ========== ========== ==========
Pro forma net income (loss) per
share
Basic............................. $ 0.19 $ 0.21 $ 0.01 $ 0.01 $ (0.40) $ (0.22) $ (0.39)
========== ========== ========== ========== ========== ========== ==========
Diluted........................... $ 0.19 $ 0.21 $ 0.01 $ 0.01 $ (0.40) $ (0.22) $ (0.39)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------- ------ ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 455 $ 818 $ 245 $ 78 $ 46 $ 2,351
Working capital (deficit)................................... (411) (449) (1,429) (1,472) (1,726) (133)
Total assets................................................ 1,907 2,273 2,186 2,582 2,675 6,416
Long-term liabilities....................................... 31 12 -- -- 1,032 1,787
Total shareholders' equity (deficit)........................ (200) (163) (686) (743) (2,065) (6,737)
</TABLE>
14
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Telemate.Net provides integrated network usage management solutions. From
our inception in 1986, through 1996, we focused exclusively on providing call
accounting software solutions. By the early 1990s, we had emerged as a call
accounting market leader by evolving our product line to meet the functionality
and price performance requirements of our customers. In 1996, seeking to
capitalize on the opportunity the Internet would present, we began researching
and developing an Internet usage management solution. In May 1997, we released
the initial version of our Internet usage management solution, which we believe
was the first such product on the market. In May 1998, we began shipping our
latest generation of Internet usage management software. In November 1998, we
introduced our integrated network usage management products, which can be used
by our customers for Internet usage management only, call accounting only, or a
combination of both.
In 1996, our management decided to invest the cash flow from our call
accounting business in the development of an Internet usage management solution.
Our focus on developing an Internet product included sacrificing potential
profits and borrowing $1.0 million in 1998. The refocusing of our business
resulted in reduced call accounting revenue growth. From 1996 through 1998,
average annual call accounting revenue growth was 17%, which is significantly
lower than the call accounting revenue growth from 1990 through 1995. We believe
the investments we have made have positioned us for future growth in the
emerging integrated network usage management market.
Our revenue consists of product and service revenue. Our product revenue is
derived primarily from licensing our software products. We also resell
complementary hardware, which accounted for less than 10% of our total revenue
in 1998. In 1998, we had orders ranging from an order for the basic QuickView
product for $995 to a multi-site order for our Enterprise product for
approximately $150,000. Service revenue consists of fees paid for support
services and professional services. Support service revenue consists of fees
paid for maintenance services and product updates. Maintenance services include
diagnosis and correction of errors in the product and telephone consultation to
discuss general support questions. Product updates include error correction,
minor enhancements to the product models purchased, and periodic updates to
tariff information for call accounting products. Professional services include
installation, training and custom report generation. Substantially all of our
license agreements are perpetual. Support agreements are typically for a term of
one year and renew automatically upon payment of an annual maintenance fee by
the customer. This support fee typically represents 20% of the current list
price of the products licensed.
We recognize revenue from software licenses in accordance with the American
Institute of Certified Public Accountants Statement of Position 97-2, Software
Revenue Recognition and Statement of Position 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2. Revenue derived from software license fees and
hardware is recognized upon shipment. Revenue derived from software support
services primarily involves annual contracts and is recognized ratably over the
service period. Revenue related to professional services is recognized as
services are provided. Deferred revenue generally represents advance payments
received from customers and billings invoiced to customers for software support
and professional services in advance of the time revenue is recognized.
We identify revenue as call accounting revenue or Internet/integrated
revenue based upon the types of data sources licensed and the delivery of call
accounting product features. If a customer is delivered tariff information for
all data sources they have licensed, the product revenue is identified as call
accounting. All other product revenue is identified as Internet/integrated.
Service revenue is identified based on the associated product identification.
We sell our products through a combination of direct sales by our sales
personnel and indirect sales primarily through resellers and distributors. While
our direct sales force is expected to continue to generate a large proportion of
future revenue, we are increasingly utilizing indirect distribution channels,
such as
15
<PAGE> 20
network resellers, systems integrators and distributors, as an important
complement to our direct sales force. While most of our past indirect
distribution efforts were focused on the U.S. market, we added five distributors
in Europe during the first six months of 1999. We expect to grow our
international distribution significantly during the next few years. Distributors
and resellers purchase the product for resale at a discount from our standard
price list. This discount ranges from 20% to 65% and varies based on a number of
factors including their volume of business, whether they distribute to other
resellers and whether they provide product support.
We also maintain relationships with leading networking and network security
product vendors that help to market and distribute our products. These vendors
assist in the sales and marketing of our products by bundling them with their
own products, selling our products through their sales forces and promoting our
products at trade shows, seminars and through their web sites. We intend to
continue to focus sales resources on strengthening existing relationships and
creating new relationships with strategic organizations.
Since our inception in 1986, we have elected to operate under subchapter S
of the Internal Revenue Code of 1986, as amended, and comparable provisions of
state income tax laws. An S corporation generally is not subject to income tax
at the corporate level. The S corporation's income generally passes through to
shareholders and is taxed on their personal income tax returns. As a result, our
earnings have been taxed directly to our existing shareholders. On June 16,
1999, we terminated our status as an S corporation under the tax code. In
connection with the termination of our S corporation status, we distributed
$270,000 and we reclassified the accumulated deficit of $296,000 through the S
corporation termination date, limited to the amount of paid in capital, to
additional paid-in capital.
The accompanying statements of income (loss) for each of the years ended
December 31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and
1999, reflect provisions for income taxes on an unaudited pro forma basis, using
the asset and liability method, as if we were a C corporation fully subject to
federal and state income taxes. The unaudited pro forma provision for (benefit
from) income taxes was $98,000, $(4,000) and $13,000 for the years ended
December 31, 1996, 1997 and 1998, respectively, and $7,000 and $(13,000) for the
six months ended June 30, 1998 and 1999, respectively.
On June 16, 1999, our S corporation status terminated upon closing of the
sale of 300,000 shares of Series A redeemable convertible preferred stock. At
that time, we established our net deferred tax assets and liabilities; no net
deferred tax assets or liabilities were recorded because the realization of
deferred tax assets was not considered to be likely.
RESULTS OF OPERATIONS
The following tables set forth our call accounting and Internet/integrated
revenue, both in absolute dollars and as a percentage of total revenue:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Call accounting:
Product revenue......................... $3,785 $4,620 $ 4,479 $2,257 $2,031
Service revenue......................... 3,114 4,053 4,850 2,437 2,405
------ ------ ------- ------ ------
Total call accounting revenue......... 6,899 8,673 9,329 4,694 4,436
Internet/integrated:
Product revenue......................... -- 270 971 309 775
Service revenue......................... -- 5 82 21 212
------ ------ ------- ------ ------
Total Internet/integrated revenue..... -- 275 1,053 330 987
------ ------ ------- ------ ------
Total revenue...................... $6,899 $8,948 $10,382 $5,024 $5,423
====== ====== ======= ====== ======
</TABLE>
16
<PAGE> 21
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Percentage of total revenue:
Call accounting:
Product revenue......................... 54.9% 51.6% 43.1% 44.9% 37.5%
Service revenue......................... 45.1 45.3 46.7 48.5 44.3
------ ------ ------- ------ ------
Total call accounting revenue......... 100.0 96.9 89.8 93.4 81.8
Internet/integrated:
Product revenue......................... -- 3.0 9.4 6.2 14.3
Service revenue......................... -- 0.1 0.8 0.4 3.9
------ ------ ------- ------ ------
Total Internet/integrated revenue..... -- 3.1 10.2 6.6 18.2
------ ------ ------- ------ ------
Total revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ======= ====== ======
</TABLE>
The following table sets forth for the periods indicated statement of
operations data expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue............................ 54.9% 54.6% 52.5% 51.1% 51.8%
Service revenue............................ 45.1 45.4 47.5 48.9 48.2
------ ------ ------ ------ -------
Total revenue...................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ -------
Cost of revenue:
Product costs.............................. 8.3 8.2 8.9 8.6 10.2
Service costs.............................. 11.0 11.8 12.3 12.5 13.1
------ ------ ------ ------ -------
Total cost of revenue.............. 19.3 20.0 21.2 21.1 23.3
------ ------ ------ ------ -------
Gross profit................................. 80.7 80.0 78.8 78.9 76.7
Operating expenses:
Research and development................... 8.7 15.5 17.8 17.5 14.0
Sales and marketing........................ 43.2 39.4 44.4 44.5 40.1
General and administrative................. 27.0 24.9 28.2 30.3 31.2
------ ------ ------ ------ -------
Total operating expenses........... 78.9 79.8 90.4 92.3 85.3
------ ------ ------ ------ -------
Operating income (loss)...................... 1.8 0.2 (11.6) (13.4) (8.6)
------ ------ ------ ------ -------
Interest income (expense):
Increase in redeemable stock purchase
warrant................................. -- -- -- -- (13.5)
Other interest income (expense)............ 0.2 0.2 (1.2) (0.8) (1.4)
------ ------ ------ ------ -------
Total interest..................... 0.2 0.2 (1.2) (0.8) (14.9)
------ ------ ------ ------ -------
Net income (loss)............................ 2.0% 0.4% (12.8)% (14.2)% (23.5)%
====== ====== ====== ====== =======
Pro forma provision for (benefit from) income
taxes...................................... 1.4 (0.1) 0.1 0.1 (0.2)
------ ------ ------ ------ -------
Pro forma net income (loss).................. 0.6% 0.5% (12.7)% (14.3)% (23.3)%
====== ====== ====== ====== =======
</TABLE>
Six Months Ended June 30, 1999 and 1998
Revenue. Total revenue was $5.4 million for the first six months of 1999,
representing a 7.9% increase from $5.0 million for the same period in 1998.
Total product revenue was $2.8 million, or 51.8% of total revenue, in the first
six months of 1999, representing a 9.4% increase from $2.6 million, or 51.1% of
total revenue, for the same period in 1998. Total service revenue was $2.6
million, or 48.2% of total revenue, in the first six months of 1999,
representing a 6.4% increase from $2.5 million, or 48.9% of total
17
<PAGE> 22
revenue, for the same period in 1998. This increase was the result of the
increase in Internet/integrated revenue in the first six months of 1999.
Call Accounting Revenue. Total call accounting revenue was $4.4 million,
or 81.8% of total revenue, for the first six months of 1999, representing a 5.5%
decrease from $4.7 million, or 93.4% of total revenue, for the same period in
1998. Call accounting product revenue was $2.0 million, or 37.5% of total
revenue, for the first six months of 1999, representing a 10.0% decrease from
$2.3 million, or 44.9% of total revenue, for the same period in 1998. Call
accounting service revenue was $2.4 million, or 44.3% of total revenue, in the
first six months of 1999 and $2.4 million, or 48.5% of total revenue, for the
same period in 1998. The decline in call accounting revenue and percentage share
of total revenue in the first six months of 1999 was due to the increased focus
of our sales force on selling Internet/integrated products as compared to
selling call accounting only products and an increase in the provision for
product returns.
Internet/Integrated Revenue. Total Internet/integrated revenue was
$987,000, or 18.2% of total revenue, in the first six months of 1999,
representing a 199.1% increase from $330,000, or 6.6% of total revenue, for the
same period in 1998. Internet/integrated product revenue was $775,000, or 14.3%
of total revenue, in the first six months of 1999, representing a 150.8%
increase from $309,000, or 6.2% of total revenue, for the same period in 1998.
Internet/integrated service revenue was $212,000, or 3.9% of total revenue, in
the first six months of 1999, representing a 909.5% increase from $21,000, or
0.4% of total revenue, for the same period in 1998. The increase in
Internet/integrated product revenue and percentage of total revenue was due to
the increased focus of our sales force on selling our Internet/integrated
products. The increase in Internet/integrated service revenue was driven by the
increase in Internet/ integrated product sales.
Cost of Product Revenue. Cost of product revenue includes employee
compensation, costs of materials related to production, shipment and fulfillment
and payments under third-party licensing agreements. Cost of product revenue was
$555,000, or 10.2% of total revenue, in the first six months of 1999,
representing a 28.5% increase from $432,000, or 8.6% of total revenue, for the
same period in 1998. This increase in cost and the corresponding increase as a
percentage of total revenue was primarily attributable to an increase in the
percentage of total costs for royalty payments for third-party licensing.
Cost of Service Revenue. Cost of service revenue is comprised primarily of
service employee compensation. Cost of service revenue was $708,000, or 13.1% of
total revenue, for the first six months of 1999, representing a 12.9% increase
from $627,000, or 12.5% of total revenue, for the same period in 1998. This
increase was due to an increase in staff to handle the expansion of the number
of companies under annual maintenance contracts and the increase in professional
services sold.
Research and Development Expenses. Research and development expenses
include salaries and related costs for software developers, quality assurance
personnel and documentation personnel involved in our research and development
efforts. Research and development expenses were $759,000, or 14.0% of total
revenue, for the first six months of 1999, representing a 13.8% decrease from
$881,000, or 17.5% of total revenue, for the same period in 1998. The decrease
in total research and development expenditures reflects the reduction in
expenditures for outside contractors that were used in 1998 to accelerate the
development of our Internet/integrated product line.
Sales and Marketing Expenses. Sales and marketing expenses include
salaries and related costs, commissions, travel, facilities, communications
costs and promotional expenses for our sales organization and marketing staff.
Sales and marketing expenses were $2.2 million, or 40.1% of total revenue, in
the first six months of 1999 and $2.2 million, or 44.5% of total revenue, for
the same period in 1998. This decrease as a percentage of total revenue resulted
from decreases in travel and promotional expenses and discontinued use of an
outside marketing consultant, which were partially offset by higher commissions.
General and Administrative Expenses. General and administrative expenses
include administrative salaries and related benefits, depreciation and
amortization, management fees, recruiting and relocation expenses, as well as
legal, accounting and other professional fees. General and administrative
expenses were $1.7 million, or 31.2% of total revenue, in the first six months
of 1999, representing an 11.0% increase
18
<PAGE> 23
from $1.5 million, or 30.3% of total revenue, for the same period in 1998. This
increase was primarily due to an increased provision for uncollectable accounts
and an increase in a sales tax provision.
Pro Forma Provision for (Benefit from) Income Taxes. The pro forma
effective tax rate for the six months ended June 30, 1999 was 1.0% compared to a
pro forma tax rate of 1.0% for the six months ended June 30, 1998. The pro forma
income tax benefit for the June 30, 1999 period was limited to the amount of pro
forma income tax recoverable in the two-year carryback period of $13,000. The
pro forma income tax expense for the June 30, 1998 period was due to timing
differences causing current pro forma income taxes payable that were not offset
by deferred income taxes since these have been fully reserved.
Years Ended December 31, 1998 and 1997
Total Revenue. Total revenue was $10.4 million in 1998, representing a
16.0% increase from $8.9 million in 1997. Total product revenue was $5.5
million, or 52.5% of total revenue, in 1998, representing an 11.5% increase from
$4.9 million, or 54.6% of total revenue, in 1997. Total service revenue was $4.9
million, or 47.5% of total revenue, in 1998, representing a 21.5% increase from
$4.1 million, or 45.4% of total revenue, in 1997. These increases were primarily
the result of an increase in our Internet/integrated revenue and an increase in
call accounting service revenue.
Call Accounting Revenue. Total call accounting revenue was $9.3 million,
or 89.8% of total revenue, in 1998, representing a 7.6% increase from $8.7
million, or 96.9% of total revenue, in 1997. Call accounting product revenue was
$4.5 million, or 43.1% of total revenue, in 1998, representing a 3.1% decrease
from $4.6 million, or 51.6% of total revenue, in 1997. Call accounting service
revenue was $4.9 million, or 46.7% of total revenue, in 1998, representing a
19.7% increase from $4.1 million, or 45.3% of total revenue, in 1997. The
decline in call accounting product revenue in absolute dollars and as a percent
of total revenue reflects our decision to focus some of our call accounting
resources on developing the Internet/integrated market opportunity. The
increased call accounting service revenue reflects the continued historical
renewal rate on annual maintenance contracts and a significant increase in
installation and training service revenue.
Internet/Integrated Revenue. Total Internet/integrated revenue was $1.1
million, or 10.2% of total revenue, in 1998, representing a 282.9% increase from
$275,000, or 3.1% of total revenue, in 1997. Internet/integrated product revenue
was $971,000, or 9.4% of total revenue, in 1998, representing a 260.0% increase
from $270,000, or 3.0% of total revenue, in 1997. Internet/integrated service
revenue was $82,000, or 0.8% of total revenue, in 1998, representing an increase
from $5,000, or 0.1% of total revenue, in 1997. The increase in
Internet/integrated revenue and percentage of total revenue was due to the
increased focus of our sales force on selling our Internet/integrated products
and an increase in revenue from third-party distributors put in place during
1997.
Cost of Product Revenue. Cost of product revenue was $923,000, or 8.9% of
total revenue, in 1998, representing a 25.4% increase from $736,000, or 8.2% of
total revenue, in 1997. The increase was primarily attributable to an increase
in product shipments. The increased percentage of revenue reflects a slight
increase in the percentage of sales derived from third-party products.
Cost of Service Revenue. Cost of service revenue was $1.3 million, or
12.3% of total revenue, in 1998, representing a 21.0% increase from $1.1
million, or 11.8% of total revenue, in 1997. The dollar increase was primarily
due to growth in services staff needed to support the additional customers under
annual maintenance contracts. The increased percentage of revenue reflects a
slight increase in the services staff necessary to meet the expected support and
service requirements for the new Internet product.
Research and Development Expenses. Research and development expenses were
$1.8 million, or 17.8% of total revenue, in 1998, representing a 33.0% increase
from $1.4 million, or 15.5% of total revenue, for 1997. The absolute and
percentage increases reflect the growth in research and development staff to
maintain and continue to expand our Internet/integrated product line.
Sales and Marketing Expenses. Sales and marketing expenses were $4.6
million, or 44.4% of total revenue, in 1998, representing a 30.9% increase from
$3.5 million, or 39.4% of total revenue, in 1997. The
19
<PAGE> 24
increase in absolute dollars was attributable primarily to increased commission
expenses associated with increased sales and personnel costs resulting from an
increase in our sales and marketing staff. The increased percentage of total
revenue was attributable to sales staff focusing on developing new Internet
distribution channels.
General and Administrative Expenses. General and administrative expenses
were $2.9 million, or 28.2% of total revenue, in 1998, representing a 31.2%
increase from $2.2 million, or 24.9% of total revenue, in 1997. The absolute and
percentage increases were primarily attributable to increased costs of
personnel, rent and professional fees to accommodate our growth.
Pro Forma Provision for (Benefit from) Income Taxes. The pro forma
effective tax rate for the year ended December 31, 1998 was 1.0% compared to
(10.5)% for the year ended December 31, 1997. The pro forma income tax expense
for the year ended December 31, 1998 was due to timing differences causing
current pro forma income taxes payable that were not offset by deferred income
taxes since these have been fully reserved. The pro forma income tax benefit for
the year ended December 31, 1997 was primarily a result of a decrease in the
valuation allowance.
Years Ended December 31, 1997 and 1996
Total Revenue. Total revenue was $8.9 million in 1997, representing a
29.7% increase from $6.9 million in 1996. Total product revenue was $4.9
million, or 54.6% of total revenue, in 1997, representing a 29.2% increase from
$3.8 million, or 54.9% of total revenue, in 1996. Total service revenue was $4.1
million, or 45.4% of total revenue, in 1997, representing a 30.3% increase from
$3.1 million, or 45.1% of total revenue, in 1996. These increases were primarily
the result of the increase in call accounting revenue and the introduction of
our Internet product.
Call Accounting Revenue. Total call accounting revenue was $8.7 million,
or 96.9% of total revenue, in 1997, representing a 25.7% increase from $6.9
million, or 100% of revenue, in 1996. Call accounting product revenue was $4.6
million, or 51.6% of total revenue, in 1997, representing a 22.1% increase from
$3.8 million, or 54.9% of total revenue, in 1996. Call accounting service
revenue was $4.1 million, or 45.3% of total revenue, in 1997, representing a
30.2% increase from $3.1 million, or 45.1% of total revenue, in 1996. All call
accounting revenue growth reflected increased product sales and our continued
historical support renewal rate.
Internet/Integrated Revenue. Total Internet/integrated revenue was
$275,000, or 3.1% of total revenue, in 1997, compared to no revenue in 1996.
Internet/integrated product revenue increased to $270,000, or 3.0% of total
revenue, in 1997 from no revenue in 1996. Internet/integrated service revenue
increased to $5,000, or 0.1% of total revenue, in 1997 from no revenue in 1996.
This increase was a result of the introduction of our Internet product in
mid-1997.
Cost of Product Revenue. Cost of product revenue was $736,000, or 8.2% of
total revenue, in 1997, representing a 28.2% increase from $574,000, or 8.3% of
total revenue, in 1996. This increase reflects growth in our product shipments.
Cost of Service Revenue. Cost of service revenue was $1.1 million, or
11.8% of total revenue, in 1997, representing a 38.4% increase from $761,000, or
11.0% of total revenue, in 1996. This increase was primarily due to the addition
of customer support personnel to support our growing customer base.
Research and Development Expenses. Research and development expenses were
$1.4 million, or 15.5% of total revenue, in 1997, representing a 130.0% increase
from $603,000, or 8.7% of total revenue, in 1996. The absolute and percentage
increases in total expenses were primarily attributable to increased research
and development personnel required to develop the new generation of our
Internet/integrated software products.
Sales and Marketing Expenses. Sales and marketing expenses were $3.5
million, or 39.4% of total revenue, in 1997, representing an 18.2% increase from
$3.0 million, or 43.2% of total revenue, in 1996. The
20
<PAGE> 25
absolute increase was primarily attributable to increased commissions due to
increased sales. The decrease as a percentage of revenue was due to an increase
in the number of sales per sales person.
General and Administrative Expenses. General and administrative expenses
were $2.2 million, or 24.9% of total revenue, in 1997, representing a 19.9%
increase from $1.9 million, or 27.0% of total revenue, in 1996. General and
administrative expenses grew in absolute dollars as we added personnel to
administrative areas but declined as a percentage of total revenue principally
due to economies of scale associated with increased revenue.
Pro Forma Provision for (Benefit from) Income Taxes. The pro forma
effective tax rate for the year ended December 31, 1997 was (10.5)% compared to
72.0% for the year ended December 31, 1996. The pro forma income tax benefit for
the year ended December 31, 1997 was primarily a result of a change in the
valuation allowance. The pro forma income tax expense for the year ended
December 31, 1996 was primarily a result of income before income taxes and the
change in the valuation allowance.
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly statements of operations
data for each of our last ten quarters, including the period ended June 30,
1999, as well as the percentage of our total revenue represented by each item
and revenue information for the same periods expressed in dollars and as a
percentage of total revenue. All information other than the tables of revenue
information have been derived from our financial statements. The unaudited
quarterly financial statements have been prepared on substantially the same
basis as the audited financial statements contained herein. In the opinion of
management, the unaudited quarterly financial statements include all
adjustments, consisting only of normal recurring adjustments, that we consider
to be necessary to fairly present this information when read in conjunction with
our financial statements and related notes appearing elsewhere in this
prospectus. 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,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue................ $1,023 $1,050 $1,253 $1,564 $1,369 $1,197 $1,407 $1,477
Service revenue................ 969 1,036 1,103 950 1,138 1,320 1,303 1,171
------ ------ ------ ------ ------ ------ ------ ------
Total revenue.............. 1,992 2,086 2,356 2,514 2,507 2,517 2,710 2,648
Cost of revenue:
Product costs.................. 170 171 160 235 192 240 210 281
Service costs.................. 243 238 275 297 317 309 324 324
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue...... 413 409 435 532 509 549 534 605
------ ------ ------ ------ ------ ------ ------ ------
Gross profit...................... 1,579 1,677 1,921 1,982 1,998 1,968 2,176 2,043
Operating expenses:
Research and development....... 225 328 377 457 399 483 495 468
Sales and marketing............ 691 807 878 1,146 983 1,252 1,216 1,162
General and administrative..... 533 536 546 616 717 806 711 692
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 1,449 1,671 1,801 2,219 2,099 2,541 2,422 2,322
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss)........... 130 6 120 (237) (101) (573) (246) (279)
Interest income (expense):
Increase in redeemable stock
purchase warrant............. -- -- -- -- -- -- -- --
Other interest income
(expense).................... 6 7 4 2 (1) (39) (32) (35)
------ ------ ------ ------ ------ ------ ------ ------
Total interest income
(expense)................ 6 7 4 2 (1) (39) (32) (35)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)................. $ 136 $ 13 $ 124 $ (235) $ (102) $ (612) $ (278) $ (314)
====== ====== ====== ====== ====== ====== ====== ======
Pro forma provision for (benefit
from) income taxes............... 14 1 13 (32) 1 6 3 3
------ ------ ------ ------ ------ ------ ------ ------
Pro forma net income (loss)....... $ 122 $ 12 $ 111 $ (203) $ (103) $ (618) $ (281) $ (317)
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
-------------------
MAR. 31, JUNE 30,
1999 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Product revenue................ $ 1,365 $1,443
Service revenue................ 1,293 1,322
------- ------
Total revenue.............. 2,658 2,765
Cost of revenue:
Product costs.................. 265 290
Service costs.................. 339 369
------- ------
Total cost of revenue...... 604 659
------- ------
Gross profit...................... 2,054 2,106
Operating expenses:
Research and development....... 379 380
Sales and marketing............ 979 1,196
General and administrative..... 966 724
------- ------
Total operating expenses... 2,324 2,300
------- ------
Operating income (loss)........... (270) (194)
Interest income (expense):
Increase in redeemable stock
purchase warrant............. (734) --
Other interest income
(expense).................... (40) (38)
------- ------
Total interest income
(expense)................ (774) (38)
------- ------
Net income (loss)................. $(1,044) $ (232)
======= ======
Pro forma provision for (benefit
from) income taxes............... -- (13)
------- ------
Pro forma net income (loss)....... $(1,044) $ (219)
======= ======
</TABLE>
21
<PAGE> 26
<TABLE>
<CAPTION>
REVENUE INFORMATION
-------------------
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Call accounting:
Product revenue................ $1,023 $1,025 $1,217 $1,355 $1,193 $1,064 $1,073
Service revenue................ 969 1,036 1,103 945 1,130 1,307 1,278
------ ------ ------ ------ ------ ------ ------
Total call accounting
revenue.................. 1,992 2,061 2,320 2,300 2,323 2,371 2,351
Internet/integrated:
Product revenue................ -- 25 36 209 175 133 334
Service revenue................ -- -- -- 5 9 13 25
------ ------ ------ ------ ------ ------ ------
Total Internet/integrated
revenue.................. -- 25 36 214 184 146 359
------ ------ ------ ------ ------ ------ ------
Total revenue............ $1,992 $2,086 $2,356 $2,514 $2,507 $2,517 $2,710
====== ====== ====== ====== ====== ====== ======
<CAPTION>
REVENUE INFORMATION
-------------------
THREE MONTHS ENDED
------------------------------
DEC. 31, MAR. 31, JUNE 30,
1998 1999 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Call accounting:
Product revenue................ $1,149 $ 994 $1,037
Service revenue................ 1,135 1,242 1,163
------ ------ ------
Total call accounting
revenue.................. 2,284 2,236 2,200
Internet/integrated:
Product revenue................ 329 369 406
Service revenue................ 35 53 159
------ ------ ------
Total Internet/integrated
revenue.................. 364 422 565
------ ------ ------
Total revenue............ $2,648 $2,658 $2,765
====== ====== ======
</TABLE>
Expressed as a percentage of revenue, our quarterly results were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue............ 51.4% 50.3% 53.2% 62.2% 54.6% 47.6% 51.9% 55.8%
Service revenue............ 48.6 49.7 46.8 37.8 45.4 52.4 48.1 44.2
----- ----- ------ ------ ------ ------ ------ ------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ------ ------ ------ ------ ------ ------
Cost of revenue:
Product costs.............. 8.5 8.2 6.8 9.3 7.7 9.5 7.7 10.6
Service costs.............. 12.2 11.4 11.7 11.9 12.6 12.3 12.0 12.2
----- ----- ------ ------ ------ ------ ------ ------
Total cost of
revenue.............. 20.7 19.6 18.5 21.2 20.3 21.8 19.7 22.8
----- ----- ------ ------ ------ ------ ------ ------
Gross profit................... 79.3 80.4 81.5 78.8 79.7 78.2 80.3 77.2
Operating expenses:
Research and development... 11.3 15.7 16.0 18.1 15.9 19.3 18.3 17.7
Sales and marketing........ 34.7 38.7 37.3 45.6 39.2 49.7 44.9 43.9
General and
administrative........... 26.8 25.7 23.1 24.5 28.6 32.0 26.2 26.1
----- ----- ------ ------ ------ ------ ------ ------
Total operating
expenses............. 72.8 80.1 76.4 88.2 83.7 101.0 89.4 87.7
----- ----- ------ ------ ------ ------ ------ ------
Operating income (loss)........ 6.5 0.3 5.1 (9.4) (4.0) (22.8) (9.1) (10.5)
Interest income (expense):
Increase in redeemable
stock purchase warrant... -- -- -- -- -- -- -- --
Other interest income
(expense)................ 0.3 0.3 0.2 0.1 (0.1) (1.5) (1.2) (1.4)
----- ----- ------ ------ ------ ------ ------ ------
Total interest income
(expense)............ 0.3 0.3 0.2 0.1 -- (1.5) (1.2) (1.4)
----- ----- ------ ------ ------ ------ ------ ------
Net income (loss).............. 6.8% 0.6% 5.3% (9.3)% (4.1)% (24.3)% (10.3)% (11.9)%
===== ===== ====== ====== ====== ====== ====== ======
Pro forma provision for
(benefit from) income
taxes........................ 0.7 -- 0.6 (1.3) -- 0.3 0.1 0.1
----- ----- ------ ------ ------ ------ ------ ------
Pro forma net income (loss).... 6.1% 0.6% 4.7% (8.0)% (4.1)% (24.6)% (10.4)% (12.0)%
===== ===== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
-------------------
MAR. 31, JUNE 30,
1999 1999
-------- --------
<S> <C> <C>
Revenue:
Product revenue............ 51.4% 52.2%
Service revenue............ 48.6 47.8
------ -----
Total revenue.......... 100.0 100.0
------ -----
Cost of revenue:
Product costs.............. 9.9 10.5
Service costs.............. 12.8 13.3
------ -----
Total cost of
revenue.............. 22.7 23.8
------ -----
Gross profit................... 77.3 76.2
Operating expenses:
Research and development... 14.3 13.7
Sales and marketing........ 36.9 43.3
General and
administrative........... 36.3 26.2
------ -----
Total operating
expenses............. 87.5 83.2
------ -----
Operating income (loss)........ (10.2) (7.0)
Interest income (expense):
Increase in redeemable
stock purchase warrant... (27.6) --
Other interest income
(expense)................ (1.5) (1.4)
------ -----
Total interest income
(expense)............ (29.1) (1.4)
------ -----
Net income (loss).............. (39.3)% (8.4)%
====== =====
Pro forma provision for
(benefit from) income
taxes........................ -- (0.5)
------ -----
Pro forma net income (loss).... (39.3)% (7.9)%
====== =====
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
REVENUE INFORMATION
-------------------
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Call accounting:
Product revenue............ 51.4% 49.1% 51.7% 53.9% 47.6% 42.3% 39.6%
Service revenue............ 48.6 49.7 46.8 37.6 45.1 51.9 47.2
----- ----- ------ ------ ------ ------ ------
Total call accounting
revenue.............. 100.0 98.8 98.5 91.5 92.7 94.2 86.8
Internet/integrated:
Product revenue............ -- 1.2 1.5 8.3 7.0 5.3 12.3
Service revenue............ -- -- -- 0.2 0.3 0.5 0.9
----- ----- ------ ------ ------ ------ ------
Total
Internet/integrated
revenue.............. -- 1.2 1.5 8.5 7.3 5.8 13.2
----- ----- ------ ------ ------ ------ ------
Total revenue........ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ====== ====== ====== ====== ======
<CAPTION>
REVENUE INFORMATION
-------------------
THREE MONTHS ENDED
------------------------------
DEC. 31, MAR. 31, JUNE 30,
1998 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Call accounting:
Product revenue............ 43.4% 37.4% 37.5%
Service revenue............ 42.9 46.7 42.1
------ ------ -----
Total call accounting
revenue.............. 86.3 84.1 79.6
Internet/integrated:
Product revenue............ 12.4 13.9 14.7
Service revenue............ 1.3 2.0 5.8
------ ------ -----
Total
Internet/integrated
revenue.............. 13.7 15.9 20.4
------ ------ -----
Total revenue........ 100.0% 100.0% 100.0%
====== ====== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations from cash generated from
operations and the issuance of long-term debt. We had cash and cash equivalents
of $2.4 million at June 30, 1999, $46,000 at December 31, 1998 and $78,000 at
December 31, 1997.
Cash provided by (used in) operating activities during the six months ended
June 30, 1999 and June 30, 1998 was $102,000, and $(439,000), respectively. This
increase reflects the net impact of increases in our net loss and in accounts
receivable, which were partially offset by an increase in accounts payable and
accrued expenses, the recording of the accretion of the common stock warrant
related to our loan with Sirrom Investments, Inc. and an increase in deferred
revenue. Cash provided by (used in) operating activities during the years ended
December 31, 1998, 1997 and 1996 was $(771,000), $121,000, and $753,000
respectively. The decreases were primarily a result of decreases in net income
in 1998 compared to 1997, and 1997 compared to 1996.
Our investing activities primarily include expenditures for fixed assets in
support of our product development activities and infrastructure. Net cash used
in investing activities decreased to $161,000 in the six months ended June 30,
1999 compared to $191,000 for the same period in 1998. This decrease resulted
primarily from a decrease in fixed assets purchased. Net cash used in investing
activities increased to $306,000 in 1998 from $210,000 in 1997. These
expenditures relate primarily to an increase in purchases of property and
equipment. Net cash used in investing activities was $670,000 in 1996. The
decrease in net cash used in investing activities between 1997 and 1996 relates
primarily to a decrease in purchases of property and equipment.
Net cash provided by (used in) financing activities was $2.4 million in the
six months ended June 30, 1999, compared to $965,000 for the same period in
1998. This change was due primarily to the sale of Series A redeemable
convertible preferred stock for $6.0 million, the redemption of common stock for
$4.0 million and the sale of common stock for $500,000 in the six months ended
June 30, 1999 and the issuance of long-term debt in 1998. Net cash provided by
(used in) financing activities was $1.0 million in 1998, and $(79,000) in 1997
and $(656,000) in 1996. These changes were due primarily to the issuance of
long-term debt in 1998 resulting in net proceeds of $965,000 and shareholder
distributions in 1996. We also have a $750,000 bank line of credit with Silicon
Valley Bank, which expires in November 1999. As of July 15, 1999, there was
$750,000 available under this line of credit.
On June 16, 1999, we completed the private placement of 300,000 shares of
Series A Preferred Stock, resulting in gross proceeds to us of $6.0 million and
net proceeds of approximately $5.9 million after payment by us of expenses
relating to the transaction. Of these funds, $4.0 million was used to redeem an
aggregate of 600,000 shares of common stock from David Couchman, our Chairman
and founder, and his spouse. The balance of the net proceeds will be used to
fund our operational growth. The Series A
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<PAGE> 28
Preferred Stock will automatically convert to 900,000 shares of common stock
concurrently with the consummation of this offering.
On June 21, 1999, we sold 75,000 shares of common stock for $500,000 to
James C. Davis, whom we intend to add to our Board of Directors.
Since we have not generated significant revenue from sales outside the
United States, we have not sustained material foreign currency exchange losses
and presently do not attempt to hedge our exposure to fluctuations in foreign
currency exchange rates. Should our revenue from international sales increase,
and should such sales be denominated in foreign currencies, we intend to adopt a
hedging strategy against foreign currency fluctuations.
We believe that our existing liquidity and capital resources, including the
proceeds resulting from the sale of our common stock in this offering, will be
sufficient to satisfy our cash requirements for at least the next 12 months, and
we are not aware of any events that may cause our liquidity to increase or
decrease in a material way. However, our business strategies will require a
substantial increase in expenditures. To the extent that income from operations
is insufficient to implement our business strategies, or if we identify
additional strategic investments in our business, technology or products, we may
be required to raise additional funds through equity or debt financing. If
adequate funds are not available on acceptable terms or at all, our ability to
implement our business strategies or take advantage of unanticipated
opportunities or otherwise respond to competitive pressures would be limited.
There can be no assurance that we will be able to raise these additional funds
on terms acceptable to us, or at all.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 1999. Subsequently, the
effective date was deferred until June 15, 2000. We are in the process of
evaluating this pronouncement and will adopt it upon its effective date.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. This SOP
amends SOP 97-2 to, among other things, require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the residual
method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP 97-2, and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related to
the delivered elements. SOP 98-9 is effective for fiscal years beginning after
March 15, 1999. We do not anticipate any impact from the provisions of the new
pronouncement.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
State of Readiness of our Products. All new products introduced by us will
be year 2000 compliant. We have been testing our existing products for use in
the year 2000 and beyond. The results suggest that current versions of our
products are year 2000 compliant. However, our testing does not cover every
possible computing environment. Accordingly, some customers may have year 2000
problems with products that we believe are year 2000 compliant.
Previous purchasers may be using older versions of our products. We believe
problems encountered by such users could be quickly remedied with our year 2000
upgrades for those products. In addition, we have not tested discontinued
products for year 2000 compliance, some of which are still in use. We are
attempting to identify and inform current customers that rely on such
discontinued products of their lack of compliance and are working with them to
provide alternate operating arrangements. We cannot guarantee that we will be
able to locate all users of our older, non-compliant products. Our experience in
24
<PAGE> 29
developing year 2000 compliant versions of our existing products suggests that
we can correct year 2000 problems in our discontinued products without incurring
material expenses.
State of Readiness of our Internal Systems. We may be affected by year
2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. We have completed testing all material internal systems for
year 2000 compliance. We are not currently aware of any year 2000 problem
relating to any internal systems material to the operation of our business. We
have also received assurances from our third-party vendors for all material
systems in use by us that such systems are year 2000 compliant, except with
respect to an application for customer order tracking. We anticipate that the
non-compliant application for customer order tracking will be made year 2000
compliant or replaced before December 31, 1999.
Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers, and
service providers. We believe that absent a critical failure beyond our control,
such as a prolonged loss of electrical or telephone service, year 2000 problems
experienced by third parties will not have a material impact on us. We have no
contingency plan for critical failures in third-party products. Our contingency
plan in the event of a non-critical failure is to establish relationships with
alternative suppliers or vendors to replace failed suppliers or vendors.
Cost. We do not separately track expenditures relating to year 2000
compliance. Such expenditures are primarily absorbed within our development
organization. To date, our costs related to year 2000 compliance have not been
material relative to our overall development expenditures. Furthermore, based on
our experience to date, and our assessment that all material internal systems
other than the order tracking application and all currently marketed products
are year 2000 compliant, we do not anticipate that costs associated with
remediating our non-compliant products or internal systems will be material.
Risks. We believe the most likely consequences of a failure by us to make
our products year 2000 compliant would be a decrease in sales of our products,
an increase in allocation of resources to address year 2000 problems of our
customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by our
customers due to such year 2000 problems. We believe the most likely
consequences of a failure of our internal systems or the systems of third-party
suppliers or service providers would be our inability to process orders, issue
invoices, and develop products. Should any of these problems occur, we could be
required to devote significant resources to correct them. Aside from the
possibility of having to establish relationships with alternative suppliers or
vendors to replace failed suppliers or vendors, we do not currently anticipate
having to develop a contingency plan for handling any year 2000 problems that
are not detected or corrected prior to their occurrence. Due to the general
uncertainty inherent in the year 2000 computer problem, resulting from the
uncertainty of the year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our business, results of operations and
financial condition.
25
<PAGE> 30
BUSINESS
OVERVIEW
Telemate.Net Software, Inc. provides integrated network usage management
solutions that enable businesses to monitor, analyze and manage the use of both
their Internet and voice networks. We believe our patent-pending Telemate.Net
software is the first product to integrate both Internet usage management and
call accounting capabilities. Our Telemate.Net family of products enables
businesses to optimize network utilization, improve employee productivity,
enhance network security, improve e-commerce effectiveness, and control,
allocate and recover network costs. We sell our products through a combination
of direct sales and third-party resellers and distributors. We have installed
our products in over 14,000 customer sites, and our customers represent most
major commercial, industrial and service categories.
INDUSTRY BACKGROUND
Emergence of the Internet as a Global Communications and Commerce Medium
The Internet has emerged as a rapidly growing global communications and
commerce medium. International Data Corporation, a market research organization,
estimates that the number of users who buy and sell goods over the Internet
increased to 142 million users in 1998, and is forecast to reach almost 200
million by year end 1999 and to surpass 500 million users by 2003. This increase
in use is expected to drive commerce on the Internet to more than $1.0 trillion
by 2003. The U.S. Department of Commerce estimates that Internet traffic doubles
every 100 days.
Due to the growth in the number of web users and the increasing use of the
Internet to conduct business, many organizations now recognize the Internet as
strategic to their business. Organizations are capitalizing on the global reach
of the Internet to expand into new markets and acquire and retain customers, and
are utilizing the web as a powerful distribution channel to market and deliver
goods and services. Also, businesses are increasingly using the web to interact
with suppliers, distributors and other business partners to achieve business
efficiencies. Furthermore, many businesses utilize intranets, which are networks
that use Internet technology for communications within an organization, to
disseminate information and improve operations. Internet access is also being
provided to many employees as a necessary component of their jobs. As a result,
organizations have begun to invest heavily in Internet technology and
infrastructure.
The Need for an Internet Usage Management Solution
While the Internet offers significant opportunities for businesses, the use
of the Internet involves business risks as well, including the potential for
employee abuse, reduced productivity, legal liabilities, theft or loss of data,
business interruption, capacity overloads and unnecessary expense. As a result,
organizations are faced with the challenge of exploiting the Internet's
potential while mitigating the risks associated with this new technology.
Businesses need to be able to determine whether their employees are using the
Internet productively and how best to manage Internet traffic to meet the
constraints of the network. We believe the rapid adoption of the Internet for
business purposes will ultimately require companies to manage the costs of using
the Internet in much the same way as they manage telephone costs.
In addition, as businesses increasingly use the Internet for marketing,
e-commerce and customer support, managers need to understand how customers and
business partners are interacting with their web site. For instance, a company
can determine which visitors to the web site are purchasing products and which
pages they visited before doing so, thus providing valuable information to
managers on the effectiveness of their web marketing efforts. GartnerGroup, a
market research organization, predicts that by year-end 2000, approximately 70%
of Global 1000 companies will adopt web measurement and tracking functionality,
as compared to approximately 35% of Global 1000 companies that had adopted this
functionality as of year-end 1998.
26
<PAGE> 31
In addition, as greater network access increases exposure to network
security breaches, network managers need a software solution that can analyze
the large amounts of data collected by network security devices to help
determine if their existing Internet infrastructure is secure. Consequently,
companies are seeking a management and reporting system that provides the
network intelligence they require to maximize their investment in the Internet.
The Need for an Integrated Network Usage Management Solution
Historically, voice and data networks have developed separately, with voice
traffic carried on the telephony network and data traffic carried over the
computer network. During the 1960's, enterprises increasingly deployed private
branch exchanges, known as PBXs, that were able to collect substantial amounts
of data on telephony network usage. As a result, in the 1970's, software
solutions were developed that could access, process and analyze this data in
order for enterprises to monitor and manage telephone usage and to allocate the
costs associated with such usage. Throughout the 1980's and 1990's, emerging
technology, deregulation and increasing competition in the telecommunications
industry coupled with the growth in Internet usage and data traffic have led to
a growing trend toward convergence of voice and data networks. Today's Internet
technology enables both voice and data transmissions to be routed over computer
networks. Internet telephony has emerged as a low-cost alternative to
traditional long distance telephone communications.
The convergence of voice and data networks has created additional
challenges for organizations. As voice over the Internet, or VoIP, applications
are implemented, we believe companies increasingly will want to manage their
use, just as they have for traditional PBX networks. Organizations are also
encountering security risks as employees have the ability to access the Internet
directly over voice lines, thereby bypassing established security firewalls. To
address this converging network environment, we believe businesses will need a
monitoring and reporting system capable of providing usage information for both
their Internet and voice networks. Businesses require this integrated network
usage management solution to:
- provide flexible reporting capabilities that can be easily modified to
obtain the desired information;
- be easy to implement and use;
- interface with a large number of data sources from a wide range of
manufacturers;
- collect data in a variety of formats;
- process large volumes of detailed data and track this data to specific
departments and individuals within the organization or visitors to the
network; and
- be scalable to accommodate the needs of businesses of all sizes.
THE TELEMATE.NET SOLUTION
Our Telemate.Net product provides an integrated solution that enables
businesses to monitor, analyze and manage the use of their Internet and voice
networks. We believe our patent-pending software is the first product to
integrate Internet usage management and call accounting capabilities. The
Telemate.Net solution provides the following key advantages:
Network Optimization. Telemate.Net can be used by managers throughout an
organization to maximize the effectiveness of their Internet and voice networks.
For example:
- information technology managers can monitor network usage, resolve
network bottlenecks and be alerted to security breaches;
- financial officers can manage and allocate network costs;
- human resources managers can monitor compliance with network use policies
and detect improper use of the network;
27
<PAGE> 32
- sales managers can measure productivity of Internet and telephone-based
sales activities; and
- marketing managers can analyze the effectiveness of Internet marketing
campaigns.
Comprehensive Reporting. Telemate.Net's reporting engine incorporates over
200 standard report templates and provides access not only to summary data on
network usage and activity but also to the detailed information supporting the
summary data. For example, a network manager can use the summary information to
detect network bottlenecks and access detailed data to identify which
department, individual or type of usage has caused the bottleneck. Our solutions
also provide a filtering capability that allows users to modify the standard
report templates to incorporate additional information or exclude unwanted data.
The automation capabilities of Telemate.Net's reporting engine also allow users
to define who receives reports and schedule how and when they are delivered.
Ease of Implementation and Use. Telemate.Net is designed to simplify
product installation and use. We have embedded the Microsoft SQL Server(TM)
database within Telemate.Net, eliminating the need for customers to install
their own database. Telemate.Net's data collection engine can easily import data
directly from a wide variety of network devices. In addition, Telemate.Net's
simple, point-and-click, multi-panel user interface allows customers to easily
access, analyze and process this data.
Flexible Data Collection and Reformatting. The Telemate.Net data
collection and reformatting module extracts data in many formats from a variety
of sources and converts this data into a standard format. Once standardized,
data from many sources can be integrated into a single database to enable
consolidated reporting. We initially developed this technology to allow us to
collect data from a wide variety of PBX types and formats. The flexibility of
the Telemate.Net technology enabled us to quickly develop data collection and
reformatting capabilities for additional network devices such as proxy servers,
intrusion detection products and firewalls. We are currently developing these
capabilities for web servers, VoIP devices, VPN servers and e-mail servers. We
refer to all of these devices as data sources.
Robust Data Storage, Management and Processing. Telemate.Net's database
can efficiently store large amounts of detailed data gathered by networking and
network security devices. Telemate.Net's processing and database module
incorporates an organizational directory that tracks network usage data by user,
department or other group within the organization. This organizational directory
also maintains historical links between users and their network activity. The
database also allows Telemate.Net to provide extensive cost allocation based on
user-determined parameters.
Scalability. Telemate.Net provides an integrated solution for network
usage management that is highly scalable to accommodate the needs of enterprises
of all sizes. Its database is scalable from a low volume, desktop application to
a high volume, high performance network environment. An organization can select
the model with the capacity, functionality, reports and number of data sources
to meet its current needs, and as these needs change, the organization can
easily upgrade to other models and additional data sources using a simple
activation code.
STRATEGY
Our objective is to capitalize on our expertise in call accounting and
early entry into Internet usage management to become the leading provider of
integrated network usage management software. Our strategy to achieve this
objective includes the following:
Capitalize on Our Technology. We believe that Telemate.Net offers the
highest level of network usage reporting detail, flexibility and scalability
available today. We believe we are currently the only company offering an
integrated product that provides both Internet usage management and telephone
call accounting capabilities. We intend to capitalize on the core technology of
our existing products to provide additional functionality, such as management
and analysis of data from web servers, VoIP switches and routers, VPN servers
and e-mail servers. We believe that our experience in the network usage
management industry and flexible core technology will enable us to continue to
adapt our solutions as the network usage management needs of enterprises evolve.
Expand Our Direct Sales Force and Capitalize on Our Direct Sales
Approach. Our direct sales organization currently consists of 38 sales
professionals primarily employing a telephone and online sales
28
<PAGE> 33
approach. We have refined this approach over the past decade so that we can
complete sales with little or no face-to-face contact, often performing online
product demonstrations. This has allowed us to avoid expensive field office
operations and travel. We routinely close transactions ranging from $1,000 to
$50,000 over the telephone. Orders over $50,000 typically require only one or
two direct visits with the customer. Web-based marketing is making our direct
sales operation more productive by delivering sales information and trial
products in a more timely and efficient manner. We intend to continue to expand
our direct sales force rapidly in the next few years to increase sales of our
Internet and integrated products.
Increase Sales to Existing Customers. We have installed our products in
over 14,000 customer locations. Prior to 1999, our sales efforts were focused
primarily on call accounting. As a result, over 75% of our customers have only
purchased our call accounting products. We have been successful selling call
accounting upgrades to this customer base in a cost effective manner. We believe
this large base of existing call accounting customers represents an excellent
opportunity to sell Internet usage management products as well. In 1999, we
began to focus a portion of our direct sales force on generating additional
sales from our existing customer base. This group will continue to place primary
emphasis on selling our Internet and integrated network usage management
solutions.
Strengthen and Expand Strategic Distribution and Marketing
Relationships. A number of leading network and network security product vendors
help us distribute and market our products by bundling them with their own
products, selling our products through their sales forces and promoting our
products at trade shows, seminars and through their web sites. We also sell our
products worldwide through a growing number of network resellers, systems
integrators and distributors. We intend to pursue additional strategic
distribution and marketing relationships both domestically and internationally,
and to expand the scope of our existing relationships in order to complement our
direct sales capabilities and expand our customer base.
Expand Internet Marketing and E-Commerce Capabilities. We intend to
continue to use the Internet to build our brand awareness, generate leads for
our direct sales force and resellers and generate web sales. We utilize a
variety of web-based advertising and marketing programs along with web site
links and traditional marketing programs to attract prospects and customers to
our web site. In addition to obtaining general information about our products,
users are able to download our products for a 30-day trial period. Our web site
has proved to be the most productive source of prospects for our direct sales
force and therefore, we expect to significantly expand our web marketing
programs. We also plan to begin accepting and fulfilling orders via the Internet
before the end of 1999.
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PRODUCTS
Our principal Telemate.Net products are as follows:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
<S> <C>
TELEMATE.NET QUICKVIEW QuickView is designed for organizations that require data
collection from a single data source, have moderate
requirements for the storage of usage data and are
satisfied with basic usage reports. Because QuickView
operates on Microsoft's Windows 95, 98 and NT operating
systems, it is suitable for most small business users.
Customers may choose to report on one of the following
data sources from a variety of manufacturers: firewalls,
proxy servers, intrusion detection products or PBXs.
QuickView may be easily upgraded to QuickView Plus,
WorkGroup or Enterprise using an activation code.
TELEMATE.NET QUICKVIEW PLUS QuickView Plus is designed for customers that have basic
reporting needs and moderate data storage requirements
but also require reporting on multiple data sources.
QuickView Plus allows a user to collect, analyze and
report on usage data from multiple firewalls, proxy
servers, intrusion detection devices or PBXs. Data
sources may be of a single type or a combination of types
and manufacturers. QuickView Plus may be easily upgraded
to WorkGroup or Enterprise using an activation code.
TELEMATE.NET WORKGROUP WorkGroup is designed for small to mid-size organizations
that require large volumes of data storage and seek
extensive network usage reporting. It provides the same
general features as QuickView and also provides
information and reports on usage, traffic and security
violations. WorkGroup allows allocation of Internet usage
costs and includes more than one hundred standard
reports. WorkGroup integrates the features of the
QuickView products to provide one solution for multiple
data sources. WorkGroup may be easily upgraded to
Enterprise using an activation code.
TELEMATE.NET ENTERPRISE Enterprise is designed for most mid-size to large
enterprises seeking a more complete network usage
management solution. It includes over 200 reports, a URL
categorization database, third-party billing, allocation
of equipment and overhead costs, and a custom report
writing tool, currently Seagate Software, Inc.'s Crystal
Reports Professional 7, in addition to the general
features found in WorkGroup.
</TABLE>
In addition to our Telemate.Net products, we also offer the following
add-on functionality:
Additional Data Source Modules. Additional data source modules may be
purchased to expand QuickView Plus, WorkGroup or Enterprise to collect data from
additional firewalls, proxy servers, intrusion detection products or PBXs.
URL Categorization. Telemate.Net offers a uniform resource locator, or
URL, categorization database, which groups hundreds of thousands of Internet
addresses into 28 categories such as travel, shopping, hate and discrimination,
pornography, sports, gambling and employment agency sites. Telemate.Net then
reports on Internet usage by category, thus allowing companies to identify
misuse and abuse of their networks. These URLs are updated on a daily basis.
Advanced Asset Manager. Advanced Asset Manager is a cable and connectivity
management software solution that allows network managers to graphically view
the location of network cables and circuits
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within the business' facility. Advanced Asset Manager documents cable and
circuit routes, multiple network layouts, availability of spare circuits, work
orders, technician assignment, and hardware inventory.
SERVICES
We currently provide installation, training and technical support services
for our customers. These services have been a growing source of recurring
revenue for us. We intend to continue to improve our support staff's technical
knowledge and problem solving abilities to ensure that our customers remain
satisfied with our products and services. In addition, we intend to develop
web-based training, installation and custom report generation services that will
expand current customer training seminars and installation services. Technical
support is provided under annual maintenance contracts that provide customers
with access to telephone support and product updates. In addition, we intend to
expand the customer service capabilities of our web site to enable customers to
initiate service requests, obtain answers to frequently asked questions and
obtain product updates over the Internet.
TECHNOLOGY
Our core technology is designed to allow businesses to easily extract
needed data from a wide range of network data sources and translate it into a
standardized format. This standardized data is then enhanced by linking it to an
organizational directory and other relevant information and storing it in a
database. Our flexible and powerful reporting engine extracts the specific
information needed and generates a report, which can then be distributed to
management in a variety of formats.
Telemate.Net's core technology has four major modules:
Data Collection and Reformatting Module. The data collection and
reformatting module extracts data from a variety of data sources. Because
the data is initially extracted in different formats, Telemate.Net converts
the data into a standard format so it can be integrated for use within our
application.
Processing and Database Module. The processing and database module
has the following components:
- Directory: The directory allows Telemate.Net to link sources of
network activity, such as user identifications, Internet addresses and
telephone extensions, to specific individuals, departments, divisions
and companies. The directory also contains a history function that
keeps track of these links as they change so that these sources are
properly linked to the owner of the source at that time.
- Costing: Our costing capability assigns a cost to each voice or data
transaction, which allows organizations to allocate network expenses.
A variety of costing methods are available that can be tailored to the
organization's needs and preferences.
- Alarms: Our product has the ability to establish PBX activity levels
and, if these levels are exceeded, alert management of this occurrence
via e-mail or beeper. This feature aids in the detection of hacking
and potential fraud conditions. We plan to extend this alarm
functionality to Internet data sources during the first half of 2000.
- Domain Name Server Lookup: Telemate.Net performs several types of
Domain Name Server, or DNS, lookup. A DNS maintains a database that
correlates numerical Internet addresses with the equivalent URL, or
"www.", address. If the data collected from a data source includes
only the numerical Internet address of a destination web site,
Telemate.Net will search the external DNS to obtain the equivalent URL
address and include it in the data record. For example, if the data
collected reveals a numerical address of 209.17.193.130, the DNS
lookup function will provide the more commonly used URL address of
www.telemate.net.
- URL Categorization: We provide a database of several hundred thousand
URLs that is updated daily. These URLs are grouped into 28 different
categories. This allows companies to
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detect unwanted usage of their networks. As information from a data
source is added to the activity database, this URL categorization
database is searched and the proper category is added to the record.
- Automated Operations: Most application functions can be executed
automatically on a specific schedule set by the user. Such functions
include
-- collection of data from a data source;
-- processing of that data;
-- generation and distribution of specific reports to management; and
-- purging of processed data to manage the size of the database.
For example, the user can specify that on the tenth day of each month
the system will purge all of the detailed records older than 60 days,
or that every Monday the system will distribute a weekly departmental
summary via e-mail to all department managers.
- Embedded Database: Under an original equipment manufacturer agreement
with Microsoft, we embed Microsoft's SQL database in our Telemate.Net
products. Our QuickView product includes the Microsoft SQL 7.0 MSDE
desktop database while our WorkGroup and Enterprise products include
the full Microsoft SQL 7.0 Server database. Telemate.Net is designed
to allow us to efficiently integrate other databases, such as a
UNIX-based Oracle database, in the future.
- Multiprocessing: As the number of data sources and the volume of data
on a network increase, Telemate.Net has the ability to distribute both
processing and reporting onto multiple PCs to balance the workload and
further enhance scalability.
Reporting Engine Module. Our reporting engine is currently designed
for use with Seagate's Crystal Reports, a reporting tool. This means that
users do not have to learn Crystal's command language or the structure of
the SQL Server database in order to use our products. Telemate.Net's
reporting engine:
- incorporates more than 200 standard reports and templates designed and
refined over time with input from our customers;
- provides a filtering capability that allows the user to easily modify
the standard reports thereby customizing the report to provide the
specific information needed;
- allows users to create new reports or to modify existing report
templates using Crystal Reports Professional; and
- allows any customized report format to be stored and accessed at a
future time or scheduled for automated execution and distribution.
Interface Module. Telemate.Net employs an easy to use,
functionally-rich user interface, featuring the multi-paneled style used in
Windows applications. We utilize third-party interface tools to create a
familiar "look and feel" to the product. The interface is designed so that
users can operate our application and generate reports with a minimal
amount of training.
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CUSTOMERS
We have installed our products in over 14,000 customer sites. Our customers
represent most major commercial, industrial and service categories and typically
have more than 100 employees. In 1998, no one customer accounted for more than
5% of our annual revenue. The following table sets forth some of our current
customers who have purchased $5,000 or more in products and services from us in
the last three years:
<TABLE>
<S> <C>
CALL ACCOUNTING INTERNET/INTEGRATED
American Red Cross Arrow Electronics
AT&T Wireless Services Arthur Andersen
Castlerock Entertainment BellSouth Business Systems
Dun and Bradstreet Coca-Cola Bottling
Eastman Kodak Cox Communications
Ericsson Dayton Hudson
Federal Reserve Bank Atlanta Emerson Power Transmission
Kaiser Permanente General American Life
Merck Georgia-Pacific
National Geographic International Paper
PricewaterhouseCoopers Parke-Davis Pharmaceutical Research
Snap-On Philip Morris
Solo Cup Sears Roebuck
Tommy Hilfiger USA SmithKline Beecham
U.S. Air National Guard U.S. Army
</TABLE>
SALES AND MARKETING
We conduct our sales efforts through a combination of direct sales and
arrangements with network resellers, systems integrators and distributors. Our
direct sales force primarily employs a telephone and online sales approach and
prior to 1999 was primarily focused on the sale of our call accounting
applications. We have recently developed sales teams focused on large account
and government agency sales, sales of our Internet and integrated products and
sales of additional products and functionality to our existing customer base.
Large Enterprise and Government Sales. We expect that enterprises with
more than 1,000 employees will comprise almost half of the revenue opportunity
in the network usage management market over the next five years. According to
the most recent U.S. census data, these 6,700 large enterprises represent more
than 650,000 potential installations in the United States. In recent years we
have enhanced the scalability and functionality of our products to better
address the needs of these large enterprises. As a result, our sales to large
enterprises have increased over the past several years, leading to an increase
in our average sales price.
Mid-size Enterprise Sales. We continue to focus on enterprises with 100 to
1,000 employees. We expect these mid-size enterprises will represent almost half
of the revenue opportunity in the network usage management market over the next
five years. According to estimates from the U.S. Census Bureau, this market
includes over 70,000 companies. We intend to increase our use of web-based
marketing to pursue these mid-size enterprises.
Installed Base Sales. We have established a separate sales team that
focuses exclusively on selling additional products to our existing customers. We
believe there is a significant opportunity to upgrade our installed base of
customers to the latest generation of our software. In addition, as our
customers' networks grow, we expect to sell additional functionality and data
sources to these customers. As we expand our web-based marketing and customer
support activities, we expect to be able to more efficiently identify qualified
prospects for upgrades.
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E-Commerce Sales. To augment our direct sales efforts, we are expanding
our capabilities to market and execute sales transactions via our web site. Our
initial e-commerce sales focus will address support contract renewals,
low-priced product upgrades and sales of entry-level products. Over time, as
customers become accustomed to e-commerce transactions, we expect that some of
our mid-sized and large enterprise business will flow through our web site.
Because existing customers can easily upgrade features or add data sources
utilizing an activation code, we expect installed base e-commerce to grow
rapidly over the next few years.
Network Resellers and Distributors. While our direct sales force is
expected to continue to generate a large proportion of our future revenue, we
are increasingly employing indirect distribution channels worldwide as an
important complement to our direct sales force. We have established a team of
distribution sales representatives that is developing relationships with and
providing sales support to network resellers, systems integrators and
distributors. While most of our efforts have been focused within the United
States, we added five international distributors in the first six months of
1999. We intend to accelerate the expansion of both our international and
domestic distribution channels over the next few years.
Strategic Distribution and Marketing Relationships. Leading networking and
network security product vendors, including AXENT Technologies, Check Point
Software, Cisco Systems, Lucent Technologies, Microsoft and Network Associates,
help to market and distribute our products. These companies assist in the sales
and marketing of our products by bundling them with their own products, selling
our products through their sales forces and promoting our products at trade
shows, seminars and through their web sites. However, because we do not have
written agreements with most of these parties, we cannot guarantee that these
relationships will continue at all or on terms acceptable to us. We are
currently working to expand our existing relationships and develop additional
strategic relationships.
Marketing. Our marketing efforts are focused on creating brand awareness
and attracting prospective customers to our web site. While a large portion of
our marketing budget will be dedicated to web-based and electronic marketing, we
will continue to employ traditional marketing programs such as direct mail,
trade shows, public relations and print advertising. However, these traditional
marketing programs will focus on encouraging customers and prospects to visit
our web site. As we expand our web-based marketing activities and add content
relating to network usage management, we expect to attract more customers and
prospective customers to our site. We anticipate this will generate qualified
leads for our sales force to pursue as well as direct e-commerce business.
COMPETITION
We believe that we are the only company that has developed an integrated
network usage management solution for the Internet and voice networks. However,
we do experience competition with companies that offer either Internet usage
management or call accounting software. Our Internet usage management products
primarily compete with other providers of Internet management software,
including WebTrends, the SecureIT division of VeriSign, Elron Software, Talley
Systems and Sequel Technology. Many of our competitors offer point products that
only address a small segment of the market or only provide low-end summarization
capabilities. Telemate.Net is scalable to large numbers of users while
maintaining substantial amounts of data on each user and provides significantly
more detail, history, organizational linking and flexible reporting capabilities
than competing solutions. Our primary call accounting software competitors
include IntegraTrak, ISI, MicroTel, Switchview, Telco Research, Verimark, Xiox
and Xtend. Most of these companies offer products that are functionally similar
to Telemate.Net's prior generation of software. With the introduction of our
integrated Internet usage management and call accounting product, we believe we
have a competitive advantage over those companies that offer call
accounting-only software.
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INTELLECTUAL PROPERTY
We currently have a pending United States patent application that seeks to
protect inventions underlying the integration of voice and network data
reporting technology in our Telemate.Net product. We currently do not have any
issued patents. We have obtained federal registration for the Telemate and
Telemate.Net marks. We view our technology as proprietary and rely on a
combination of trade secret, copyright, patent and trademark laws,
non-disclosure agreements and contractual provisions to establish and protect
our proprietary rights. When we license our products, we use a signed license
agreement with a select number of our customers and a standard printed or
electronic license containing confidentiality terms customary in the industry
for all other users in order to protect the proprietary rights in our
technology. We license our products in a format that does not permit the user to
change the software code. In addition, because we treat the source code for our
products as a trade secret, all employees and third parties who require access
to the source code are first required to sign non-disclosure agreements.
HUMAN RESOURCES
As of August 31, 1999, we employed 149 persons, including 24 in product
development, 46 in services and support, 56 in sales and marketing, 10 in
operations and 13 in finance and administration. None of our employees is
subject to a collective bargaining agreement. We consider our relations with our
employees to be good.
FACILITIES
We are headquartered in Atlanta, Georgia, where we lease approximately
33,000 square feet under a lease agreement expiring in September 2003. We have
options to lease additional space in our current office complex, which should
allow us to accommodate growth in the immediately foreseeable future. All of our
employees work in the corporate headquarters.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their respective ages as of the
date of this prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David H. Couchman............................ 53 Chairman of the Board
Richard L. Mauro............................. 56 Chief Executive Officer, President and Director
Richard J. Post.............................. 44 Senior Vice President -- Finance and Operations,
Chief Financial Officer, Secretary and Treasurer
James A. Kranzusch........................... 54 Senior Vice President-Sales
Dean D. Rau.................................. 64 Senior Vice President-Technology
L. Mark Newton............................... 46 Senior Vice President-Customer Support Services
</TABLE>
- ---------------
David H. Couchman is our founder and has served as Chairman of our Board of
Directors since our inception in January 1986. Mr. Couchman served as our Chief
Executive Officer from January 1986 until December 1996. Mr. Couchman has 29
years of computer sales and product management experience. Before founding
Telemate.Net, Mr. Couchman held a number of executive systems, sales and
marketing positions in several large corporations and startup companies,
including Burroughs Corporation, a computer products company, (now Unisys) and
On-Line Software International, an applications software company (acquired by
Computer Associates). Mr. Couchman holds a bachelor's degree in Business
Administration and Industrial Relations from the University of Maryland.
Richard L. Mauro has served as our Chief Executive Officer and President
since December, 1996. He has served as a director of Telemate.Net since June
1999. He was President and Chief Operating Officer from March 1994, when he
joined Telemate.Net, until December 1996. Mr. Mauro has 35 years of general
management and sales, marketing, and engineering management experience. Prior to
joining Telemate.Net, Mr. Mauro served as Chief Executive Officer and President
of Insight Marketing Partners, Inc., a marketing and management consulting
company he founded that focused on assisting early-stage software companies,
from March 1990 until March 1994. From January 1986 until March 1990, Mr. Mauro
was Vice President-Marketing for INFORUM, a technology center in Atlanta. He
began his career with the IBM Corporation in June 1964 where he held a variety
of engineering, sales and product marketing management positions. During his
last eight years at IBM, he focused on PC-related products, including leading
the PC merchandising function for IBM's retail product centers. Mr. Mauro holds
a bachelor's degree in Electronic Engineering from Manhattan College and a
master's degree in Industrial Administration from Union College.
Richard J. Post has served as our Senior Vice President -- Finance and
Operations, Chief Financial Officer, Secretary and Treasurer since June 1999.
From September 1996 until February 1999, Mr. Post served as Senior Vice
President, Chief Financial Officer, Secretary and Treasurer of MedCath
Incorporated, a cardiovascular services company. From 1986 to 1996, Mr. Post was
employed as an investment banker, assisting clients with a wide variety of
public and private debt and equity financings and merger and acquisition
transactions. From January 1994 until September 1996, he served as Senior Vice
President, Investment Banking, Corporate Finance Group of Price Waterhouse LLP,
an accounting and consulting firm. From February 1992 until January 1994, he
served as Senior Manager in the Corporate Finance Department of Ernst & Young,
an accounting and consulting firm. From August 1988 until February 1992, he
served as Vice President in the Investment Banking Department of Bear, Stearns &
Co., Inc., an investment banking and securities brokerage firm. From September
1986 until August 1988, Mr. Post was an Investment Banking Associate at The
First Boston Corporation, an investment banking and securities brokerage firm.
Prior to his investment banking career, Mr. Post served as a Military
Intelligence Officer in the United States Army. Mr. Post holds a bachelor's
degree in English and Philosophy from the University of Notre Dame and an MBA
from the Harvard Business School.
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James A. Kranzusch has served as our Senior Vice President-Sales since
March 1998. Mr. Kranzusch has 29 years of sales management experience with both
large corporations and early-stage ventures. Prior to joining Telemate.Net, Mr.
Kranzusch served as founder and President of ClientView, Inc., an Atlanta sales
consulting company, from March 1995 until March 1998. From March 1992 to March
1995, Mr. Kranzusch was Director of Major Accounts at Carter & Associates, a
commercial real estate company in Atlanta. From September 1985 until February
1992, he was Executive Vice-President and General Manager for INFORUM, a
technology center in Atlanta. Mr. Kranzusch was employed by the IBM Corporation
from March 1970 until August 1985, most recently as Division Sales Director. Mr.
Kranzusch holds a bachelor's degree in Business Administration from Auburn
University and a master's degree in Business Policy from Columbia University.
Dean D. Rau has served as our Vice President-Technology since September
1996. Mr. Rau has 40 years of experience managing the planning, design,
development, testing and support of software products. Prior to joining
Telemate.Net, Mr. Rau served as a Senior Project Manager with the Atlanta
Committee for the Olympic Games from May 1993 until August 1996. Mr. Rau also
served as Vice President-Development with Coin Dealership Systems, Inc., a
software company, from August 1990 until May 1993. In addition, Mr. Rau was
employed by the IBM Corporation from June 1959 until December 1989 in a number
of application development management positions, including Senior Applications
Development Manager. Mr. Rau holds a bachelor's degree in Business
Administration from the University of Washington.
L. Mark Newton has served as our Senior Vice President-Customer Support
Services since September 1988. Mr. Newton has more than 20 years of experience
in systems development and support management services. Prior to joining
Telemate.Net, Mr. Newton served as Director of Telecommunications and Biomedical
Electronics with Southern Baptist Hospital in New Orleans from February 1981
until September 1988. Mr. Newton has an associate's degree in Electronics
Technology from the Oklahoma City Technical Center.
OTHER KEY MANAGEMENT PERSONNEL
Joseph P. Wilder has served as our Assistant Treasurer since June 1999,
Director of Finance since May 1999 and Controller since June 1998. He joined the
Company as Assistant Controller in November 1997. Mr. Wilder has 25 years of
accounting management experience. Prior to joining Telemate.Net, Mr. Wilder was
Director-Finance with Mast Advertising & Publishing, Inc., an Atlanta directory
publishing company, from May 1992 until July 1997 and served as an independent
consultant from July 1997 until November 1997. From October 1977 until April
1992, Mr. Wilder was employed by Contel Corporation, a diversified
telecommunications company, in a number of positions including Director-
Internal Audit. He started his career with Price Waterhouse in St. Louis in
1973. Mr. Wilder has a bachelor's degree in Accounting from St. Louis University
and is a CPA.
Morten S. Jensen has served as our Director of Product Management since
October 1998. He joined Telemate.Net in February, 1992 as a programmer and was
promoted to the position of Director of our Internet usage management product
line in February 1997. Prior to joining Telemate.Net, Mr. Jensen was employed as
a programmer at Communications Management, Inc., a voice-mail service company in
Atlanta, from December 1989 to February 1992. Mr. Jensen holds an associate's
degree in Computer Science from Nicholls State University in Louisiana.
Randall S. Schiff has served as our Director of Marketing Communications
since May 1998. Prior to joining Telemate.Net, Mr. Schiff served as Director of
Corporate Communications with Harbinger Corporation, an e-commerce company, from
April 1996 to October 1997 and as Director of Marketing with IQ Software, Inc.,
a reporting software company, from February 1993 to April 1996. Mr. Schiff holds
a bachelor's degree in Psychology from Miami University (Ohio) and an MBA from
the Fuqua School of Business at Duke University.
Sean S. O'Shea has served as our Director of Business Plans and Operations
since joining the Company in September 1994. From January 1990 until September
1994, he was a senior accountant in
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Atlanta with BDO Seidman, an international public accounting firm. Mr. O'Shea
holds a bachelor's degree in Business Administration, Accounting and Finance
from Emory University and is a CPA.
John P. O'Reilly has served as our Director of Development since February
1997. He joined Telemate.Net in September 1987. He has been involved in the
development of all four generations of our product line and was the overall
project director for the Internet and integrated product introduced in 1998. Mr.
O'Reilly holds a bachelor's degree in Computer Science from the University of
Georgia.
Raphael D. McAbee-Reher has been with us since our inception in January
1986, and, since October 1987, has served as a Vice President in our development
organization. Mr. McAbee-Reher is a graduate of the Control Data Institute.
Kent H. Jones has served as our Executive Director of Distribution Sales
since January 1999. He joined Telemate.Net in October 1990 as a sales associate
and served in a variety of sales and marketing management positions prior to
assuming his most recent position. He received a bachelor's degree from North
Central College and an MBA from Northern Illinois University.
Gary D. Bartnick has served as our Director of National Account and
Government Sales since October 1998. From October 1995 until October 1998, Mr.
Bartnick held various positions with us, including Director of Business
Development, Director of U.S. Sales and Director of Channel Sales. Prior to
joining Telemate.Net in October 1995, Mr. Bartnick was employed as a Major
Account Manager with Siemens AG, an international manufacturer with a focus on
electrical engineering and electronics. Mr. Bartnick holds a bachelor's degree
in Journalism from Ohio University.
Jeff Miller has served as our Director of U.S. Sales since October 1997. He
joined us in March 1995 as a direct sales representative and served as a
Government Sales Manager from January 1996 to December 1996 and a National Sales
Manager from January 1997 to October 1997. From March 1994 to March 1995, Mr.
Miller held sales management positions with Morrison's, Inc., a restaurant
services company in Atlanta. He attended Niagara College's school of management
and business administration.
ELECTION OF DIRECTORS
We intend to add Murali Anantharaman, James C. Davis and Larry Bradner as
members of our Board of Directors within 90 days after the date of this
prospectus. It will be necessary for us to appoint two of these or two other
independent directors within the 90 day time period in order to maintain our
listing on the Nasdaq Stock Market. Failure to appoint two such directors could
result in the delisting of our common stock.
Murali Anantharaman, age 42, has served as a General Partner with LiveOak
Equity Partners, L.P., a venture capital firm that makes equity investments in
emerging growth companies in the information technology and healthcare sectors,
since he co-founded LiveOak in July 1998. From May 1987 to June 1998, Mr.
Anantharaman was a partner in EGL Holdings, an Atlanta-based equity investment
firm. Previously, Mr. Anantharaman was a Vice President with CSP International
in New York, a management strategy consulting firm focused on information
technology and communications companies. Mr. Anantharaman has served as a
director of Simione Central Holdings, Inc., a developer of healthcare software,
since October 1996. Mr. Anantharaman received a Bachelor's degree in Engineering
from the University of Madras, a Master of Science degree in Operations Research
from Case Western Reserve University and an MBA from the Harvard Business
School.
James C. Davis, age 47, has served as a principal with Buckskull Partners,
an investment and advisory services firm, since March 1999. Mr. Davis previously
served in a number of roles with Harbinger Corporation, an e-commerce company,
including Group Executive -- Business Development from October 1998 until
December 1998, President and Chief Executive Officer from March 1997 until
October 1998, President of Group Operations from January 1995 until March 1997,
President from January 1989 until December 1993, and Senior Vice President of
Harbinger Computer Services, Inc. from May 1984 until December 1988. From
January 1994 until January 1995, Mr. Davis served as a principal with Davis &
Associates, an Atlanta consulting firm. Mr. Davis currently serves on the board
of directors of
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StoreSearch, an Internet services company. Mr. Davis holds a bachelor's degree
in Engineering from Mississippi State University and an MBA from the Harvard
Business School where he was a Baker Scholar.
J. Lawrence Bradner, age 48, served as Chairman and Chief Executive Officer
of Syntellect, Inc., a provider of enterprise call center systems and outsourced
call center services, from March 1996 until May 1999. Mr. Bradner also served as
President of Syntellect from March 1998 to May 1999. From 1991 until March 1996,
Mr. Bradner was Chairman and Chief Executive Officer of Pinnacle Investment
Associates and Telecorp Systems, Inc., a wholly owned subsidiary of Pinnacle, a
provider of call center systems and outsourced pay-per-view ordering services
for the cable and satellite television industries. From 1977 until 1990, Mr.
Bradner was employed by Scientific-Atlanta, Inc., a provider of satellite, cable
television and other telecommunications products based in Atlanta, Georgia. Mr.
Bradner holds a bachelor's degree in Industrial and Systems Engineering from the
Georgia Institute of Technology and an MBA from the Harvard Business School.
TERMS OF DIRECTORS
Concurrent with the effective date of this offering, the Board of Directors
will be divided into three classes, with members serving for staggered
three-year terms. Following the proposed election of Messrs. Anantharaman, Davis
and Bradner to the Board of Directors, it is expected that the Board will be
comprised of one Class I director, Mr. Davis, two Class II directors, Messrs.
Mauro and Bradner, and two Class III directors, Messrs. Couchman and
Anantharaman. 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 2000, 2001 and 2002 annual meetings
of shareholders, respectively. There are no family relationships between any of
our directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee is expected to consist of Messrs. Couchman,
Anantharaman and Davis. The Audit Committee will review, with our independent
auditors, the scope and timing of audit services and any other services they are
asked to perform. In addition, the Audit Committee will make annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year. The Compensation Committee is expected to consist
of Messrs. Anantharaman and Davis. The Compensation Committee will review and
evaluate the compensation and benefits of all our officers, review general
policy matters relating to the compensation and benefits of our employees and
make recommendations concerning these matters to our Board of Directors. The
Compensation Committee also will administer our stock option plans. The
Executive Committee is expected to consist of Messrs. Mauro and Couchman. The
Executive Committee will have the authority to act on behalf of the Board of
Directors in the management or direction of our business and affairs to the
extent authorized by resolution of a majority of the Board of Directors and
subject to any limitations imposed by the laws of the State of Georgia. We do
not have a standing nominating committee.
COMPENSATION OF DIRECTORS
We reimburse each director for reasonable out-of-pocket expenses incurred
in attending meetings of the Board of Directors and any of its committees. We
may in the future compensate directors who are not employed by us for their
attendance at regular and special meetings. In addition, directors may
participate in our 1999 Stock Incentive Plan. As of July 15, 1999, no options to
acquire shares of common stock have been granted under this plan to directors of
Telemate.Net.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or will be an executive officer
of Telemate.Net.
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<PAGE> 44
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the year ended
December 31, 1998 for our President and Chief Executive Officer as well as our
four other most highly compensated executive officers whose total annual salary
and bonuses, determined at December 31, 1998, exceeded $100,000 (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------
---------------------- NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- --------------------------- -------- --------- -------------------- ---------------
<S> <C> <C> <C> <C>
Richard L. Mauro................... $180,000 $ 70,200 -- --
President and Chief Executive
Officer
David H. Couchman.................. 140,000(2) 57,100(2) -- --
Chairman of the Board
L. Mark Newton..................... 100,000 25,750 -- --
Senior Vice President-Support
Services
Dean D. Rau........................ 95,000 26,963 -- --
Vice President-Technology
James A. Kranzusch................. 96,846 18,644 180,000 --
Senior Vice President-Sales
</TABLE>
- ---------------
(1) In accordance with SEC rules, 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 payments for consulting services. As of June 15, 1999, Mr.
Couchman no longer served as an employee of or as a consultant to us. Mr.
Couchman does not receive any compensation for his service as Chairman of
the Board other than reimbursement for reasonable out-of-pocket expenses
incurred in attending meetings of the Board or a committee thereof. However,
if the Board determines that directors who are not employed by us will be
paid for their attendance at meetings, then it is anticipated that Mr.
Couchman would be eligible to receive such payments.
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<PAGE> 45
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all individual grants of stock options
during the year ended December 31, 1998, to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Mauro................ -- -- -- -- -- --
David H. Couchman............... -- -- -- -- -- --
L. Mark Newton.................. -- -- -- -- -- --
Dean D. Rau..................... -- -- -- -- -- --
James A. Kranzusch.............. 180,000 26.7% $0.96 3/10/08 $108,673 $275,399
</TABLE>
- ---------------
(1) All options were granted with 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.
(2) The potential realizable value is calculated based on the ten-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 for the entire term of the option. The actual realizable
value of the options based on the price to the public in this offering will
substantially 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 at December 31, 1998:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FISCAL YEAR-END FISCAL YEAR-END(1)
------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard L. Mauro........................ -- 725,955 -- $164,550
David H. Couchman....................... -- -- -- --
L. Mark Newton.......................... -- 282,315 -- 63,991
Dean D. Rau............................. -- 193,380 -- 16,760
James A. Kranzusch...................... -- 180,000 -- --
</TABLE>
- ---------------
(1) Based on the estimated fair market value of our common stock as of December
31, 1998 of $0.96 per share, less the exercise price payable upon exercise
of such options. Such estimated fair market value as of December 31, 1998 is
substantially lower than the price to the public in this offering.
(2) All of the options listed in this column became exercisable subsequent to
December 31, 1998.
STOCK OPTION AND OTHER COMPENSATION PLANS
Stock Incentive Plan. Our Stock Incentive Plan became effective on December
29, 1994. The aggregate number of shares of our common stock reserved for
issuance under the plan is 3,900,000 shares. The purpose of the plan is to
provide incentives for our key employees, officers, consultants and directors
and to promote our success, thereby benefiting shareholders and aligning the
economic interests of the participants with those of the shareholders. The plan
is administered by the Compensation Committee of the Board of Directors, which
determines eligible participants, performance goals, measurement criteria,
performance ratings and amount and timing of payments. Option grants under the
plan are determined
41
<PAGE> 46
annually on the basis of our performance over the year in relation to
pre-determined financial and operating goals. Options are granted under the plan
at the sole discretion of the Compensation Committee. As of August 31, 1999,
options to purchase 3,364,770 shares of our common stock were outstanding under
the plan at a weighted average exercise price of $2.03 per share, and 362,844
shares of our common stock had been issued upon exercise of options granted
under the plan.
1999 Stock Incentive Plan. Our 1999 Stock Incentive Plan was approved by
our shareholders on June 14, 1999. The aggregate number of shares of our common
stock reserved for issuance under the 1999 Stock Incentive Plan is 1,000,000
shares. The number of shares of common stock available for issuance under the
1999 Stock Incentive Plan shall automatically increase on the first day of each
fiscal year, beginning with fiscal year 2000, by a number of shares equal to 5%
of the total number of shares of our common stock outstanding on the last day of
the preceding fiscal year, unless the Board of Directors determines to limit or
forego this increase. The 1999 Stock Incentive Plan was adopted to provide
incentives for key employees, officers, consultants and directors to promote our
success. Awards granted under the 1999 Stock Incentive Plan may be either
restricted stock or options intended to qualify as "incentive stock options" or
nonqualified stock options. As of August 31, 1999, 245,000 shares of our common
stock were subject to outstanding options under the 1999 Stock Incentive Plan at
a weighted average exercise price of $11.50 per share, and no shares of our
common stock had been issued upon exercise of options granted under the plan.
EMPLOYMENT AGREEMENTS
Both Messrs. Couchman and Mauro have signed agreements with us restricting
their ability to compete with us or to solicit our customers or employees during
their employment with us and for a period of two years thereafter. All of our
principal employees, including other executive officers, are required to sign an
agreement with us restricting the ability of the employee to compete with us or
to solicit our customers or employees during his or her employment and for a
period of one year thereafter. The agreement also provides for our ownership of
the work product of the employee, an assignment to us of intellectual property,
and a prohibition from the disclosure of our trade secrets and confidential
information.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Amended and Restated Articles of Incorporation provide that the
liability of our directors for monetary damages shall be limited to the fullest
extent permissible under Georgia law and that we may indemnify our officers,
employees and agents to the fullest extent permitted under Georgia law.
Our Amended and Restated Bylaws provide that we must indemnify our
directors against all liabilities to the fullest extent permitted under Georgia
law and that we must advance all reasonable expenses incurred in a proceeding
where the director was either a party or a witness because he or she was a
director. In addition, we have entered into indemnification agreements with our
directors and certain of our officers providing indemnification to the fullest
extent permitted by applicable law and also setting forth procedures, including
the advancement of expenses, that apply in the event of a claim for
indemnification.
We do not currently maintain a directors' and officers' liability insurance
policy but we intend to purchase such insurance, in the amount of $5.0 million,
in the near future.
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<PAGE> 47
RELATED PARTY TRANSACTIONS
On June 16, 1999, we issued and sold 150,000 shares of Series A Preferred
Stock in a private placement to LiveOak Equity Partners, L.P. for an aggregate
price of $3.0 million. We intend to add Murali Anantharaman, a principal of
LiveOak, to our Board of Directors following this offering. The shares of Series
A Preferred Stock held by LiveOak will automatically convert into 450,000 shares
of common stock concurrently with this offering. The private placement is
described more fully below.
Also on June 16, 1999, Telemate.Net redeemed an aggregate of 600,000 shares
of common stock held by David H. Couchman, our Chairman and a principal
shareholder, and his spouse for $4.0 million. The redemption was funded from our
proceeds from the sale of the Series A Preferred Stock in the private placement.
On June 21, 1999, we issued and sold 75,000 shares of common stock to James
C. Davis for an aggregate price of $500,000. We intend to add Mr. Davis to our
Board of Directors following this offering.
In the past, we have loaned money to our shareholders for such purposes as
providing funds for the exercise of vested stock options in accordance with our
Stock Incentive Plan and reconciling an S corporation distribution error. As of
August 3, 1999, Richard L. Mauro, our Chief Executive Officer and President, had
an outstanding balance of $47,000, pursuant to these loans. The loans are
evidenced by recourse promissory notes and accrue interest at 110% of the long
term applicable Federal Rate as adjusted each January. Mr. Mauro's loans, which
were made to provide funds for him to exercise stock options, are recourse loans
and are secured by the stock acquired through the loans. Mr. Mauro intends to
repay his loans with his proceeds from the sale of his shares in this offering.
Our Board of Directors has adopted a resolution whereby all future
transactions with related parties, including any loans from us to our officers,
directors, principal shareholders or affiliates, must be approved by 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 must be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
S CORPORATION DISTRIBUTION AND TERMINATION OF S CORPORATION STATUS
On June 16, 1999, we terminated our S corporation status for federal and
state income tax purposes. We made distributions of $270,000 to those persons
who were shareholders on the date the S corporation status was terminated,
including an aggregate of $214,000 to our executive officers and directors;
$265,000 of the overall amount reduced existing loans outstanding and $5,000 was
paid in cash. As a result of our S corporation termination, we reclassified
accumulated deficit (limited to the amount of paid in capital) of $296,000 to
additional paid-in capital.
PRIVATE PLACEMENT OF SERIES A PREFERRED STOCK
On June 16, 1999, we completed the private placement of 300,000 shares of
our Series A Preferred Stock to three institutional investors. The private
placement resulted in gross proceeds to us of $6.0 million and net proceeds of
approximately $5.9 million after payment of expenses related to the private
placement. Of these proceeds, $4.0 million was used to redeem 600,000 shares of
common stock held by David Couchman and his spouse. The remaining proceeds will
be used to fund working capital. The Series A Preferred Stock will convert to
900,000 shares of common stock concurrently with this offering.
43
<PAGE> 48
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of August 31, 1999, and as adjusted to reflect
the sale of the common stock being offered hereby, by: (a) each of our
directors; (b) each of our Named Executive Officers; (c) each person we intend
to add to our Board of Directors following this offering; (d) all those known by
us to be beneficial owners of more than five percent of the outstanding shares
of our common stock; (e) the selling shareholders; and (f) all of our executive
officers and directors as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) SHARES TO BE AFTER THE OFFERING(1)
--------------------- SOLD IN THE ---------------------
NAME SHARES PERCENT OFFERING SHARES PERCENT
- ---- ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
OFFICERS AND DIRECTORS:
David H. Couchman(2)........................... 2,017,668 53.6% -- 2,017,668 28.5%
Melanie Noble-Couchman(3)...................... 2,017,668 53.6 -- 2,017,668 28.5
Richard L. Mauro(4)............................ 885,000 19.7 90,000 795,000 10.2
James A. Kranzusch(5).......................... 180,000 4.6 -- 180,000 2.5
Dean D. Rau(6)................................. 195,000 4.9 -- 195,000 2.7
L. Mark Newton(7).............................. 405,000 10.0 40,000 365,000 5.0
Murali Anantharaman(8)......................... 450,000 11.9 -- 450,000 6.4
James C. Davis................................. 75,000 2.0 -- 75,000 1.1
J. Lawrence Bradner............................ -- -- -- -- --
Raphael McAbee-Reher(9)........................ 480,000 12.2 50,000 430,000 6.1
LiveOak Equity Partners, L.P.(10).............. 450,000 11.9 -- 450,000 6.4
Noro-Moseley Partners IV, L.P.(11)............. 450,000 11.9 -- 450,000 6.4
Noro-Moseley Partners IV-B, L.P.(12)........... 450,000 11.9 -- 450,000 6.4
Sirrom Investments, Inc.(13)................... 122,448 3.2 24,000 98,448 1.4
John P. O'Reilly(14)........................... 120,000 3.1 12,000 108,000 1.5
All directors and executive officers as a group
(6 persons)(15).............................. 3,682,668 72.8% 130,000 3,552,668 42.0%
</TABLE>
- ---------------
(1) For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding prior to the offering includes
(a) 2,867,844 shares outstanding as of August 31, 1999; (b) 900,000 shares
issuable upon the automatic conversion of 300,000 shares of Series A
Preferred Stock concurrently with this offering; and (c) shares issuable by
Telemate.Net pursuant to options held by the respective person or group
that may be exercised within 60 days following August 31, 1999. The number
of shares of common stock deemed outstanding after this offering includes
an additional 3,284,000 shares that are being offered for sale by
Telemate.Net in this 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. Presently
Exercisable Options are deemed to be outstanding and to be beneficially
owned by the person or group holding such options for the purpose of
computing the percentage ownership of such person or group but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person or group. Unless otherwise set forth herein,
the mailing address of the named beneficial owner is c/o Telemate.Net
Software, Inc., 4250 Perimeter Park South, Suite 200, Atlanta, Georgia
30341.
(2) Includes 157,668 shares held by Melanie Noble-Couchman, Mr. Couchman's
spouse, 528,000 shares held by The Melanie J. Noble-Couchman Family Trust
and 528,000 shares held by The David Hall Couchman Family Trust, with
respect to each of which Mr. Couchman disclaims beneficial ownership. Mr.
Couchman has granted the underwriters an option to purchase up to 90,000
shares pursuant to the underwriters' over-allotment option.
44
<PAGE> 49
(3) Includes 804,000 shares held by David H. Couchman, Ms. Noble-Couchman's
spouse, 528,000 shares held by The Melanie J. Noble-Couchman Family Trust
and 528,000 shares held by The David Hall Couchman Family Trust, with
respect to each of which Ms. Noble-Couchman disclaims beneficial ownership.
Ms. Noble-Couchman has granted the underwriters an option to purchase up to
10,000 shares pursuant to the underwriters' over-allotment option.
(4) Includes 725,955 shares issuable upon the exercise of presently exercisable
options.
(5) Includes 171,444 shares issuable upon the exercise of presently exercisable
options.
(6) Includes 193,380 shares issuable upon the exercise of presently exercisable
options.
(7) Includes 282,315 shares issuable upon the exercise of presently exercisable
options.
(8) Includes 450,000 shares held by LiveOak Equity Partners, of which Mr.
Anantharaman is a general partner.
(9) Includes 170,445 shares issuable upon the exercise of presently exercisable
options.
(10) The mailing address for LiveOak Equity Partners is 2500 North Winds
Parkway, Suite 325, Alpharetta, Georgia 30004.
(11) Includes 75,000 shares held by Noro-Moseley Partners IV-B, an entity
affiliated with Noro-Moseley Partners IV. The mailing address for
Noro-Moseley Partners is 4200 Northside Parkway, NW, Nine North Parkway
Square, Atlanta, Georgia 30327.
(12) Includes 375,000 shares held by Noro-Moseley Partners IV, an entity
affiliated with Noro-Moseley Partners IV-B.
(13) Includes 122,448 shares currently issuable upon exercise of a warrant at an
exercise price of $0.003 per share. The mailing address for Sirrom
Investments, Inc. is 500 Church Street, Suite 200, Nashville, Tennessee
37219.
(14) Includes 102,405 shares issuable upon the exercise of presently exercisable
options.
(15) Includes an aggregate of 1,373,094 shares issuable upon the exercise of
presently exercisable options.
45
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of (a) 100,000,000 shares of common
stock, $.01 par value per share, and (b) 20,000,000 shares of preferred stock,
$.01 par value per share. As of August 31, 1999, we had 2,867,844 shares of
common stock issued and outstanding, which excludes the 900,000 shares of common
stock issuable upon conversion of preferred stock, and 300,000 shares of
preferred stock issued and outstanding. The following summary is a description
of the material terms of our capital stock and is subject to, and qualified in
its entirety by the provisions of our Articles of Incorporation and 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 our common stock are entitled to one vote per share
for the election of directors and all matters to be submitted to a vote of our
shareholders. Subject to the rights of any holders of preferred stock, 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 us out of
funds legally available therefor. In the event of our dissolution, liquidation
or winding up, 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 our common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of our
common stock are, and the shares of common stock to be issued by us in
connection with this offering will be, duly authorized, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to limitations prescribed by
laws, without further shareholder approval, to issue from time to time up to an
aggregate of 20,000,000 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 Telemate.Net. We
currently have no plans to issue any additional shares of preferred stock.
WARRANT
On March 27, 1998, we issued to Sirrom Investments, Inc. a warrant to
purchase shares of our common stock. The number of shares issuable pursuant to
the exercise of this warrant increases on the anniversary date of the warrant
each year that the loan remains outstanding up to May 31, 2003. Under the
warrant, as amended on June 14, 1999, a maximum of 557,376 shares may be issued
under the warrant at an exercise price of $0.003 per share. Currently, 122,448
shares of our common stock are issuable under the warrant. The warrant was
issued in connection with our loan agreement with Sirrom and expires on May 31,
2003.
REGISTRATION RIGHTS
The holders of 2,923,668 shares of common stock are entitled to require us
to file a registration statement to register all or a portion of such shares
under the Securities Act. Such request can be made at any time following 180
days after the date of this prospectus. These holders are entitled to make only
two demands for such registration in any 12-month period.
In addition, the holders of 2,923,668 shares of common stock and the
holders of (a) 105,000 additional shares of common stock and (b) a warrant
presently exercisable for 122,448 shares of common stock are entitled to have
such shares included in a registration statement filed by us, subject to
restrictions
46
<PAGE> 51
contained in the warrant. These rights generally terminate on the date when the
holder of the common stock is able to sell all of its shares without restriction
on the number of shares or manner of sale under Rule 144 of the Securities Act.
We are required to bear the expense of such registrations except for any
underwriting discounts and commissions, which will be borne by the selling
shareholders in proportion to the number of shares sold.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION, BYLAWS AND GEORGIA LAW
As noted above, our Board of Directors, without shareholder approval, has
the authority under our Amended and Restated Articles of Incorporation to issue
preferred stock with rights superior to the rights of the holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of our common stock and could be issued
with terms calculated to delay or prevent a change of control of Telemate.Net or
make removal of management more difficult.
Shareholder Meetings. Under our Amended and Restated Bylaws, the
shareholders may call a special meeting only upon the request of holders of at
least 35% of votes entitled to be cast on each issue proposed to be considered
at the special meeting. Additionally, our Board of Directors, the Chairman of
the Board, the Chief Executive Officer or the President may call special
meetings of shareholders.
Requirements for Advance Notification of Shareholder Nominations and
Proposals. Our Amended and Restated Bylaws establish advance notice procedures
with respect to shareholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the direction of the
Board of Directors or a committee thereof.
Georgia Business Combination Statute. We have elected in our Amended and
Restated Bylaws to be subject to provisions of Georgia law prohibiting various
business combinations involving shareholders that have an economic interest in
the transaction for a period of five years after the shareholder becomes an
interested shareholder of Telemate.Net. A "business combination" includes, among
other things, a merger or consolidation involving Telemate.Net and the
interested shareholder and the sale of 10% or more of our assets. In general,
the Georgia Business Combination Statute defines an "interested shareholder" as
any entity or person beneficially owning 15% or more of a company's outstanding
voting stock and any entity or person affiliated with or controlling or
controlled by such entity or person.
Georgia Fair Price Statute. We have elected in our Amended and Restated
Bylaws to be subject to the "fair price" provisions under Georgia law. These
provisions require that a "business combination" with an "interested
shareholder" must be approved by directors of the company who will continue to
be directors following the business combination and shareholders other than the
interested shareholders. The fair price provisions do not restrict a business
combination if the cash, stock or other property received by the company's
shareholders meets various fair value criteria described in the statute.
These charter provisions and provisions of Georgia law may have the effect
of delaying, deterring or preventing a change of control of Telemate.Net.
LISTING
Application has been made to include our common stock on the Nasdaq Stock
Market under the trading symbol "TMNT."
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is SunTrust Bank, Inc.
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<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for our
common stock will be developed or be sustained after this offering. Sales of
substantial amounts of common stock in the public market after this offering, or
the possibility of these sales occurring, could adversely affect prevailing
market prices for the common stock or our future ability to raise capital
through an offering of equity securities.
After this offering, we will have outstanding an aggregate of 7,075,844
shares of common stock. Of these shares, the 3,500,000 shares offered hereby
will be freely tradable in the public market without restriction under the
Securities Act, unless these shares are held by "affiliates" of Telemate.Net, as
that term is defined in Rule 144 under the Securities Act. The remaining
3,575,844 shares of common stock outstanding upon completion of this offering
will be "restricted securities," as that term is defined in Rule 144 under the
Securities Act. These restricted securities were issued and sold by us in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted shares may be sold in the public market only if they
are registered or if they qualify for an exemption from registration, such as
Rules 144 or 701 under the Securities Act, which are summarized below.
Pursuant to "lock-up" agreements, all our executive officers, directors,
shareholders and employees, who collectively hold an aggregate of 3,575,844
restricted shares of our common stock, have entered into agreements with
SoundView Technology Group, Inc. in which they have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any of
these shares for a period of 180 days from the date of this prospectus.
SoundView Technology Group, Inc. may, in its sole discretion and at any time
without prior notice, release all or any portion of the common stock subject to
these lock-up agreements. SoundView Technology Group, Inc. currently has no
plans to release any portion of the securities subject to these lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, SoundView Technology Group, Inc. will consider, among other factors,
market conditions at the time, the number of shares proposed to be released or
for which the release is being requested and a shareholder's reasons for
requesting the release. We have also entered into an agreement with SoundView
Technology Group, Inc. that we will not offer, sell or otherwise dispose of our
common stock for a period of 180 days from the date of this prospectus.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market upon completion of this offering will
be as follows:
- no shares eligible for sale without restriction;
- approximately 2,463,813 shares will be eligible for sale 180 days after
the date of this prospectus upon the expiration of lock-up agreements
with the underwriters; and
- approximately 1,112,031 shares will become eligible for sale thereafter
at various times upon the expiration of their respective one-year holding
periods.
Following the expiration of the lock-up periods, shares issued upon
exercise of options granted by us prior to the date of this prospectus will also
be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of these shares in reliance upon Rule
144 but without compliance with all of the restrictions, including the holding
period requirement, imposed under Rule 144. In general, under Rule 144 a person
who has beneficially owned restricted shares for at least one year, including
the holding period of any prior owner who is not an affiliate of Telemate.Net,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the then outstanding shares of
common stock, or approximately 70,617 shares immediately after this offering; or
the average weekly trading volume of the common stock during the four calendar
weeks preceding the filing of a Form 144 with respect to the sale. Sales under
Rule 144 are also subject to manner of sale and notice requirements and to the
availability of current public information about Telemate.Net. Under Rule
144(k), a person who is not deemed to have been an affiliate of Telemate.Net at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years including the holding period
of any prior owner who is not an affiliate of
48
<PAGE> 53
Telemate.Net, is entitled to sell the shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
We intend to file after the effective date of this offering a registration
statement on Form S-8 to register approximately 4,900,000 shares of common stock
issuable upon the exercise of outstanding stock options or reserved for issuance
under our Stock Incentive Plan and 1999 Stock Incentive Plan. This registration
statement will become effective automatically upon filing. Shares issued under
the foregoing plan, after the filing of a registration statement on Form S-8,
may be sold in the open market, subject to the Rule 144 limitations applicable
to affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by us.
Following this offering, holders of an aggregate of 3,028,668 shares of
outstanding common stock, and the holder of a warrant exercisable for 122,448
shares, will have rights to require us to register their shares for future sale.
See "Description of Capital Stock" for a more complete description of the
warrant.
49
<PAGE> 54
UNDERWRITING
Upon the terms and subject to the conditions set forth in an underwriting
agreement, the underwriters named below, for whom SoundView Technology Group,
Inc., J.C. Bradford & Co. and The Robinson-Humphrey Company, LLC are acting as
representatives, have severally agreed to purchase from us and the selling
shareholders an aggregate of 3,500,000 shares of common stock. The number of
shares of common stock that each underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
SoundView Technology Group, Inc. ...........................
J.C. Bradford & Co. ........................................
The Robinson-Humphrey Company, LLC..........................
=========
Total............................................. 3,500,000
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock, subject to legal considerations and
various other conditions.
We and the selling shareholders have agreed to indemnify the underwriters
against liabilities stemming from untrue statements of fact or misleading
insertions or omissions in the offering materials, including liabilities under
the Securities Act, and to contribute to payments that the underwriters may be
required to make in respect thereof.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to initial sellers, who may include the underwriters, at
such price less a concession not to exceed $ per share. The underwriters and
those initial sellers may allow a concession upon resale to other, secondary
sellers not to exceed $ per share. After the initial public offering of the
shares offered hereby, the offering price and other selling terms may be changed
by the representatives. The representatives have advised us that the
underwriters do not intend to confirm any shares to any accounts over which they
exercise discretionary control.
At our request, the underwriters have reserved up to 175,000 shares of
common stock for sale at the initial public offering price to our directors,
officers, employees, and their family members, as well as to vendors and
suppliers with whom we do business. The number of shares of common stock
available for sale to the general public will be reduced if such persons
purchase the reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.
The underwriting discount is equal to the public offering price per share
of common stock minus the price per share of common stock paid by the
underwriters. The following table shows the per share and total public offering
price, the underwriting discount to be paid by us to the underwriters in
connection with this offering and the proceeds, before expenses, to us. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
50
<PAGE> 55
<TABLE>
<CAPTION>
PER SHARE NO EXERCISE FULL EXERCISE
--------- ----------- -------------
<S> <C> <C> <C>
Public offering price................................ $ $ $
Underwriting discount................................
Proceeds, before expenses, to us.....................
</TABLE>
Other expenses of this offering, including the registration fees, transfer
agent fees and the fees of financial printers, counsel and accountants, payable
by us are expected to be approximately $750,000.
We and two existing shareholders have granted the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of 525,000 additional shares of common stock at the initial public
offering price less underwriting discounts and commissions. This option may be
exercised solely for the purpose of covering over-allotments, if any, in
connection with this offering. If this option is exercised, the first 100,000
shares will be sold by the selling shareholders and the remaining 425,000 shares
will be sold by us. To the extent that the underwriters exercise this option,
each of the underwriters will be committed, subject to the conditions enumerated
in the underwriting agreement, to purchase a number of additional shares
proportionate to that underwriter's initial commitment as indicated in the
preceding table.
This offering is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have, along with our executive officers, directors and shareholders,
agreed, subject to exceptions involving stock issued to employees in accordance
with our stock incentive plans, not to: (1) offer, sell, dispose of or hedge any
shares of common stock or any securities convertible into or exchangeable for
common stock; or (2) enter into any swap or other arrangement that transfers all
or a portion of the economic consequences associated with the ownership of any
common stock (regardless or whether any of the transactions described in clause
(1) or (2) is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise) for a period of 180 days after the date of
this prospectus without the prior written consent of SoundView Technology Group,
Inc. In addition, during such period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and certain of our shareholders have agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock without the prior written consent of SoundView Technology
Group, Inc.
In connection with this offering, the underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934,
pursuant to which such persons may bid for or purchase shares of common stock
for the purpose of stabilizing the market price for shares of common stock. The
underwriters also may create a short position for the account of the
underwriters by selling more shares of common stock in connection with this
offering than they are committed to purchase from us and the selling
shareholders, and in such case may purchase shares of common stock in the open
market following the completion of this offering to cover all or a portion of
the shares of common stock or by exercising the underwriters' over-allotment
option referred to above. In addition, SoundView Technology Group, Inc., on
behalf of the underwriters, may impose "penalty bids" under contractual
arrangements with the other underwriters whereby it may reclaim from an
underwriter or a seller participating in this offering for the account of the
other, the selling concession with respect to shares of common stock that are
distributed in this offering but subsequently purchased for the account of the
underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the common stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required and, if they are
undertaken, may be discontinued at any time.
51
<PAGE> 56
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock offered hereby was
determined by negotiation among the selling shareholders, the representatives
and us. The factors that were considered in determining the initial public
offering price were prevailing market conditions, our revenue and earnings,
market valuations of other companies engaged in activities similar to ours,
estimates of our business potential and prospects, the present state of our
business operations, the history of and prospects for our business and the
industry in which we compete, our management and other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of the common stock offered
hereby will be passed upon for us by Morris, Manning & Martin, L.L.P., Atlanta,
Georgia. Legal matters in connection with this offering will be passed upon for
the underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
The financial statements of Telemate.Net included in this prospectus to the
extent and for the periods indicated in their reports have been audited by KPMG
LLP, independent public accountants and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 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, parts of which are omitted in accordance with the rules
and regulations of the SEC. For further information with respect to Telemate.Net
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 SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices: 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 SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. In
addition, we are required to file electronic versions of these documents with
the SEC through the SEC's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system. The SEC 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 SEC. Information
concerning Telemate.Net is also available for inspection at the offices of the
Nasdaq Stock Market, Reports Section, 1735 K Street, N.W., Washington, D.C.
20006.
We intend to furnish to our 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.
52
<PAGE> 57
TELEMATE.NET SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Telemate.Net Software, Inc.:
We have audited the accompanying balance sheets of Telemate.Net Software,
Inc. as of December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telemate.Net Software, Inc.
as December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
June 18, 1999, except as to Note 1c, which is as of September 2, 1999
Atlanta, Georgia
/s/ KPMG LLP
KPMG LLP
F-2
<PAGE> 59
TELEMATE.NET SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(PRO FORMA)
(NOTE 11)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 77,724 $ 45,593 $ 2,351,350 $ 2,351,350
Trade accounts receivable...................... 1,630,544 1,904,252 2,981,413 2,981,413
Less: allowance for doubtful accounts and
returns...................................... (60,000) (95,000) (206,915) (206,915)
---------- ----------- ----------- -----------
Total accounts receivable............. 1,570,544 1,809,252 2,774,498 2,774,498
Prepaid expenses............................... 52,788 71,330 115,808 115,808
Other current assets........................... 151,259 55,614 42,552 42,552
---------- ----------- ----------- -----------
Total current assets.................. 1,852,315 1,981,789 5,284,208 5,284,208
Property and equipment, net of depreciation and
amortization................................. 629,723 590,910 597,367 597,367
Other assets................................... 99,463 102,218 534,818 534,818
---------- ----------- ----------- -----------
$2,581,501 $ 2,674,917 $ 6,416,393 $ 6,416,393
========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank........................... $ -- $ 80,000 $ -- $ --
Accounts payable............................... 450,355 469,213 647,629 647,629
Accrued expenses and other liabilities......... 733,209 768,863 1,344,823 1,344,823
Deferred revenue............................... 2,140,754 2,390,071 3,424,346 3,424,346
---------- ----------- ----------- -----------
Total current liabilities............. 3,324,318 3,708,147 5,416,798 5,416,798
---------- ----------- ----------- -----------
Long-term debt................................. -- 908,310 929,472 929,472
---------- ----------- ----------- -----------
Redeemable stock purchase warrant.............. -- 123,428 857,428 --
---------- ----------- ----------- -----------
Total liabilities..................... 3,324,318 4,739,885 7,203,698 6,346,270
---------- ----------- ----------- -----------
Commitments and contingencies
Series A redeemable convertible preferred
stock, par value $.01 per share, liquidation
value $6,030,000, stated at current
redemption value 300,000 shares designated,
issued and outstanding at June 30, 1999; no
shares issued and outstanding pro forma at
June 30, 1999................................ -- -- 5,950,000 --
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 19,700,000
authorized and undesignated, none issued..... -- -- -- --
Common stock, $.01 par value; 100,000,000
shares authorized, 3,261,813 shares issued at
December 31, 1997, 1998, and 2,754,813 shares
issued at June 30, 1999, and 3,654,813 shares
issued, pro forma at June 30, 1999........... 32,618 32,618 27,548 36,548
Additional paid-in capital..................... 169,765 176,248 499,250 8,072,678
Retained earnings (accumulated deficit)........ (584,776) (1,890,536) (7,134,438) (7,909,438)
Notes receivable and accrued interest from
shareholders................................. (360,424) (383,298) (129,665) (129,665)
---------- ----------- ----------- -----------
Total shareholders' equity
(deficit)........................... (742,817) (2,064,968) (6,737,305) 70,123
---------- ----------- ----------- -----------
$2,581,501 $ 2,674,917 $ 6,416,393 $ 6,416,393
========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 60
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue................ $3,784,898 $4,890,198 $ 5,450,400 $2,565,639 $ 2,806,962
Service revenue................ 3,114,125 4,058,199 4,931,642 2,458,368 2,616,439
---------- ---------- ----------- ---------- -----------
Total revenue............. 6,899,023 8,948,397 10,382,042 5,024,007 5,423,401
---------- ---------- ----------- ---------- -----------
Cost of revenue:
Product costs.................. 574,104 735,773 923,049 431,987 555,354
Service costs.................. 760,868 1,053,121 1,274,341 626,659 708,454
---------- ---------- ----------- ---------- -----------
Total cost of revenue..... 1,334,972 1,788,894 2,197,390 1,058,646 1,263,808
---------- ---------- ----------- ---------- -----------
Gross profit.............. 5,564,051 7,159,503 8,184,652 3,965,361 4,159,593
---------- ---------- ----------- ---------- -----------
Operating expenses:
Research and development....... 602,934 1,387,147 1,844,645 880,547 759,049
Sales and marketing............ 2,979,143 3,522,496 4,612,483 2,235,288 2,174,758
General and administrative..... 1,861,106 2,230,498 2,926,106 1,523,419 1,690,274
---------- ---------- ----------- ---------- -----------
Total operating
expenses............... 5,443,183 7,140,141 9,383,234 4,639,254 4,624,081
---------- ---------- ----------- ---------- -----------
Operating income (loss).......... 120,868 19,362 (1,198,582) (673,893) (464,488)
Interest income (expense):
Increase in redeemable stock
purchase warrant............ -- -- -- -- (734,000)
Other interest income.......... 19,036 23,312 34,845 7,914 15,350
Other interest expense......... (3,807) (4,483) (142,023) (49,583) (92,841)
---------- ---------- ----------- ---------- -----------
Total interest income
(expense).............. 15,229 18,829 (107,178) (41,669) (811,491)
---------- ---------- ----------- ---------- -----------
Net income (loss)......... $ 136,097 $ 38,191 $(1,305,760) $ (715,562) $(1,275,979)
========== ========== =========== ========== ===========
Basic net income (loss) per
share.......................... $ .04 $ .01 $ (.40) $ (.22) $ (.40)
========== ========== =========== ========== ===========
Diluted net income (loss) per
share.......................... $ .04 $ .01 $ (.40) $ (.22) $ (.40)
========== ========== =========== ========== ===========
Weighted average shares
outstanding:
Basic.......................... 3,201,744 3,261,813 3,261,813 3,261,813 3,218,520
========== ========== =========== ========== ===========
Diluted........................ 3,434,403 3,732,768 3,261,813 3,261,813 3,218,520
========== ========== =========== ========== ===========
Unaudited pro forma net income
(loss) data:
Pro forma provision for
(benefit from) income
taxes....................... 98,000 (4,000) 13,000 7,000 (13,000)
Pro forma net income (loss).... $ 38,097 $ 42,191 $(1,318,760) $ (722,562) $(1,262,979)
========== ========== =========== ========== ===========
Pro forma net income (loss) per
share:
Basic....................... $ .01 $ .01 $ (.40) $ (.22) $ (.39)
========== ========== =========== ========== ===========
Diluted..................... $ .01 $ .01 $ (.40) $ (.22) $ (.39)
========== ========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 61
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
RETAINED RECEIVABLE TOTAL
COMMON STOCK ADDITIONAL EARNINGS AND ACCRUED SHAREHOLDERS'
------------------- PAID-IN (ACCUMULATED INTEREST FROM EQUITY
SHARES AMOUNTS CAPITAL DEFICIT) SHAREHOLDERS (DEFICIT)
--------- ------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1995 (unaudited)........ 3,156,150 $31,563 $ 93,080 $ (242,479) $ (44,721) $ (162,557)
Issuance of common stock under stock incentive
plan.......................................... 57,141 570 41,436 -- (39,294) 2,712
Purchase and retirement of common stock......... (15,492) (155) (13,106) -- 11,310 (1,951)
Notes receivable from shareholders.............. -- -- -- -- (140,000) (140,000)
Distributions to shareholders................... -- -- -- (516,585) -- (516,585)
Accrued interest on shareholder notes........... -- -- -- -- (4,077) (4,077)
Net income...................................... -- -- -- 136,097 -- 136,097
--------- ------- ---------- ----------- --------- ----------
BALANCE at December 31, 1996.................... 3,197,799 $31,978 121,410 (622,967) (216,782) (686,361)
Issuance of common stock under stock incentive
plan.......................................... 64,014 640 48,355 -- (44,041) 4,954
Notes receivable from shareholders.............. -- -- -- -- (83,780) (83,780)
Accrued interest on shareholder notes........... -- -- -- -- (15,821) (15,821)
Net income...................................... -- -- -- 38,191 -- 38,191
--------- ------- ---------- ----------- --------- ----------
BALANCE at December 31, 1997.................... 3,261,813 32,618 169,765 (584,776) (360,424) (742,817)
Grant of compensatory stock options............. -- -- 6,483 -- -- 6,483
Accrued interest on shareholder notes........... -- -- -- -- (22,874) (22,874)
Net loss........................................ -- -- -- (1,305,760) -- (1,305,760)
--------- ------- ---------- ----------- --------- ----------
BALANCE at December 31, 1998.................... 3,261,813 32,618 176,248 (1,890,536) (383,298) (2,064,968)
Unaudited:
Issuance of common stock for software
product.................................... 18,000 180 119,820 -- -- 120,000
Effects of change from S corporation to C
corporation for income taxes:
- Distributions........................... -- -- -- (269,991) 265,272 (4,719)
- Reclassification of accumulated deficit
to additional paid-in capital............ -- -- (296,068) 296,068 -- --
Purchase and retirement of common stock..... (600,000) (6,000) -- (3,994,000) -- (4,000,000)
Sale of common stock........................ 75,000 750 499,250 -- -- 500,000
Accrued interest on shareholder notes........... -- -- -- -- (11,639) (11,639)
Net loss........................................ -- -- -- (1,275,979) -- (1,275,979)
--------- ------- ---------- ----------- --------- ----------
BALANCE at June 30, 1999 (unaudited)............ 2,754,813 27,548 499,250 (7,134,438) (129,665) (6,737,305)
Pro forma unaudited:
Conversion of Series A redeemable
convertible preferred stock to common
stock...................................... 900,000 9,000 5,941,000 -- -- 5,950,000
Rescission of put feature on redeemable
stock purchase warrant, including
additional
charge for interest expense for assumed
increase in warrant value.................. -- -- 1,632,428 (775,000) -- 857,428
--------- ------- ---------- ----------- --------- ----------
BALANCE at June 30, 1999 Pro forma unaudited.... 3,654,813 $36,548 $8,072,678 $(7,909,438) $(129,665) $ 70,123
========= ======= ========== =========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 62
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 136,097 $ 38,191 $(1,305,760) $(715,562) $(1,275,979)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 217,261 322,591 353,052 154,585 154,587
Provision for bad debts and returns................ 50,000 10,000 35,000 15,000 120,000
Compensation on stock options...................... -- -- 6,483 -- --
Accrued interest on shareholder notes.............. (4,077) (15,821) (22,874) -- (11,639)
Amortization of discount on redeemable stock
purchase warrant................................. -- -- 31,738 10,579 21,162
Accretion of redeemable stock purchase warrant..... -- -- -- -- 734,000
Loss on fixed asset disposal....................... -- -- 789 -- --
Changes in assets and liabilities:
(Increase) decrease in trade accounts
receivable..................................... (86,427) (433,904) (273,708) 118,013 (1,088,626)
(Increase) decrease in prepaid expenses and other
current assets................................. 3,363 (251,648) 77,103 18,603 (28,037)
(Increase) decrease in other assets.............. -- -- 23,568 71,148 (312,599)
Increase (decrease) in accounts payable, accrued
expenses, and other liabilities................ 153,920 351,313 54,512 (167,623) 754,375
Increase in deferred revenue..................... 282,963 100,292 249,317 56,465 1,034,275
----------- --------- ----------- --------- -----------
Net cash provided by (used in) operating
activities................................... 753,100 121,014 (770,780) (438,792) 101,519
----------- --------- ----------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................. (670,185) (209,659) (312,916) (191,278) (161,043)
Proceeds from sale of asset.......................... -- -- 7,000 -- --
----------- --------- ----------- --------- -----------
Net cash used in investing activities.......... (670,185) (209,659) (305,916) (191,278) (161,043)
----------- --------- ----------- --------- -----------
Cash flows from financing activities:
Proceeds (payments) from/on credit facility.......... -- -- 80,000 -- (80,000)
Proceeds from issuance of long-term debt, net........ -- -- 964,565 964,565 --
Proceeds from issuance of Series A redeemable
convertible preferred stock, net................... -- -- -- -- 5,950,000
Proceeds from issuance of common stock............... -- -- -- -- 500,000
Proceeds from the exercise of stock options.......... 2,712 4,954 -- -- --
Shareholder distributions............................ (516,585) -- -- -- (4,719)
Purchase and retirement of common stock.............. (1,951) -- -- -- (4,000,000)
Notes receivable from shareholders................... (140,000) (83,780) -- -- --
----------- --------- ----------- --------- -----------
Net cash provided by (used in) financing
activities................................... (655,824) (78,826) 1,044,565 964,565 2,365,281
----------- --------- ----------- --------- -----------
Net (decrease) increase in cash................ (572,909) (167,471) (32,131) 334,495 2,305,757
Cash and cash equivalents at beginning of period....... 818,104 245,195 77,724 77,724 45,593
----------- --------- ----------- --------- -----------
Cash and cash equivalents at end of period............. $ 245,195 $ 77,724 $ 45,593 $ 412,219 $ 2,351,350
=========== ========= =========== ========= ===========
Supplemental disclosure of cash -- cash paid for
interest............................................. $ 3,807 $ 4,483 $ 110,283 $ -- $ 71,682
=========== ========= =========== ========= ===========
Supplemental disclosures of significant noncash
investing and financing activities:
Discount on redeemable stock purchase warrant........ $ -- $ -- $ 123,428 $ 123,428 $ --
=========== ========= =========== ========= ===========
Financing costs withheld from long-term debt
proceeds........................................... $ -- $ -- $ 35,435 $ 35,435 $ --
=========== ========= =========== ========= ===========
Reduction of notes from shareholders in exchange for
cash distributions................................. $ -- $ -- $ -- $ -- $ 265,272
=========== ========= =========== ========= ===========
Issuance of common stock in exchange for software.... $ -- $ -- $ -- $ -- $ 120,000
=========== ========= =========== ========= ===========
Cancellation of note from shareholder in exchange for
treasury stock acquired............................ $ 11,310 $ -- $ -- $ -- $ --
=========== ========= =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 63
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Business
Telemate Software, Inc. (the "Company") develops, markets and supports
integrated network usage management software which allows customers to manage
the use of their voice and data networks. Organizations utilize the Company's
products to help improve employee productivity, enhance network security, and
control and recover network costs. In November 1998, the Company released its
patent-pending software product, Telemate.Net(TM), which integrates call
accounting and Internet usage management.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as of the balance sheet dates and revenues and
expenses for the reporting periods to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
On May 7, 1999, the Company changed its name to Telemate.Net Software, Inc.
from Telemate Software, Inc.
(b) Summary of Significant Accounting Policies
Unaudited Interim Information
The interim financial statements (including notes to financial statements)
of the Company for the six months ended June 30, 1998 and 1999, included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). In the opinion of
management, the accompanying unaudited interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1999, and the
results of its operations and its cash flows for the three months ended June 30,
1998 and 1999. Historical results are not necessarily indicative of the results
to be expected in the future.
Revenue Recognition and Deferred Revenues
The Company recognizes revenue in accordance with The American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No.
97-2, Software Revenue Recognition, and Statement of Position 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2.
Product revenue primarily consists of software license revenue. Hardware
sales are also included in product revenue and represent less than 10% of total
revenue.
Revenues derived from software license fees and hardware are recognized
upon shipment. Revenues derived from software maintenance and support services
involve primarily annual contracts and are recognized ratably over the service
period. Revenues related to installation and training are recognized as services
are provided.
Deferred revenues generally represent advance payments received from
customers and billings invoiced to customers for software maintenance and
support services billed in advance of the time revenues are recognized.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-7
<PAGE> 64
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using accelerated
methods over the shorter of the estimated useful life or lease term. The
estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Computer equipment and purchased software................... 3-5 years
Furniture and office equipment.............................. 5-7 years
Automobiles................................................. 3-5 years
Leasehold improvements...................................... 5 years
</TABLE>
Computation of Net Income (Loss) Per Share and Proforma Net Income (Loss) Per
Share
The Company has presented net income (loss) per share pursuant to SFAS No.
128, Earnings Per Share, and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Pursuant to SEC Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock issued for nominal consideration,
prior to the effective date of the initial public offering ("IPO"), are required
to be included in the calculation of basic and diluted net income (loss) per
share, as if they were outstanding for all periods presented. The Company has
not had any such issuances or grants for nominal consideration.
Pro forma net income (loss) per share is computed on the same basis
described above using pro forma net income. Pro forma net income is actual net
income adjusted for pro forma income tax expense (benefits) as described in
notes 1 and 12.
Following is a reconciliation between basic and diluted shares for the
purposes of calculating the basic and diluted earnings per share in the
accompanying financial statements.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998 1999
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Shares used in the calculation of net
earnings (loss) per share:
Basic shares outstanding.............. 3,201,744 3,261,813 3,261,813 3,218,520
Effect of dilutive securities:
Options granted..................... 232,659 470,955 -- --
--------- --------- --------- ---------
Fully diluted shares outstanding...... 3,434,403 3,732,768 3,261,813 3,218,520
========= ========= ========= =========
</TABLE>
Potentially dilutive securities include stock options (Note 8), stock
warrants (Note 10) and Series A redeemable convertible preferred stock (Note 7).
Research and Development Costs
Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.
Income Taxes
For Federal and state income tax purposes, until June 16, 1999 the
shareholders of the Company elected that the earnings of the Company be taxed
under the S corporation provisions of the Internal Revenue Code. As a result of
this election, the Company has not provided for Federal or state income tax
F-8
<PAGE> 65
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
expense or any deferred income taxes as earnings are passed through to, and the
related income tax liabilities become the individual responsibility of, the
shareholders of the Company.
On June 16, 1999, the Company's S corporation status terminated upon
closing of the Series A Preferred Stock sale.
Subsequent to June 16, 1999, income taxes were accounted for under the
asset and liability method. In accordance with the asset and liability method,
deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of changes in tax rates is recognized in
income in the period that includes the enactment date.
Stock Compensation Plan
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees and complies with the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which
encourages entities to recognize as compensation expense over the vesting period
the fair value of all stock-based awards on the date of grant. Under APB No. 25,
compensation cost, if any, for fixed plan accounting, is recognized over the
respective vesting period based on the difference, on the date of grant, between
the fair value of the Company's common stock and the grant price.
Comprehensive Income
No statement of comprehensive income has been included in the accompanying
financial statements since the results would not differ from the accompanying
statements of operations or shareholders equity.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the
classifications presented in the 1998 financial statements.
Industry Segment
On January 1, 1998 the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company operates and
manages its business in one segment, that being a software and services provider
to the network usage management market.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The fair value of each of the following instruments approximates their
carrying value because of the short maturity of these instruments: cash; trade
accounts receivable; accounts payable; accrued expenses and other liabilities.
The fair value of the Company's long-term debt and redeemable stock
purchase warrant are estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar
F-9
<PAGE> 66
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
debt instruments of comparable maturities by the Company's bankers. The carrying
values approximate fair values at December 31, 1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all fiscal years beginning after June
15, 1999. Subsequently, the effective date was deferred until June 15, 2000. The
Company is in the process of evaluating this pronouncement and will adopt it
upon its effective date.
In December 1998, the AICPA issued SOP No. 98-9, Modification of SOP No.
97-2, Software Revenue Recognition, with Respect to Certain Transactions. This
SOP amends SOP No. 97-2 to, among other matters, require recognition of revenue
using the "residual method" in circumstances outlined in the SOP. Under the
residual method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP No. 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related to
the delivered elements. SOP No. 98-9 is effective for fiscal years beginning
after March 15, 1999. The Company does not believe that the adoption of SOP No.
98-9 will have a material effect on its revenue recognition.
(c) Stock Split
On September 2, 1999, the Company consummated a three-for-one stock split
in the form of a stock dividend. The information in the accompanying financial
statements has been retroactively restated to reflect the effects of the stock
split.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, DECEMBER 31, 1999
1997 1998 (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Computer equipment and purchased software......... $1,191,794 $1,450,933 $1,584,265
Furniture and office equipment.................... 278,411 321,941 340,333
Automobiles....................................... 21,638 -- --
Leasehold improvements............................ 91,553 101,295 110,614
---------- ---------- ----------
1,583,396 1,874,169 2,035,212
Less accumulated depreciation and amortization.... 953,673 1,283,259 1,437,845
---------- ---------- ----------
$ 629,723 $ 590,910 $ 597,367
========== ========== ==========
</TABLE>
F-10
<PAGE> 67
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
3. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Personnel related accruals.................... $543,184 $496,316 $ 595,504
Other accruals................................ 190,025 272,547 749,319
-------- -------- ----------
$733,209 $768,863 $1,344,823
======== ======== ==========
</TABLE>
4. NOTE PAYABLE TO BANK
On June 1, 1998, the Company increased its credit facility from $500,000 to
$750,000. Originally issued in December 1996, the credit facility is with a
commercial bank, bears interest at the prime rate plus 1 1/4%, (9% at December
31, 1998) and matures on May 31, 1999. The Company extended its line of credit
under similar terms and conditions through November 1999. The credit facility is
secured by substantially all assets of the Company. No amounts were outstanding
at December 31, 1997 and June 30, 1999. At December 31, 1998, $80,000 was
outstanding on this facility.
The terms of this facility also require that the Company maintain a
financial ratio with respect to current assets to current liabilities and
certain other covenants. At December 31, 1998 and June 30, 1999, the Company was
in compliance with these covenants.
5. NOTE PAYABLE
In March 1998, the Company obtained $1 million from the issuance of a
secured promissory note. The proceeds of the note provided working capital for
the Company's continued product development activities. At December 31, 1998 and
June 30, 1999, the balance outstanding, net of an unaccreted discount of $91,690
and $70,528, totaled $908,310 and $929,472.
Interest is payable monthly at 14% until maturity, which occurs in March
2003. The note is secured by substantially all of the assets of the Company and
is subordinated to the note payable to bank. The terms of this facility contain
numerous covenants and restrictions including, but not limited to, restrictions
on the Company from paying dividends and from entering into certain transactions
without permission from the lender.
6. NOTES RECEIVABLE FROM SHAREHOLDERS
In 1997 and prior years, the Company issued shares of common stock for
options that were exercised under the terms of the Company's Stock Incentive
Plan. Upon exercise, the Company received cash and full recourse promissory
notes payable to the Company secured by this common stock. The notes accrue
interest at 110% of the Long-Term Applicable Federal Rate, as adjusted each
January 1, and are due at variable dates through 2007. In addition, funds were
advanced to certain shareholders in 1997 and prior years. The shareholders have
signed promissory notes for the advanced funds which are due on demand. On June
16, 1999 Telemate.Net declared distributions totaling $269,991, of which
$265,272 was effectively paid by reduction in the outstanding notes receivable
from shareholders and $4,719 was paid in cash. The notes bear interest at rates
ranging from 6.00% to 7.11%. Total accrued interest on the notes from
shareholders was $20,191, $43,065 and $21,366 at December 31, 1997 and 1998 and
June 30, 1999, respectively.
F-11
<PAGE> 68
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
7. SHAREHOLDERS' EQUITY
(a) Amendment to the Articles of Incorporation
Effective June 16, 1999 the articles of incorporation of the Company were
amended whereby the amount of common stock authorized for issuance was increased
from 10 million shares to 100 million shares. Additionally, the articles of
incorporation were amended whereby 20 million shares of preferred stock with a
par value of $.01 per share were authorized, part or all of which shares of
Preferred Stock will be established and designated from time to time by the
Board of Directors in such series and with such preferences, limitations and
relative rights as may be determined by the Board of Directors. The accompanying
financial statements reflect the amended authorized shares as though authorized
as of December 31, 1995. Of the preferred shares authorized, the Series A
Redeemable Convertible Preferred Stock (Preferred Stock) was established and has
many rights and privileges, including but not limited to those included herein.
The Series A Redeemable Convertible Preferred Stock is convertible into three
shares of common stock for each share of preferred, subject to change, at any
time subsequent to closing and is automatically convertible upon the completion
of a qualified registered public offering.
(b) Common Stock
On June 8, 1999, the Company entered into an asset purchase agreement
whereby the Company issued 18,000 shares of common stock in exchange for a
software product from an unrelated party. The purchase was valued at $120,000
based on the estimated fair value of common stock at the time of the
transaction. The seller has certain rights, privileges and restrictions,
including but not limited to, piggyback registration rights. An additional
12,000 shares were placed in escrow to be released only upon the Company's
acceptance of an additional version of the software product; upon acceptance and
release of the escrow shares, the Company will record the additional product
costs based upon the fair value of the Company's common stock at that time.
On June 16, 1999, the Company purchased and retired an aggregate of 600,000
shares of common stock from two principal shareholders, one of which is a
Director, for $4,000,000.
On June 21, 1999, the Company sold 75,000 shares of common stock to a
prospective board member for $500,000 in total proceeds. The purchaser has
certain rights, including but not limited to, registration rights and piggyback
rights.
(c) Sale of Series A Redeemable Convertible Preferred Stock
On June 16, 1999, the Company issued 300,000 shares of Series A redeemable
convertible preferred stock for cash totaling $6,000,000 ($5,950,000 after
estimated expenses of $50,000).
The holders of Preferred Stock shall be entitled to receive a 12% accruing
dividend, compounded annually, payable only upon liquidation or redemption.
Holders of the Preferred Stock shall also be entitled to participate equally (on
an as-converted basis) in any cash dividends paid to any other class of equity
securities of the Company. The Preferred Stock is voting, and the holders of the
Preferred Stock are entitled to representation by two board members. The holders
of Preferred Stock also have the right of first refusal for sale of additional
shares.
At any time on or after March 31, 2004, holders of a majority of the
outstanding shares of Preferred Stock may elect to have the Company redeem all
of the then outstanding shares of Preferred Stock for an amount per share equal
to the greater of (i) the original purchase price plus all accrued and unpaid
dividends or (ii) the fair market value of the securities on the date the
redemption election is made.
F-12
<PAGE> 69
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
The holders of the Preferred Stock have demand and demand piggyback
registration rights. In addition, the holders of Preferred Stock as well as
certain common stock shareholders are parties to a shareholder agreement which,
among other things, grants the Company and certain principal shareholders the
right of first refusal to purchase additional shares. Upon an IPO the preferred
stock will automatically convert to common stock and the shareholder agreement
will be automatically terminated.
The Company is also restricted from entering into certain transactions
without previous consent of the holders of all or a majority of the Preferred
Stock (or common shares upon conversion to common stock) including, but not
limited to, issuing additional shares of Preferred Stock or to sell, assign,
lease or otherwise dispose of twenty-five percent (25%) or more of its assets.
As part of the Series A Preferred Stock sale, an executive and the
principal stockholder became a party to a non-compete agreement.
8. STOCK INCENTIVE PLAN
The Company has a Stock Incentive Plan (the "Plan"), under which the Board
of Directors is authorized to grant selected employees, including officers,
options to purchase the Company's common stock. Options granted pursuant to the
Plan are exercisable for shares of common stock at a price not less than 100% of
the fair market value on the date of grant. In July 1998, the number of shares
of common stock reserved for issuance under the Plan was increased by 300,000 to
an aggregate of 3,300,000 shares. On May 18, 1999 the number of shares of common
stock reserved for issuance under the Plan was increased by 600,000 to an
aggregate of 3,900,000 shares. The Plan provides for the grant of incentive
stock options, nonqualified stock options, and restricted stock awards to
selected employees. The stock options are vested and exercisable over a period
determined by the Board of Directors not to exceed ten years after the date of
grant.
In June 1999, the Board of Directors and Shareholders approved the 1999
Stock Incentive Plan authorizing 1,000,000 options to acquire common stock; the
shares are subject to adjustments based on various features.
In 1996, 57,141 options were exercised at prices ranging from $.73 to $.81
per share. In 1997, 64,014 options were exercised at prices ranging from $.73 to
$.87 per share. The exercise issuance price was $42,006 and $48,995 in 1996 and
1997, respectively. The optionees entered into notes (see note 6) in the amount
of $39,294 and $44,041 payable to the Company for these purchases during the
year ended December 31, 1996 and 1997, respectively. The notes accrue interest
at 110% of the Long-Term Applicable Federal Rate, as adjusted and are due at
variable dates through 2007. During 1998 and the six month period ended June 30,
1999, no options were exercised.
F-13
<PAGE> 70
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
A summary of stock option activity under the Stock Incentive Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OUTSTANDING PRICE
OPTIONS PER SHARE
----------- ---------
<S> <C> <C>
Options outstanding at December 31, 1995.................... 1,756,350 $ .74
Options granted............................................. 652,500 .87
Options canceled............................................ (226,008) .73
Options exercised........................................... (57,141) .74
--------- -----
Options outstanding at December 31, 1996.................... 2,125,701 .78
Options granted............................................. 714,000 .96
Options canceled............................................ (63,000) .89
Options exercised........................................... (64,014) .77
--------- -----
Options outstanding at December 31, 1997.................... 2,712,687 .82
Options granted............................................. 674,025 .96
Options canceled............................................ (458,025) .91
Options exercised........................................... -- --
--------- -----
Options outstanding at December 31, 1998.................... 2,928,687 .84
--------- -----
Options granted............................................. 597,000 6.67
Options canceled............................................ (110,832) 2.20
Options exercised........................................... -- --
--------- -----
Options outstanding at June 30, 1999........................ 3,414,855 1.85
========= =====
Options exercisable at June 30, 1999........................ 2,255,355 .81
========= =====
Options available for grant at June 30, 1999................ 1,223,332
=========
</TABLE>
At December 31, 1998 and June 30, 1999, the range of exercise prices and
weighted-average remaining contractual life of the outstanding options were $.73
to $.96 and 6.98 years and $.73 to $6.67 and 7.60 years, respectively.
The weighted-average fair value of options granted during the year ended
December 31, 1996, 1997, and 1998 and the six months ended June 30, 1999 was
$.30, $.32, $.32, and $1.86, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
(excluding a volatility assumption) with the following weighted-average
assumptions used for grants during 1996, 1997, 1998, and the six months ended
June 30, 1999: expected dividend yield of 0%; expected lives of six years;
risk-free interest rate of 6.77%, 6.54%, 5.25% and 5.75% for 1996, 1997, and
1998, and the six months ended June 30, 1999, respectively.
F-14
<PAGE> 71
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan. Accordingly, no compensation cost has been recognized
for its stock option plans because the exercise price of the option equals or
exceeds the fair value of the underlying stock at the date of grant. Had
compensation costs for the Company's stock-based compensation plan been
determined in accordance with SFAS No. 123, the Company's net income (loss)
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998 1999
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net income (loss):
As reported..................... $136,097 $38,191 $(1,305,760) $(1,275,979)
Pro forma....................... 91,030 (48,421) (1,433,334) (1,700,995)
Basic net income (loss) per common
share
As reported..................... .04 .01 (.40) (.40)
Pro forma....................... .03 (.01) (.43) (.53)
Diluted earnings (loss) per common
share
As reported..................... .04 .01 (.40) (.40)
Pro forma....................... .03 (.01) (.43) (.53)
</TABLE>
(9) COMMITMENTS
(a) Leases
In the ordinary course of business, the Company enters into noncancelable
operating lease agreements for its office facilities. Management expects that,
as these lease agreements expire, they will be renewed or replaced by similar
operating lease agreements. Rental expense under the operating leases was
$161,504, $263,045, $324,035 and $207,176 for the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1999, respectively. During 1998,
the Company modified its existing lease contract to assume additional rental
space. The lease term for the entire facility is through September 2003. The
future minimum annual lease payments under the noncancelable operating lease
agreements with remaining terms greater than one year for the next five years
and in the aggregate are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $ 412,104
2000........................................................ 426,536
2001........................................................ 441,470
2002........................................................ 456,913
2003........................................................ 352,109
----------
$2,089,132
==========
</TABLE>
(b) Employee Benefit Plan
Effective January 1, 1993, the Company adopted the Telemate Software 401(k)
Savings and Investment Plan (the "401(k) Plan"). In order to participate in the
401(k) Plan, employees must be at least 21 years of age and have completed 90
days of service. The terms of the 401(k) Plan allow employees to contribute up
to 20% of pretax compensation up to the maximum allowed under Internal Revenue
Service ("IRS") regulations. The Company may make discretionary matching
contributions up
F-15
<PAGE> 72
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
to the maximum allowed under IRS regulations. In addition, the Company may make
a discretionary profit-sharing contribution to the 401(k) Plan. The
discretionary matching and profit-sharing contributions vest at the rate of 20%
per year. For the years ended December 31, 1996, 1997, and 1998 and the six
months ended June 30, 1999, the Company made discretionary matching
contributions of $56,499, $44,585, $72,571 and $34,144, respectively, to the
Plan. The Company did not make any discretionary profit sharing contributions
during 1996, 1997 or 1998.
(c) Royalty Agreements
The Company has royalty agreements whereby royalties are paid to vendors
for the use of the vendor's software in conjunction with the Company's products.
(10) REDEEMABLE STOCK PURCHASE WARRANT
In connection with the $1 million note payable described in note 5, in
March 1998, the Company issued a warrant for the purchase of common stock at an
exercise price of $.003 per share. Under the stock purchase warrant, the number
of shares issuable upon exercise increases over time if the note payable remains
outstanding as follows:
<TABLE>
<CAPTION>
COMMON SHARES AVAILABLE
FOR ISSUANCE UPON
EXERCISE OF WARRANT
DATE (SUBJECT TO INCREASE)
- ---- -------------------------
<S> <C>
March 27, 1998.............................................. 60,606
March 27, 1999.............................................. 122,448
March 27, 2000.............................................. 185,568
March 27, 2001.............................................. 250,002
March 27, 2002.............................................. 315,792
</TABLE>
The warrant may be exercised at any time from the grant date until May 31,
2003.
The terms of the stock purchase warrant include many rights and privileges
in favor of the lender, including but not limited to, antidilution rights,
certain registration rights and put rights for cash for a period of 30 days
immediately prior to the expiration thereof at a price equal to the fair market
value of the common stock issuable to the holder upon exercise, as defined. In
accordance with Emerging Issues Task Force No. 96-13, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock, the Company estimated the fair value of the warrant at the date of
issuance. The Company anticipates repaying the indebtedness in February 2000;
accordingly, the Company is currently amortizing the initial fair value of the
warrant to the extent of 122,448 shares, or $123,428, over 23 months as
additional interest cost. The Company will continually revise the warrant to
fair value with changes in fair value reported in interest expense. At June 30,
1999, the fair value was $6.67 per share, as determined by Black-Scholes, and
accordingly, the Company increased the redeemable stock purchase warrant and
recorded a charge of $734,000 to interest expense in the six months ended June
30, 1999.
On June 14, 1999, the warrant issued by the Company was amended whereby the
number of shares available for exercise at certain dates were revised. The
amendment stipulates that, so long as the note remains outstanding, so long as a
certain redemption of shares has occurred and an Initial Public Offering
F-16
<PAGE> 73
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
("IPO") meeting certain criteria has not occurred, the number of shares
available for exercise will increase as follows:
<TABLE>
<CAPTION>
COMMON SHARES AVAILABLE
DATE UPON EXERCISE OF WARRANTS
---- -------------------------
<S> <C>
March 27, 2000.............................................. 282,723
March 27, 2001.............................................. 417,111
March 27, 2002.............................................. 557,376
</TABLE>
The amendment provides that the future number of shares available for
exercise will remain unchanged from the original agreement if an IPO meeting
certain criteria does take place by March 30, 2000 and the note remains
outstanding.
Concurrently with the amendment to the warrant, a waiver agreement between
the warrant holder and the Company was executed whereby the warrant holder
agreed to waive its right to put the warrant back to the Company upon the
closing of an IPO.
(11) UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma amounts included in the accompanying pro forma
balance sheet as of June 30, 1999, reflect the following unaudited pro forma
adjustments:
- Reclassification of the redeemable stock purchase warrant to additional
paid-in capital, which will occur on the IPO date since the holder of the
warrant agreed to rescind the put right upon IPO, including additional
charge for interest expense of $775,000 due to a change in the fair
market value of the redeemable stock purchase warrant assuming the IPO
occurred June 30, 1999 at an assumed offering price of $13.00
- Conversion of the Series A redeemable convertible preferred stock to
common stock.
(12) UNAUDITED PRO FORMA AND ACTUAL UNAUDITED INCOME TAXES
The unaudited pro forma provision for income taxes reflects the income tax
expense (benefit) that would have been reported if the Company had been a C
Corporation prior to June 16, 1999. The components of unaudited pro forma income
taxes are as follows:
<TABLE>
<CAPTION>
JANUARY 1,
THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 16,
1996 1997 1998 1999
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Pro forma income taxes:
Current:
Federal............................ $ 81,811 $ (3,325) $ 9,347 $ (9,347)
State.............................. 16,189 (675) 3,653 (3,653)
-------- -------- -------- --------
Total current................. 98,000 (4,000) 13,000 (13,000)
-------- -------- -------- --------
Deferred:
Federal............................ -- -- -- --
State.............................. -- -- -- --
-------- -------- -------- --------
Total deferred................ -- -- -- --
-------- -------- -------- --------
Total pro forma income
taxes....................... $ 98,000 $ (4,000) $ 13,000 $(13,000)
======== ======== ======== ========
</TABLE>
F-17
<PAGE> 74
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
The following table reconciles the expected corporate federal income taxes
(computed by multiplying the Company's income before income taxes by 34%) to the
Company's unaudited pro forma provision for (benefit from) income taxes:
<TABLE>
<CAPTION>
JANUARY 1,
THROUGH
JUNE 16,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999
1996 1997 1998 (UNAUDITED)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Expected pro forma provision for
(benefit from) income taxes.......... $ 46,273 $ 12,984 $(443,958) $(445,228)
State income taxes, net of federal tax
effect............................... 10,685 (446) 2,411 (2,411)
Permanent differences.................. 5,959 4,023 51,312 259,567
Change in valuation allowance.......... 54,407 (30,504) 486,289 194,074
Other, net............................. (19,324) 9,943 (83,054) (19,002)
-------- -------- --------- ---------
$ 98,000 $ (4,000) $ 13,000 $ (13,000)
======== ======== ========= =========
</TABLE>
On June 16, 1999, the Company converted to a C corporation for income tax
purposes. In connection with the change in income tax status to a C corporation,
the Company recorded the following additional entries on June 16, 1999:
- Reclassified the accumulated deficit totaling approximately $296,068 on
this date to additional paid in capital which represented undistributed
estimated losses during the S corporation period limited to the amount of
paid in capital.
- Established net deferred income tax asset/liability since the Company has
assumed the income tax basis on its assets and liabilities. No net amount
was recorded since the deferred tax assets are fully reserved.
The accompanying statements of income (loss) for each of the years in the
three years ended December 31, 1998 and the six months ended June 30, 1998 and
the period from January 1, 1999 through June 16, 1999, reflect provisions for
income taxes on an unaudited pro forma basis, using the asset and liability
method, as if the Company had been a C corporation, fully subject to federal and
state income taxes. There was no income tax expense for the 14 day period ended
June 30, 1999.
F-18
<PAGE> 75
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the unaudited deferred income tax assets and liability as of June
30, 1999, are presented below:
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1999
--------
<S> <C>
Deferred income tax assets:
Allowance and deferrals................................... $152,471
Accrued bonuses and vacation pay.......................... 107,631
Research and development capitalization................... 632,664
Depreciation.............................................. 1,395
--------
Gross deferred income tax assets....................... 894,161
--------
Valuation allowance......................................... 724,083
--------
Net deferred income tax assets............................ 170,078
Pro forma deferred income tax liability:
Amortization.............................................. 170,078
--------
Deferred income tax liability............................. 170,078
--------
Net deferred income tax asset (liability)................. $ --
========
</TABLE>
(13) SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to June 30, 1999 the Company granted approximately 303,000 stock
options. Of such options, 4,455 were granted at an exercise price of $6.67 per
share and the remaining options were granted at an exercise price of $11.50 per
share. The options issued at $6.67 per share will result in a compensation
charge totaling approximately $21,000, which will be expensed over the vesting
period. These options vest over periods ranging from 2 to 3 years.
F-19
<PAGE> 76
Telemate.net logo
<PAGE> 77
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 16,700
National Association of Securities Dealers, Inc. fee........ $ 6,500
Nasdaq Stock Market listing fee............................. $ 70,000
Accountants' fees and expenses.............................. $350,000
Legal fees and expenses..................................... $150,000
Transfer Agent's fees and expenses.......................... $ 2,000
Printing and engraving expenses............................. $150,000
Miscellaneous............................................... $ 4,800
--------
Total expenses.................................... $750,000
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Articles of Incorporation provide that the
liability of the directors for monetary damages shall be eliminated to the
fullest extent permissible under the Georgia Business Corporation Code (the
"GBCC") and that we may indemnify our officers, employees and agents to the
fullest extent permitted under the GBCC.
Telemate.Net's Amended and Restated Bylaws provide that we must indemnify
our directors against all liabilities to the fullest extent permitted under the
GBCC and that we must advance all reasonable expenses incurred in a proceeding
in which the director was either a party or a witness because he or she was a
director.
The GBCC provides that, in general, a corporation may indemnify an
individual who is or was a party to any proceeding (other than action by, or in
the right of, such corporation) by reason of the fact that he or she is or was a
director of the corporation, against liability incurred in connection with such
proceeding, including any appeal thereof, provided specified standards are met,
including that such officer or director acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation, and provided further that, with respect to any criminal action
or proceeding, the officer or director had no reasonable cause to believe his or
her conduct was unlawful. In the case of proceedings by or in the right of the
corporation, the GBCC provides that, in general, a company may indemnify an
individual who was or is a party to any such proceeding by reason of the fact
that he or she is or was a director of the corporation against reasonable
expenses incurred in connection with such proceeding, if it is determined that
the director has met the relevant standard of conduct. To the extent that any
directors are successful on the merits or otherwise in the defense of any of the
proceedings described above, the GBCC provides that a corporation is required to
indemnify such officers or directors against reasonable expenses incurred in
connection therewith. The GBCC further provides, in general, for the advancement
of reasonable expenses incurred by a director who is a party to a proceeding if
the director furnishes the corporation (1) a written affirmation of his or her
good faith belief that he or she has met the standard of conduct under the GBCC
or that the proceeding involves conduct for which liability has been eliminated
under the corporation's articles of incorporation; and (2) a written undertaking
to repay any advances if it is ultimately determined that he or she is not
entitled to indemnification. In addition, the GBCC provides for the
indemnification of officers, employees and agents under other circumstances.
Section 7(c) of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains provisions pursuant to which our officers, directors and controlling
persons may be entitled to be indemnified by the underwriters named therein.
II-1
<PAGE> 78
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have issued the securities set forth below
that were not registered under the Securities Act of 1933:
(1) Since September 1, 1996, we have issued stock options under our Stock
Incentive Plan and 1999 Stock Incentive Plan to purchase an aggregate of
2,586,971 shares of our common stock. Since September 1, 1996, we have issued a
total of 165,045 shares of our common stock pursuant to the exercise of options
at a weighted average exercise price of $0.86 per share. The options were
granted and the shares were issued upon the exercise of options in reliance on
Rule 701 of the Securities Act.
(2) On March 27, 1998, we issued a warrant to purchase shares of our common
stock to Sirrom Investments, Inc. pursuant to our loan agreement with Sirrom
Investments. The number of shares issuable pursuant to the exercise of this
warrant increases on the anniversary date of the warrant each year that the loan
remains outstanding up to May 31, 2003. Under the warrant, as amended on June
14, 1999, a maximum of 557,376 shares may be issued under the warrant at an
exercise price of $0.003 per share. Currently, 122,448 shares of our common
stock are issuable under the warrant. We issued this warrant in reliance on Rule
4(2) of the Securities Act.
(3) On June 8, 1999, we issued 30,000 shares of our common stock, valued at
$6.67 per share, to James A. Myers in connection with our purchase of
intellectual property rights owned by Mr. Myers. We sold these shares in
reliance on Regulation D, Rule 506, of the Securities Act.
(4) On June 16, 1999, we issued 300,000 shares of our Series A Preferred
Stock to LiveOak Equity Partners, L.P., Noro-Moseley Partners IV, L.P., and
Noro-Moseley Partners IV-B, L.P. at $20.00 per share, for an aggregate purchase
price of $6.0 million. These shares will be converted into 900,000 shares of our
common stock concurrently with this offering. We sold these shares in reliance
on Regulation D, Rule 506, of the Securities Act.
(5) On June 21, 1999, we issued 75,000 shares of our common stock to James
C. Davis at $6.67 per share, for an aggregate purchase price of $500,000. We
sold these shares in reliance on Regulation D, Rule 506, of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of exhibits filed as part of this
registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1** -- Amended and Restated Articles of Incorporation of the
Registrant.
3.3** -- 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** -- Form of Employment Agreement for Officers and Key Employees.
10.2** -- Lease Agreement, dated January 28, 1992, between KGE
Associates, LP and Complementary Solutions, Inc.
10.3** -- First Amendment to Lease, dated June 11, 1993, between KGE
Associates, LP and Complementary Solutions, Inc.
10.4** -- Second Amendment to Lease, dated June 22, 1994, between KGE
Associates, LP and Complementary Solutions, Inc.
10.5** -- Third Amendment to Lease, dated March 30, 1995, between KGE
Associates, LP and Complementary Solutions, Inc.
10.6** -- Fourth Amendment to Lease, dated June 14, 1996, between KGE
Associates, LP and Telemate Software, Inc.
</TABLE>
II-2
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.7** -- Fifth Amendment to Lease, dated July 26, 1996, between KGE
Associates, LP and Telemate Software, Inc.
10.8** -- Sixth Amendment to Lease, dated August 2, 1996, between KGE
Associates, LP and Telemate Software, Inc.
10.9** -- Seventh Amendment to Lease, dated July 16, 1998, between KGE
Associates, LP and Telemate Software, Inc.
10.10** -- Telemate Software, Inc. Stock Incentive Plan.
10.11** -- Employment Agreement, dated June 16, 1999, between Richard
L. Mauro and Telemate.Net Software, Inc.
10.12** -- Employment Agreement, dated June 16, 1999, between David H.
Couchman and Telemate.Net Software, Inc.
10.13** -- Telemate.Net Software, Inc. 1999 Stock Incentive Plan.
10.14** -- Amendment to Telemate Software, Inc. Stock Incentive Plan.
23.1* -- Consent of KPMG 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).
99.1* -- Consent of Murali Anantharaman.
99.2* -- Affidavit of Telemate.Net Software, Inc. regarding consent
of James C. Davis.
99.3* -- Consent of J. Lawrence Bradner.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
(b) Financial Statement Schedules: Schedule I -- Valuation Accounts
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 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> 80
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia
on the 2nd day of September, 1999.
TELEMATE.NET SOFTWARE, INC.
By: /s/ RICHARD L. MAURO
------------------------------------
Richard L. Mauro
President and Chief Executive
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 September 2, 1999
- -----------------------------------------------------
David H. Couchman
/s/ RICHARD L. MAURO President, Chief Executive September 2, 1999
- ----------------------------------------------------- Officer and Director
Richard L. Mauro (Principal Executive Officer)
* Chief Financial Officer September 2, 1999
- ----------------------------------------------------- (Principal Financial and
Richard J. Post Accounting Officer)
*By: /s/ RICHARD L. MAURO
-------------------------------------------------
Richard L. Mauro
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 81
SCHEDULE I
TELEMATE.NET SOFTWARE, INC.
VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
YEAR ENDED OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
- ---------- ---------- ---------- ------------- -------
<S> <C> <C> <C> <C>
December 31, 1996.................................... $ -- $71,709 $21,709 $50,000
December 31, 1997.................................... 50,000 33,158 23,158 60,000
December 31, 1998.................................... 60,000 62,349 27,349 95,000
</TABLE>
- ---------------
(1) Write-offs of accounts receivable.
II-5
<PAGE> 1
Exhibit 1.1
3,500,000 Shares of Common Stock
TELEMATE.NET SOFTWARE, INC.
UNDERWRITING AGREEMENT
September___, 1999
SOUNDVIEW TECHNOLOGY GROUP, INC.
J.C. BRADFORD & CO.
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the several Underwriters
c/o SoundView Technology Group, Inc.
22 Gatehouse Road
Stamford, Connecticut 06902
Ladies and Gentlemen:
TELEMATE.NET SOFTWARE, Inc., a Georgia corporation (the "Company"), and
the selling stockholders named in Schedule B attached hereto (the "Selling
Stockholders") propose to sell, upon the terms and subject to the conditions of
this Agreement, to the several underwriters named in Schedule A attached hereto
(the "Underwriters"), an aggregate of 3,500,000 shares (the "Firm Shares") of
the Company's common stock, par value $.01 per share (the "Common Stock"). The
Company also proposes to sell to the Underwriters, upon the terms and subject to
the conditions of this Agreement, as set forth in Section 4, up to an additional
525,000 shares of Common Stock (the "Option Shares," and, collectively with the
Firm Shares, the "Shares").
1. Registration Statement. A registration statement (File No. 333-__) on Form
S-1 relating to the Shares, including a Preliminary Prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (collectively referred to as the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission.
The term "Preliminary Prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
Preliminary Prospectus have been delivered to the
<PAGE> 2
representatives of the several Underwriters hereunder (collectively, the
"Representatives"). The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including financial statements and all exhibits and any information
deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations. If
the Company files a registration statement to register a portion of the Shares
and relies on Rule 462(b) of the Rules and Regulations for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to the "Registration Statement"
shall be deemed to include the Rule 462 Registration Statement, as amended from
time to time. The term "Prospectus" means the prospectus as first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such
filing is required, the form of final prospectus included in the Registration
Statement at the Effective Date.
2. Representations and Warranties of the Company. The Company represents and
warrants to, and agrees with, the several Underwriters that:
(a) Securities Act Compliance. The Registration Statement conforms in
all material respects with the requirements of the Securities Act and has been
filed with the Commission under the Securities Act. The Commission has not
issued or, to the Company's knowledge, threatened to issue any order preventing
or suspending the use of any Preliminary Prospectus, and, at its date of issue,
each Preliminary Prospectus conformed in all material respects with the
requirements of the Securities Act and did not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and, when the Registration Statement
becomes effective and at all times subsequent thereto up to and including the
Closing Dates (as hereinafter defined), the Registration Statement and the
Prospectus and any amendments or supplements thereto, contained and will contain
all material statements and information required to be included therein by the
Securities Act and conformed and will conform in all material respects to the
requirements of the Securities Act, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, included or will
include any untrue statement of a material fact or omitted or will omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing representations,
warranties and agreements shall not apply to information contained in or omitted
from any Preliminary Prospectus or the Registration Statement or the Prospectus
or any such amendment or supplement thereto in reliance upon, and in conformity
with, written information furnished to the Company by any Underwriter
specifically for use in the preparation thereof. There is no contract,
agreement, lease, franchise or document required to be described in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which is not described therein or filed therewith as
required, and all descriptions of any such contracts, agreements, leases,
franchises or documents contained in the Registration Statement are accurate and
complete descriptions of such documents in all material respects.
(b) Organization, Good Standing and Qualification. The Company and each
of its subsidiaries has been duly organized and is validly existing and in good
standing as a corporation under the laws of its jurisdiction of incorporation,
with power and authority
2
<PAGE> 3
(corporate and other) to own or lease its properties and to conduct its business
as described in the Prospectus. The Company and each of its subsidiaries is in
possession of and operating in compliance with all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and orders
required for the conduct of its business, all of which are valid and in full
force and effect, and is duly qualified to do business and in good standing as a
foreign corporation in all other jurisdictions where its ownership or leasing of
properties or the conduct of its business requires such qualification. The
Company and each of its subsidiaries has obtained all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public regulatory or governmental agencies and bodies to
own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the Prospectus,
except where the failure to obtain any of the foregoing would not have a
material adverse effect on the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of the
Company and its subsidiaries taken as a whole ("Material Adverse Effect"), and
no such consent, approval, authorization, order, registration, qualification,
license or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus.
(c) Subsidiaries. Except as set forth in Exhibit 21.1 to the
Registration Statement, the Company does not have any subsidiaries and does not
own or control, directly or indirectly, any interest in any other corporation,
association or other business entity.
(d) No Changes. Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and except as
set forth or contemplated in the Prospectus, neither the Company nor any of its
subsidiaries has incurred any liabilities or obligations nor entered into any
transactions not in the ordinary course of business, and there has not been any
Material Adverse Effect, or any material adverse change in the capital stock,
short-term or long-term debt of the Company and its subsidiaries taken as a
whole.
(e) Capitalization. The Company's authorized and outstanding capital
stock is on the date hereof, and will be on the Closing Dates, as set forth
under the heading "Capitalization" in the Prospectus (except that such
disclosure need not reflect the issuance of the Option Shares) and conforms in
all material respects to the description thereof set forth under the heading
"Description of Capital Stock" in the Prospectus. The outstanding shares of
Common Stock (including the Shares) (i) conform in all material respects to the
description thereof in the Prospectus, (ii) have been duly authorized and
validly issued and are fully paid and nonassessable, (iii) have been issued in
compliance with all federal and state securities laws, and (iv) were not issued
in violation of or subject to any preemptive rights or similar rights to
subscribe for or purchase securities. Except as disclosed in the Prospectus and
the financial statements of the Company and related notes thereto included in
the Prospectus, the Company does not have outstanding any options or warrants to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations, except for options granted
subsequent to the date of information provided in the Prospectus pursuant to the
Company's [1999] Stock Incentive Plan (the "Stock Incentive Plan"), as disclosed
in the Prospectus. The description of the Stock Incentive Plan and the options
or other rights granted or exercised thereunder, as set forth in the
3
<PAGE> 4
Prospectus, accurately and fairly presents the information required to be
disclosed with respect to such Stock Incentive Plan, options and rights.
(f) Valid Issuance of the Shares. The Shares to be issued and sold by
the Company to the Underwriters hereunder, when issued and delivered against
payment therefor as provided herein, will be duly and validly issued, fully paid
and nonassessable and free of any preemptive or similar rights and will conform
in all material respects to the description thereof in the Prospectus.
(g) Authorization. The Company has the full corporate power and
authority to enter into this Agreement and to perform its obligations hereunder
(including to issue, sell and deliver the Shares), and this Agreement has been
duly and validly authorized, executed and delivered by the Company and is a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditor's
rights generally, (ii) as the enforceability of any indemnification provision
may be limited under federal or state securities laws or (iii) as the remedy of
specific forms of equitable relief may be subject to equitable defenses and the
discretion of the court before which any proceeding may be brought
(collectively, the "Enforceability Exceptions").
(h) Compliance with other Instruments. The execution, delivery and
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach of any of the terms or provisions of,
constitute a default under or result in the creation of any lien under any
indenture, mortgage, deed of trust, loan agreement or other material agreement
or instrument to which the Company is a party or by which the Company or any of
its respective properties is or may be bound, the Certificate of Incorporation,
By-laws or other organizational documents of the Company, or any law, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its respective properties.
(i) Legal Compliance. The Company, in all material respects, is in
compliance with and conducts its business in conformity with all applicable
federal, state, local and foreign laws, rules and regulations of any court or
governmental agency or body, and, to the knowledge of the Company, except as set
forth in the Registration Statement and the Prospectus, no prospective change in
any of such federal or state laws, rules or regulations has been adopted which,
when made effective, would have a Material Adverse Effect.
(j) Governmental Consents. No consent, approval, authorization or order
of any court or governmental agency or body is required for the consummation by
the Company of the transactions contemplated by this Agreement, except such as
may be required by the National Association of Securities Dealers, Inc. (the
"NASD") or under federal or state securities laws in connection with the
purchase and distribution of the Shares by the Underwriters.
(k) Financial Statements. The financial statements, together with the
related notes and schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the Registration
Statement, the financial condition and the results of operations and cash flows
of the Company at the respective dates or for the respective
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<PAGE> 5
periods therein specified. Such statements and related notes and schedules have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis, except as may be set forth in the Prospectus and
all adjustments necessary for a fair presentation of results for such periods
have been made. The selected financial and statistical data set forth in the
Prospectus under the caption "Selected Financial Data" fairly present, on the
basis stated in the Registration Statement, the information set forth therein
and the data has been compiled on a basis consistent with the financial
statements presented therein. The Company has provided the Representatives with
all financial statements from its inception to the date hereof that are
available to the officers of the Company.
(l) Independent Auditors. KPMG LLP, who have expressed their opinions
on the audited financial statements and related schedules included in the
Registration Statement and the Prospectus, are independent public accountants as
required by the Securities Act and the Rules and Regulations.
(m) Litigation. Except as set forth in the Prospectus, there is no
legal or governmental action, suit, proceeding or investigation pending to which
the Company or any of its affiliates is a party or to which any property of the
Company or any affiliate is subject, which, if determined adversely to the
Company or any such affiliate, might individually or in the aggregate (i)
prevent or adversely affect the transactions contemplated by this Agreement,
(ii) suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Preliminary Prospectus in any jurisdiction, or (iv) have
a Material Adverse Effect, and, to the best of the Company's knowledge, no such
action, suit, proceeding or investigation is threatened or contemplated against
the Company or any subsidiary or affiliate by governmental authorities or
others. The Company is not party to or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body or other
governmental agency or body.
(n) Tax Returns and Payments. The Company has filed all necessary
federal, state, local and foreign income, payroll, franchise and other tax
returns, except where the failure to file would not have a Material Adverse
Effect, and has paid all taxes shown as due thereon or with respect to any of
its properties, and there is no tax deficiency that has been, or, to the
knowledge of the Company, is likely to be asserted against the Company or any of
its respective properties or assets that would have a Material Adverse Effect.
All distributions to the stockholders of the Company prior to the date hereof
have been made in compliance with applicable law and have not exceeded the
amounts to which such stockholders were legally entitled.
(o) Registration Rights. No person or entity has the right to require
registration of shares of Common Stock or other securities of the Company as a
result of the filing or effectiveness of the Registration Statement and, in any
event, except as set forth in the Prospectus, no person or entity has the right
to require registration of shares of Common Stock or other securities of the
Company.
(p) Price Stabilization and Manipulation. Neither the Company nor any
of its officers, directors, subsidiaries or affiliates has taken or will take,
directly or indirectly, any action designed or intended to stabilize or
manipulate the price of any security of the Company,
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<PAGE> 6
or which caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the price of
any security of the Company.
(q) Patents and Trademarks. The Company owns or otherwise possesses or
has the right to use all patents, trademarks, trademark registrations, service
marks, service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights either (i) described in the Prospectus as
being owned by it or (ii) necessary for the conduct of its business as so
described, as now conducted or as proposed to be conducted. The Company is not
aware of any claim to the contrary or any challenge by any other person to the
rights of the Company with respect to the foregoing. The Company's business as
now conducted does not infringe or conflict with in any material respect any
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
U.S. patents or other intellectual property or franchise rights or, to the
Company's knowledge, foreign patents of any person. No claim has been made
against the Company alleging the infringement by the Company of any patent,
trademark, service mark, trade name, copyright, trade secret, license in or
other intellectual property right or franchise right of any person, except as
described in the Prospectus or with respect to claims which, singly or in the
aggregate, will not have a Material Adverse Effect.
(r) Material Contracts. The Company or a subsidiary of the Company, as
the case may be, has performed all material obligations required to be performed
by it under all contracts required by Item 601(b)(10) of Regulation S-K under
the Securities Act to be filed as exhibits to the Registration Statement (the
"Material Contracts"), and neither the Company nor, to the knowledge of the
Company, any other party to such contract is in default under or in breach of
any such obligations, except with respect to any defaults or breaches which,
singly or in the aggregate, will not result in a Material Adverse Effect. The
Company has not received any notice of such default or breach. Each Material
Contract is in full force and effect, and is the legal, valid and binding
obligation of the Company, and is enforceable as to and by the Company in
accordance with its terms.
(s) Labor Agreements and Actions. The Company is not involved in any
labor dispute and, to the Company's knowledge, no such dispute is threatened.
The Company is not aware that (i) any executive, key employee or significant
group of employees of the Company plans to terminate employment with the
Company, or (ii) any such executive or key employee is subject to any
noncompete, nondisclosure, confidentiality, employment, consulting or similar
agreement that would be violated by the present or proposed business activities
of the Company. The Company neither has nor expects to have any liability for
any prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), to which the Company makes or ever has made a contribution
and in which any employee of the Company is or has ever been a participant,
except where such liability would not have a Material Adverse Effect. With
respect to such plans, the Company is in compliance in all material respects
with all applicable provisions of ERISA and any other applicable statutes,
orders, rules and regulations. For each such plan which is subject to the
funding rules of Section 412 of the Internal Revenue Code of 1986, as amended
(the "Code"), or Section 302 of ERISA, the fair market value of the assets of
such plan exceeds the present value of all benefits accrued under such plan
determined using
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<PAGE> 7
reasonable actuarial assumptions, except with respect to any non-compliance with
such provisions which, singly or in the aggregate, will not have a Material
Adverse Effect.
(t) Lock-Up Agreements. Except as disclosed in the Prospectus, the
Company has obtained the written agreement, in substantially the form attached
hereto as Schedule C, from each of its officers and directors and certain of the
Company's shareholders.
(u) Title to Property and Assets. The Company or a subsidiary of the
Company has and, as of the Closing Dates, will have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned or proposed to be owned by it which is material to the business
of the Company taken as a whole, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as would not have a Material Adverse Effect. Any real property and buildings
held under lease by the Company or proposed to be held after giving effect to
the transactions described in the Prospectus are, or will be as of the Closing
Dates, held by it under valid, subsisting and enforceable leases with such
exceptions as would not have a Material Adverse Effect, in each case except as
described in or contemplated by the Prospectus.
(v) Insurance. The Company is insured by insurers of nationally
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the business in which it is engaged or proposes to
engage after giving effect to the transactions described in the Prospectus, and
the Company has no reason to believe that it will not be able to renew any such
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect, except as
described in or contemplated by the Prospectus.
(w) Brokers. Except as may be set forth in the Prospectus, there is no
broker, finder or other party that is entitled to receive from the Company any
brokerage or finder's fee or similar fee or commission as a result of any of the
transactions contemplated by this Agreement.
(x) Internal Accounting Controls. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) Distribution of Offering Materials. The Company has not distributed
and will not distribute prior to the later of (i) the First Closing Date or the
Option Closing Date, as the case may be, and (ii) the completion of the
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectus, the
Prospectus, the Registration Statement and other materials, if any, permitted by
the Securities Act and the use of which has been approved in advance in writing
by the Representatives.
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<PAGE> 8
(z) Subscription Agreements. Each of the Subscription Agreements has
been duly authorized, executed and delivered by the Company, and, when accepted
by the Company, is a valid and binding agreement of the Company, enforceable
with its terms.
(aa) Payment or Receipt of Funds. Except as set forth in the
Prospectus, neither the Company nor, to the Company's knowledge, any employee or
agent of the Company has made any payment of funds of the Company or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(bb) Investment Company. The Company is not, and upon consummation of
the transactions contemplated hereby will not be, an "investment company" or an
entity "controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(cc) Environmental Laws. The Company is in compliance with the terms
and conditions of all applicable federal, state, local and foreign laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), except where the failure to be in
compliance would not have a Material Adverse Effect. The Company has not
received notice from any governmental authority of any claim under any
Environmental Laws that could result in a Material Adverse Effect. No property
that is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (420 U.S.C. (S) 9601 et
seq.), or otherwise designated as a contaminated site under applicable state or
local laws.
(dd) Permits. The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits"), including,
without limitation, under any applicable Environmental Laws, as are necessary to
own, lease and operate its property and to conduct its business. The Company has
fulfilled and performed all of its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit, except events the
existence of which would not have a Material Adverse Effect, and, except as
described in the Prospectus, such permits contain no restrictions that are
materially burdensome to the Company and its subsidiaries taken as a whole.
(ee) Employment Matters. To the Company's knowledge, neither the
Company nor any of its subsidiaries has violated any federal or state law
relating to discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions of ERISA or
the rules and regulations promulgated thereunder, which in each case might have
a Material Adverse Effect.
(ff) 1934 Act Registration. The Company has filed a registration
statement pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which registration statement has been or will be
declared effective simultaneously with the effectiveness of the Registration
Statement.
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(gg) Nasdaq Listing. The Common Stock has been approved for quotation
on the Nasdaq National Market, subject to official notice of issuance.
(hh) Related Party Transactions. The statements in the Prospectus under
the Heading "Certain Transactions" set forth all existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings, or transactions, between or among the Company, on
the one hand, and any officer, director or stockholder of the Company, or with
any partner, affiliate or associate of any of the foregoing persons or entities,
on the other hand, required to be set forth or described thereunder.
(ii) Year 2000 Disclosure. There are no issues related to the Company's
preparedness for the Year 2000 that (i) are of a character required to be
described or referred to in the Registration Statement or Prospectus by the
Securities Act or the Rules and Regulations which have not been accurately
described in the Registration Statement or Prospectus or (ii) might reasonably
be expected to result in any Material Adverse Effect. All internal computer
systems and each Constituent Component (as defined below) of those systems and
all computer-related products and each Constituent Component of those products
of the Company fully comply with the Year 2000 Qualification Requirements. "Year
2000 Qualification Requirements" means that the internal computer systems and
each Constituent Component of those systems and all computer-related products
and each Constituent Component of those products of the Company (i) have been
reviewed to confirm that they store, process (including sorting and performing
mathematical operations, calculations and computations), input and output data
containing date and information correctly regardless of whether the date
contains date and times before, on or after January 1, 2000, (ii) have been
designated to ensure date and time entry recognition, calculations that
accommodate same century and multi-century formulas and date values, leap year
recognition and calculations, and date data interfaces values that reflect the
century, (iii) accurately manage and manipulate data involving dates and times,
including single century formulas and multi-century formulas, and will not cause
an abnormal ending scenario within the application or generate incorrect values
or invalid results involving such dates, (iv) accurately process any date
rollover and (v) accept and respond to two-digit year date input in a manner
that resolves any ambiguities as to the century. "Constituent Component" means
all software (including operating systems, programs, packages and utilities),
firmware, hardware, networking components, and peripherals provided as part of
the configuration.
(jj) Certificates. Each certificate signed by any officer of the
Company and delivered to the Underwriters or counsel for the Underwriters
pursuant to this Agreement or in connection with the offering contemplated
hereby shall be deemed to be a representation and warranty of the Company to the
Underwriters as to the matters covered thereby.
3. Representations and Warranties of the Selling Stockholders. Each Selling
Stockholder, severally and not jointly, represents and warrants to, and agrees
with, the several Underwriters that:
(a) Valid and Marketable Title. Such Selling Stockholder now has, and
on the Closing Dates will have, valid and marketable title to the Shares to be
sold by such Selling Stockholder, free and clear of any lien, claim, security
interest or other encumbrance, including,
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<PAGE> 10
without limitation, any restriction on transfer, and has full right, power and
authority to enter into this Agreement, the Power of Attorney and the Custody
Agreement (each as hereinafter defined), and each of the several Underwriters
will acquire valid and marketable title to all of the Shares being sold to the
Underwriters by such Selling Stockholder, free and clear of any liens,
encumbrances, equities claims, restrictions on transfer or other defects
whatsoever.
(b) Authority. Such Selling Stockholder now has, and on the Closing
Dates will have, upon delivery of and payment for each of the Shares hereunder,
full right, power and authority, and shall have obtained any approval required
by law, to sell, transfer, assign and deliver the Shares being sold by such
Selling Stockholder hereunder.
(c) Lock-Up Agreement. Such Selling Stockholder has executed and
delivered to the Representatives a lock-up agreement in substantially the form
attached hereto as Schedule C.
(d) Power of Attorney. Such Selling Stockholder has duly executed and
delivered a power of attorney, in substantially the form heretofore delivered to
the Representatives (the "Power of Attorney"), each appointing an
attorney-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver
this Agreement on behalf of such Selling Stockholder, to authorize the delivery
of the Shares to be sold by such Selling Stockholder hereunder and otherwise to
act on behalf of such Selling Stockholder in connection with the transactions
contemplated by this Agreement.
(e) Custody Agreement. Such Selling Stockholder has duly executed and
delivered a custody agreement, in substantially the form heretofore delivered to
the Representatives (the "Custody Agreement"), with __, as custodian (the
"Custodian"), pursuant to which certificates in negotiable form for the Shares
to be sold by such Selling Stockholder hereunder have been placed in custody for
delivery under this Agreement.
(f) Binding Obligations. Such Selling Stockholder has, by execution and
delivery of each of this Agreement, the Power of Attorney, the Custody Agreement
and, if applicable, the Lock-Up Agreement, created valid and binding obligations
of such Selling Stockholder, enforceable against such Selling Stockholder in
accordance with their respective terms, subject to the Enforceability
Exceptions.
(g) Compliance with other Instruments. The performance of this
Agreement, the Custody Agreement and the Power of Attorney, and the consummation
of the transactions contemplated hereby and thereby, will not result in a breach
or violation in any material respect by such Selling Stockholder of any of the
terms or provisions of, or constitute a default by such Selling Stockholder
under, (i) any indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other material agreement or
instrument to which such Selling Stockholder is a party or by which such Selling
Stockholder or any of its properties is bound, (ii) any judgment of any court or
governmental agency or body applicable to such Selling Stockholder or any of its
properties, or any statute, decree, order, Rule or regulation of any court or
governmental agency or body applicable to such Selling Stockholder or any of its
properties, or (iii) any provisions of the charter, bylaws or other
organizational documents of such Selling Stockholder.
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(h) No Revocation. Each Selling Stockholder agrees that (i) the Shares
represented by the certificates held in custody under the Custody Agreement are
for the benefit of and coupled with and subject to the interests of the
Underwriters and the Company hereunder, (ii) the arrangement for such custody
and the appointment of the Attorneys-in-Fact are irrevocable, (iii) the
obligations of such Selling Stockholder hereunder shall not be terminated by
operation of law, whether by the liquidation or dissolution of such Selling
Stockholder or any other event, and (iv) if such Selling Stockholder should die
or become incapacitated or is liquidated or dissolved or any other event occurs,
before the delivery of the Shares hereunder, certificates for the Shares to be
sold by such Selling Stockholder shall be delivered on behalf of such Selling
Stockholder in accordance with the terms and conditions of this Agreement and
the Custody Agreement, and action taken by the Attorneys-in-Fact under the Power
of Attorney shall be as valid as if such liquidation or dissolution or other
event had not occurred, whether or not the Custodian, the Attorneys-in-Fact or
any of them shall have notice of such liquidation or dissolution or other event.
(i) No Stabilization or Manipulation. Such Selling Stockholder has not
taken, and will not take, directly or indirectly, any action designed to, or
which might reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares pursuant to the distribution contemplated by this
Agreement, and, other than as permitted by the Securities Act, the Selling
Stockholder has not distributed and will not distribute any prospectus or other
offering material in connection with the offering and sale of the Shares.
(j) Governmental Consents. The execution, delivery and performance of
this Agreement by such Selling Stockholder, compliance by such Selling
Stockholder with all the provisions hereof and the consummation of the
transactions contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body (except as such may be required under federal
or state securities laws or by the NASD).
(k) Beneficial Ownership. The information set forth under the heading
"Principal and Selling Stockholders" in the Prospectus which specifically
relates to such Selling Stockholder does not, and will not on the Closing Dates,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of circumstances under which they were made, not misleading, and such
Selling Stockholder has agreed to immediately notify the Company if, at any time
during the period when a Prospectus is required by law to be delivered in
connection with sales of Common Stock by an Underwriter or a dealer, there is
any change in such information.
(l) Organization and Good Standing. Such Selling Stockholder, if other
than a natural person, has been duly organized and is validly existing and in
good standing under the laws of the jurisdiction of its organization as the type
of entity it purports to be.
(m) No Preemptive or Other Rights. Such Selling Stockholder does not
have, or has waived prior to the date hereof, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement. Such Selling
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Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering made by
the Prospectus, other than such rights of participation as have been satisfied
by the participation of such Selling Stockholder in the transactions to which
this Agreement relates in accordance with the terms of this Agreement. Such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
4. Purchase and Sale of the Shares. The Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters the Firm Shares,
with the number of shares to be sold by the Company and each Selling Stockholder
being the number of Shares set opposite his, her or its name in Schedule B
attached hereto, and on the basis of the representations, warranties, covenants
and agreements herein contained, but upon the terms and subject to the
conditions herein set forth, the Underwriters agree, severally and not jointly,
to purchase the Firm Shares from the Company and the Selling Stockholders, with
the number of shares of Firm Shares to be purchased by each Underwriter being
set opposite its name in Schedule A attached hereto, subject to adjustment in
accordance with Section 14 hereof. The number of Shares to be purchased by each
Underwriter from each Selling Stockholder hereunder shall bear the same
proportion to the total number of Shares to be purchased by such Underwriter
hereunder as the number of Shares being sold by each Selling Stockholder bears
to the total number of Shares being sold by all of the Selling Stockholders,
subject to adjustment by the Representatives to eliminate fractions.
(a) Purchase Price. The purchase price per Share to be paid by the
Underwriters to the Company and the Selling Stockholders will be $__ per share
(the "Purchase Price").
(b) Closing. The Company and the Selling Stockholders will deliver the
Firm Shares to the Representatives for the respective accounts of the several
Underwriters in the form of definitive certificates, issued in such names and in
such denominations as the Representatives may direct by notice in writing to the
Company and the Selling Stockholders given at or prior to 10:00 a.m., New York
time, on the second full business day preceding the First Closing Date (as
defined below) or, if no such direction is received, in the names of the
respective Underwriters or in such other names as SoundView Technology Group,
Inc.("SoundView") may designate (solely for the purpose of administrative
convenience) and in such denominations as SoundView may determine, against
payment of the aggregate Purchase Price therefor in Federal or other immediately
available funds, by certified or official bank check or checks payable to the
order of the Company and the Custodian or by wire transfer to accounts
designated by the Company and the Custodian, all at the offices of Morris,
Manning & Martin, L.L.P., 1600 Atlanta Financial Center, 3343 Peachtree Road,
N.E., Atlanta, Georgia 30326. Such delivery and closing shall occur at 10:00
a.m., New York time, on the fourth business day after the date of this Agreement
(the "First Closing Date"). The First Closing Date and the location of delivery
of, and the form of payment for, the Firm Shares may be varied by agreement
between the Company and SoundView. The First Closing Date may be postponed
pursuant to the provisions of Section 14.
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(c) Certificates for the Shares. The Company and the Selling
Stockholders shall make the certificates for the Firm Shares available to the
Representatives for examination on behalf of the Underwriters not later than
12:00 p.m., New York time, on the business day preceding the First Closing Date
at such location within [NEW YORK, NEW YORK] as may be designated by the
Representatives. If the Representatives so elect, delivery of the Firm Shares
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
(d) Payment on behalf of Underwriters. It is understood that the
Representatives, individually and not as Representatives of the several
Underwriters, may (but shall not be obligated to) make payment to the Company or
the Selling Stockholders on behalf of any Underwriter or Underwriters for the
Shares to be purchased by such Underwriter or Underwriters. Any such payment by
the Representatives shall not relieve such Underwriter or Underwriters from any
of its or their other obligations hereunder.
(e) Initial Public Offering. The several Underwriters agree to make an
initial public offering of the Firm Shares at the initial public offering price
of $__ per share as soon after the effectiveness of the Registration Statement
as, in their judgment, is advisable. The Representatives shall promptly advise
the Company and the Selling Stockholders of the making of the initial public
offering. After the initial public offering, the several Underwriters may, in
their discretion, vary the public offering price and increase or decrease the
concessions and discounts to dealers as they may determine.
(f) Information provided by Underwriters. The information set forth
under "Underwriting" in the Registration Statement, any Preliminary Prospectus
and the Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and the
Representatives on behalf of the respective Underwriters represent and warrant
to the Company that the statements made therein are correct.
(g) Over-Allotment Option.
(i) Option Shares. For the purpose of covering any
over-allotments in connection with the distribution and sale of the
Firm Shares as contemplated by the Prospectus, the Company hereby
grants to the Underwriters an option (the "Option") to purchase up to
525,000 Option Shares. The price per share to be paid for the Option
Shares shall be the Purchase Price. The Option may be exercised as to
all or any part of the Option Shares at any time, and from time to
time, not more than thirty (30) days subsequent to the effective date
of this Agreement. No Option Shares shall be sold and delivered unless
the Firm Shares previously have been, or simultaneously are, sold and
delivered. The right to purchase the Option Shares or any portion
thereof may be surrendered and terminated at any time upon notice by
the Underwriters to the Company.
(ii) Exercise of Option. The Option may be exercised by the
Underwriters upon SoundView's written notice to the Company setting
forth the number of shares of
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the Option Shares to be purchased by them and the date and time for
delivery of and payment for the Option Shares (the "Option Closing
Date," and, collectively with the First Closing Date, the "Closing
Dates"). The Option Closing Date shall not be earlier than the First
Closing Date and shall in no event be earlier than two (2) business
days nor later than ten (10) business days after written notice is
given. Option Shares shall be purchased for the account of each
Underwriter in the same proportion as the number of Firm Shares set
forth opposite such Underwriter's name on Schedule A attached hereto
bears to the total number of Firm Shares (subject to adjustment by the
Underwriters to eliminate odd lots). Upon exercise of the Option by the
Underwriters, the Company agrees to sell to the Underwriters the number
of Option Shares set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and upon the terms and
subject to the conditions herein set forth, to purchase the number of
such shares determined as aforesaid.
(iii) Option Closing. The Company will deliver the Option
Shares to the Underwriters (in the form of definitive certificates,
issued in such names and in such denominations as the Representatives
may direct by notice in writing to the Company given at or prior to
10:00 a.m., New York time, on the second full business day preceding
the Option Closing Date or, if no such direction is received, in the
names of the respective Underwriters or in such other names as
SoundView may designate (solely for the purpose of administrative
convenience) and in such denominations as SoundView may determine,
against payment of the aggregate Purchase Price therefor in Federal or
other immediately available funds, by certified or official bank check
or checks payable to the order of the Company or by wire transfer to an
account designated by the Company, all at the offices of [Morris,
Manning & Martin, L.L.P., 1600 Atlanta Financial Center, 3343 Peachtree
Road, N.E., Atlanta, Georgia 30326]. The Company shall make the
certificates for the Option Shares available to the Underwriters for
examination not later than 12:00 p.m., New York time, on the business
day preceding the Option Closing Date, at such location within [NEW
YORK, NEW YORK] as may be designated by the Representatives. If the
Representatives so elect, delivery of the Option Shares may be made by
credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives. The Option Closing
Date and the location of delivery of, and the form of payment for, the
Option Shares may be varied by agreement between the Company and
SoundView. The Option Closing Date may be postponed pursuant to the
provisions of Section 14.
5. Covenants and Agreements of the Company. The Company covenants and agrees
with the several Underwriters that:
(a) Effectiveness of Registration Statement. The Company will (i) if
the Company and the Representatives have determined not to proceed pursuant to
Rule 430A, use its best efforts to cause the Registration Statement to become
effective, (ii) if the Company and the Representatives have determined to
proceed pursuant to Rule 430A, use its best efforts to comply with the
provisions of and make all requisite filings with the Commission pursuant to
Rule 430A and Rule 424, (iii) if the Company and the Representatives have
determined to deliver Prospectuses pursuant to Rule 434, to use its best efforts
to comply with all the applicable provisions thereof, and (iv) use its best
efforts to cause any abbreviated registration
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<PAGE> 15
statement pursuant to Rule 462(b) of the Rules and Regulations as may be
required subsequent to the date the Registration Statement is declared effective
to become effective as promptly as possible. The Company will advise the
Representatives promptly as to the time at which the Registration Statement
becomes effective, will advise the Representatives promptly of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, and will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible the lifting thereof, if issued. The
Company will advise the Representatives promptly of the receipt of any comments
of the Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for additional
information and will not at any time file any amendment to the Registration
Statement or supplement to the Prospectus which shall not previously have been
submitted to the Representatives a reasonable time prior to the proposed filing
thereof or to which the Representatives shall reasonably object in writing or
which is not in compliance with the Securities Act and the Rules and
Regulations.
(b) Amendments and Reports. The Company will prepare and file with the
Commission, promptly upon the request of the Representatives, any amendments or
supplements to the Registration Statement or the Prospectus which in the opinion
of the Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Shares and will use its best efforts to cause
the same to become effective as promptly as possible. The Company will promptly
file all reports and any definitive proxy or information statements required to
be filed with the Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act subsequent to the date of the Prospectus and for so long as the delivery of
a prospectus is required in connection with the offering or sale of the Shares.
(c) Prospectus. If, at any time after the effective date of the
Registration Statement when a prospectus relating to the Shares is required to
be delivered under the Securities Act, any event relating to or affecting the
Company occurs as a result of which the Prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Securities Act,
the Company will promptly notify the Representatives thereof and will prepare an
amended or supplemented prospectus which will correct such statement or
omission.
(d) Copies of Registration Statement and Prospectus. The Company will
deliver to the Representatives, at or before the Closing Dates, manually signed
copies of the Registration Statement, and each amendment thereto, including all
financial statements and exhibits thereto, and will deliver to the
Representatives such number of copies of the Registration Statement, including
such financial statements but without exhibits, and all amendments thereto, as
the Representatives may reasonably request. The Company will deliver or mail to
or upon the order of the Representatives, from time to time until the effective
date of the Registration Statement, as many copies of the Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver or mail
to or upon the order of the Representatives on the date of the initial public
offering, and thereafter from time to time during the period when delivery of a
prospectus relating to the Shares is required under the Securities Act, as many
copies of the
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<PAGE> 16
Prospectus, in final form or as thereafter amended or supplemented as the
Representatives may reasonably request.
(e) Section 11(a) Earnings Statement. The Company will make generally
available to its Stockholders as soon as practicable, but not later than fifteen
(15) months after the effective date of the Registration Statement, an earnings
statement which will be in reasonable detail (but which need not be audited) and
which will comply with Section 11(a) of the Securities Act, covering a period of
at least twelve (12) months beginning after the "effective date" (as defined in
Rule 158 under the Securities Act) of the Registration Statement.
(f) Blue Sky Qualification. The Company will cooperate with the
Representatives to enable the Shares to be registered or qualified for offering
and sale by the Underwriters and by dealers under the securities laws of such
jurisdictions as the Representatives may reasonably request.
(g) Reports to Stockholders. So long as the Company shall be subject to
the reporting requirements of the Exchange Act, the Company will furnish to its
Stockholders annual reports containing financial statements certified by
independent public accountants and will furnish or make available to its
Stockholders quarterly summary financial information in reasonable detail, which
may be unaudited.
(h) Nasdaq National Market. The Company will use its best efforts to
maintain the listing of the Common Stock on the Nasdaq National Market for a
period of five (5) years after the effective date of the Registration Statement.
(i) Transfer Agent and Registrar. The Company will maintain a transfer
agent and registrar for its Common Stock.
(j) Market Stand-Off. The Company will not offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase or otherwise
dispose of any shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock (including, without limitation,
Common Stock which may be deemed to be beneficially owned by the Company in
accordance with the Rules and Regulations) during the one hundred eighty (180)
days following the effective date of the Registration Statement, except for the
Shares being sold hereunder and any shares of Common Stock issuable upon
exercise of [EMPLOYEE] stock options issued in accordance with the terms of the
Stock Incentive Plan as in effect on the date hereof. In addition, during the
one hundred eighty (180) days following the effective date of the Registration
Statement, the Company will not release any officer, director or securityholder
of the Company from their obligations under any similar agreement with the
Company not to sell, transfer or dispose of securities of the Company for the
180-day period following the effective date of the Registration Statement.
(k) Use of Proceeds. The Company will apply the net proceeds from the
sale of the Shares substantially in conformity with the description set forth
under the heading "Use of Proceeds" in the Prospectus.
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<PAGE> 17
(l) SEC Correspondence. The Company will supply the Representatives
with copies of all correspondence to and from, and all documents issued to and
by, the Commission in connection with the registration of the Shares under the
Securities Act.
(m) Financial Statements. Prior to the Closing Dates the Company will
furnish to the Representatives, as soon as they have been prepared, copies of
any unaudited interim financial statements of the Company for any periods
subsequent to the periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
(n) Press Releases. Prior to the Closing Dates and during the period
when a prospectus relating to the Shares is required to be delivered under the
Securities Act, the Company will issue no press release or other communications
directly or indirectly and hold no press conference with respect to the Company
or its financial condition, results of operation, business, prospects, assets or
liabilities, or the offering of the Shares, without the prior consent of the
Representatives, which consent shall not be unreasonably withheld. If at any
time during the 25-day period after the Registration Statement becomes effective
any rumor, publication or event relating to or affecting the Company shall occur
as a result of which in the Representatives' opinion the market price for the
Stock has been or is likely to be materially affected (regardless of whether
such rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after written notice from the Representatives
advising the Company to the effect set forth above, forthwith prepare, consult
with the Representatives concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representatives, responding to or commenting on such rumor, publication or
event.
(o) Investment Company Status. The Company is familiar with the
Investment Company Act and has in the past conducted its affairs, and will in
the future conduct its affairs, in such a manner to ensure that the Company was
not and will not be an "investment company" or a company "controlled" by an
"investment Company" within the meaning of the Investment Company Act and the
rules and regulations thereunder.
(p) Reports to Representatives. During the period of three (3) years
from the date hereof, the Company will furnish to the Representatives, and, upon
request of the Representatives, to each of the Underwriters (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, Stockholder's equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
accountants, (ii) as soon as practicable after the filing thereof, copies of
each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q,
Report on Form 8-K or other report filed by the Company with the Commission,
Nasdaq or any securities exchange, (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of its Common
Stock, and (iv) such other information concerning the Company as the
Representatives may reasonably request from time to time.
(q) Form S-8. The Company will not file any registration statements on
Form S-8 covering shares of Common Stock issuable under its Stock Incentive Plan
for a period of one hundred eighty (180) days following the effectiveness of the
Registration Statement.
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<PAGE> 18
6. Payment of Expenses.
(a) Expenses of the Company. The Company will pay, either directly or
by reimbursement, all costs, fees and expenses incurred in connection with
expenses incident to the performance of the obligations of the Company and of
the Selling Stockholders under this Agreement, including, but not limited to,
(i) all expenses and taxes incident to the issuance and delivery of the Shares
to the Representatives, (ii) all expenses incident to the registration of the
Shares under the Securities Act, (iii) all costs of preparing stock
certificates, including printing and engraving costs, (iv) all fees and expenses
of the registrar and transfer agent of the Shares, (v) all necessary issue,
transfer and other stamp taxes in connection with the issuance and sale of the
Shares to the Underwriters, (vi) all fees and expenses of the Company's counsel
and the Company's independent accountants, (vii) all costs and expenses incurred
in connection with the preparation, printing, filing, shipping and distribution
of the Registration Statement, each Preliminary Prospectus and the Prospectus,
including all exhibits and financial statements, and all amendments and
supplements provided for herein, the Powers of Attorney, the Custody Agreement,
[THE UNDERWRITERS' QUESTIONNAIRE], the Blue Sky memoranda and this Agreement,
(viii) all filing fees and attorneys' fees and expenses incurred by the Company
or the Underwriters in connection with exemptions from qualifying or registering
(or obtaining qualification or registration of) all or any part of the Shares
for offer and sale and determination of its eligibility for investment under the
Blue Sky or other securities laws of such jurisdictions as the Representatives
may designate, and (ix) all filing fees paid or incurred in connection with
filings made with the NASD.
(b) Expenses of the Selling Stockholders. Each Selling Stockholder will
pay, either directly or by reimbursement, all fees and expenses incident to the
performance of such Selling Stockholder's obligations under this Agreement which
are not otherwise specifically provided for herein, including, but not limited
to, any fees and expenses of counsel for such Selling Stockholder, such Selling
Stockholder's pro rata share of fees and expenses of the Attorneys-in-Fact and
the Custodian and all expenses and taxes incident to the sale and delivery of
the Shares to be sold by such Selling Stockholder to the Underwriters hereunder.
7. Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless each Underwriter, each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each of
such Underwriter and controlling person (collectively, the "Underwriter
Indemnified Parties" and, each, an "Underwriter Indemnified Party") against any
losses, claims, damages, liabilities or expenses (including the reasonable cost
of investigating and defending against any claims therefor and fees of counsel
incurred in connection therewith), joint or several, which may be based upon the
Securities Act, the Exchange Act, or any other federal, state, local or foreign
statute or regulation, or at common law, on the ground or alleged ground that
any Preliminary Prospectus, the Registration Statement or the Prospectus (or any
Preliminary Prospectus, the Registration Statement or the Prospectus as from
time to time amended or supplemented) includes or allegedly includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading,
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<PAGE> 19
unless such statement or omission was made in reliance upon, and in conformity
with, written information furnished to the Company by any Underwriter, directly
or through the Representatives, specifically for use in the preparation thereof.
The Company will be entitled to participate at its own expense in the defense
or, if it so elects, to assume the defense of any suit brought to enforce any
such liability, but, if the Company elects to assume the defense, such defense
shall be conducted by counsel chosen by it. In the event the Company elects to
assume the defense of any such suit and retain such counsel, any Underwriter
Indemnified Parties, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Company shall have specifically authorized the retaining of such counsel, or
(ii) the parties to such suit include any such Underwriter Indemnified Parties,
and the Company and such Underwriter Indemnified Parties have been advised by
counsel to the Underwriters that one or more legal defenses may be available to
it or them which may not be available to the Company, in which case the Company
shall not be entitled to assume the defense of such suit, notwithstanding its
obligation to bear the fees and expenses of such counsel. This indemnity
agreement is not exclusive and will be in addition to any liability which the
Company might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter Indemnified
Party.
(b) Indemnification by the Selling Stockholders. Each Selling
Stockholder agrees to indemnify and hold harmless each Underwriter Indemnified
Party against any losses, claims, damages, liabilities or expenses (including,
unless such Selling Stockholder elects to assume the defense, the reasonable
cost of investigating and defending against any claims therefor and fees of
counsel incurred in connection therewith), which may be based upon the
Securities Act, the Exchange Act, or any other federal, state, local or foreign
statute or regulation, or at common law, on the ground or alleged ground that
any Preliminary Prospectus, the Registration Statement or the Prospectus (or any
such documents, as from time to time amended and supplemented) includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, unless
such statement or omission was made in reliance upon, and in conformity with,
written information furnished to the Company by any Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof;
provided, however, that the indemnification obligation arising under this
Section 7(b) shall apply only to the extent that such loss, claim, damage,
liability or expense is caused by or related to an untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity
with information relating to such Selling Stockholder furnished in writing to
the Company by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendments or supplements thereto. Such Selling Stockholder shall be entitled to
participate at his own expense in the defense, or, if he so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Selling Stockholder elects to assume the defense, such defense shall be
conducted by counsel chosen by him. In the event that any Selling Stockholder
elects to assume the defense of any such suit and retain such counsel, the
Underwriter Indemnified Parties, defendant or defendants in the suit, may retain
additional counsel but shall bear the fees and expenses of such counsel unless
(i) such Selling Stockholder shall have specifically authorized the retaining of
such counsel, or (ii) the parties to such suit include such Underwriter
Indemnified Parties and such Selling Stockholder and such Underwriter
Indemnified Parties have been advised by counsel to the Underwriters that one or
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more legal defenses may be available to them which may not be available to such
Selling Stockholder, in which case such Selling Stockholder shall not be
entitled to assume the defense of such suit notwithstanding its obligation to
bear the fees and expenses of such counsel. Subject to Section 7(e) below, this
indemnity agreement is not exclusive and will be in addition to any liability
which such Selling Stockholder might otherwise have and shall not limit any
rights or remedies which may otherwise be available at law or in equity to each
Underwriter Indemnified Party. The Company and the Selling Stockholders may
agree, as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to their respective amounts of such liability for which
they each shall be responsible.
(c) Indemnification by Underwriters. Each Underwriter severally agrees
to indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Securities Act (collectively, the
"Company Indemnified Parties") and each Selling Stockholder and each person, if
any, who controls a Selling Stockholder within the meaning of the Securities Act
(collectively, the "Stockholder Indemnified Parties") against any losses,
claims, damages, liabilities or expenses (including, unless the Underwriter or
Underwriters elect to assume the defense, the reasonable cost of investigating
and defending against any claims therefor and fees of counsel incurred in
connection therewith), joint or several, which arise out of or are based in
whole or in part upon the Securities Act, the Exchange Act or any other federal,
state, local or foreign statute or regulation, or at common law, on the ground
or alleged ground that any Preliminary Prospectus, the Registration Statement or
the Prospectus (or any such document, as from time to time amended and
supplemented) includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading, but only insofar as any such statement or omission was made in
reliance upon, and in conformity with, written information furnished to the
Company by such Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof, and the parties acknowledge and
agree that the only information furnished by the Underwriters to the Company for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus, as from time to time amended or supplemented, is the information
under the caption "Underwriting" in the Prospectus that does not describe this
Agreement; provided, however, that in no case is such Underwriter to be liable
with respect to any claims made against any Company Indemnified Party or
Stockholder Indemnified Party against whom the action is brought unless such
Company Indemnified Party or Stockholder Indemnified Party shall have notified
such Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon the Company Indemnified Party or Stockholder Indemnified Party,
but failure to notify such Underwriter of such claim shall not relieve it from
any liability which it may have to any Company Indemnified Party or Stockholder
Indemnified Party otherwise than on account of its indemnity agreement contained
in this paragraph. Such Underwriter shall be entitled to participate at its own
expense in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but, if such Underwriter elects to assume
the defense, such defense shall be conducted by counsel chosen by it. In the
event that any Underwriter elects to assume the defense of any such suit and
retain such counsel, the Company Indemnified Parties or Stockholder Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any
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<PAGE> 21
additional counsel retained by them, respectively. The Underwriter against whom
indemnity may be sought shall not be liable to indemnify any person for any
settlement of any such claim effected without such Underwriter's consent. This
indemnity agreement is not exclusive and will be in addition to any liability
which such Underwriter might otherwise have and shall not limit any rights or
remedies which may otherwise be available at law or in equity to any Company
Indemnified Party or Stockholder Indemnified Party.
(d) Contribution. If the indemnification provided for in this Section 7
is unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) or (c) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand, and the Underwriters on the other hand, from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and the Selling Stockholders on the
one hand, and the Underwriters on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Selling Stockholders on the one hand, and the Underwriters on the other
hand, shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contribution were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to above shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating, defending, settling or compromising any such claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The Underwriters' obligations to
contribute are several in proportion to their respective underwriting
obligations and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
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(e) Limitation of Liability. Notwithstanding any provision herein to
the contrary, (i) the indemnity agreements contained in Section 7(a) and Section
7(b) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter (or any person controlling such Underwriter) from whom the
person asserting any such loss, claim, damage, liability or expense purchased
the Shares which are the subject thereof if, at or prior to the written
confirmation of the sale of such Shares, a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
(excluding the documents incorporated therein by reference), the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented), and such failure to send or deliver a copy of the Prospectus (or
the Prospectus as amended or supplemented) was not the result of the Company's
non-compliance with the provisions of Section 5(d), (ii) the liability for
indemnification under Section 7(b) of each Selling Stockholder shall not exceed
the Purchase Price of the Shares sold by such Selling Stockholder to the
Underwriters, and (iii) such liability shall be further limited for each Selling
Stockholder such that such Selling Stockholder's liability, in proportion to the
aggregate liability of all Selling Stockholders as a group, shall not exceed the
proportion that the number of Shares sold by such Selling Stockholder bears to
the aggregate number of Shares sold by all Selling Stockholders hereunder;
provided, however, that the limitation on liability set forth in the foregoing
clause (iii) shall not apply with respect to any particular Selling Stockholder
if such liability is attributable to such Selling Stockholder, as set forth in
the first sentence of Section 7(b); and, provided, further, that nothing in the
foregoing clause (iii) shall require the Underwriters to seek indemnification
from any other Selling Stockholder(s) as a condition of their being entitled to
indemnification from any particular Selling Stockholder. Notwithstanding
anything to the contrary in this Agreement, the Underwriters and their control
persons shall not seek indemnification pursuant to this Section 7 unless they
shall have first reasonably determined that the Company is unable or not
required to fully satisfy the obligations of the Selling Stockholders pursuant
to such Sections.
8. Survival of Indemnities, Representations, Warranties, etc. Unless this
Agreement is terminated in accordance with Section 12 hereof, the respective
indemnities, covenants, agreements, representations, warranties and other
statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by them respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, the Selling
Stockholders, the Company or any of its officers or directors or any controlling
person, and shall survive delivery of and payment for the Shares.
9. Conditions of Underwriters' Obligations. The respective obligations of the
several Underwriters hereunder shall be subject to the material accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company
and the Selling Stockholders, to compliance at and as of the Closing Dates by
the Company and the Selling Stockholders with their covenants and agreements
herein contained and other provisions hereof to be satisfied at or prior to the
Closing Dates, and to the following additional conditions:
(a) Effective Registration Statement. The Registration Statement shall
have become effective and no stop order suspending the effectiveness thereof
shall have been issued and no
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proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or the Representatives, shall be threatened by the Commission, and
any request for additional information on the part of the Commission (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the reasonable satisfaction of the Representatives.
Any filings of the Prospectus, or any supplement thereto, required pursuant to
Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in
the manner and within the time period required by Rule 424(b) and Rule 434 of
the Rules and Regulations, as the case may be.
(b) Changes. The Representatives shall have been reasonably satisfied
that there shall not have occurred any change prior to the Closing Dates in the
condition (financial or otherwise), properties, business, prospects, net worth
or results of operations of the Company and its subsidiaries taken as a whole,
or any material adverse change in the capital stock, short-term or long-term
debt of the Company and its subsidiaries taken as a whole, such that (i) the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, contains an untrue statement of fact which, in the reasonable opinion
of the Representatives, is material, or omits to state a fact which, in the
reasonable opinion of the Representatives, is required to be stated therein or
is necessary to make the statements therein not misleading, (ii) an event has
occurred which should have been set forth in a supplement or amendment to the
Prospectus which has not been set forth in such a supplement or amendment, or
(iii) it is impracticable in the reasonable judgment of the Representatives to
proceed with the public offering or to purchase the Shares as contemplated
hereby.
(c) Litigation. The Representatives shall be satisfied that no legal or
governmental action, suit, proceeding or investigation affecting the Company or
any of its subsidiaries which may have a Material Adverse Effect or may affect
the Company's or the Selling Stockholders' ability to perform their respective
obligations under this Agreement shall have been instituted or threatened, and
there shall have occurred no material adverse development in any existing such
action, suit, proceeding or investigation.
(d) Comfort Letter. Prior to the execution of this Agreement, the
Representatives shall have received from KPMG LLP, independent certified public
accountants, a letter, dated the date hereof, in form and substance reasonably
satisfactory to the Underwriters.
(e) Bring-Down. The Representatives shall have received from KPMG LLP,
independent certified public accountants, letters, dated the Closing Dates, to
the effect that such accountants reaffirm, as of the Closing Dates, and as
though made on the Closing Dates, the statements made in the letter furnished by
such accountants pursuant to Section 9(d); provided, however, that the letter
delivered on the First Closing Date shall use a "cut-off date" not earlier than
the date hereof, and the letter delivered on the Option Closing Date shall use a
"cut-off date" not more than five (5) business days prior to such Option Closing
Date.
(f) Legal Opinion of Counsel for the Company. The Representatives shall
have received from Morris, Manning & Martin, L.L.P., counsel for the Company and
[THE SELLING STOCKHOLDERS], an opinion, dated the Closing Dates, which opinion
shall be rendered to the Underwriters at the request of the Company [AND THE
SELLING STOCKHOLDERS] (and shall so state therein) to the effect that:
23
<PAGE> 24
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority
required to carry on its business and to own, lease and operate its
property as described in the Prospectus;
(ii) the Company is duly qualified and is in good standing as
a foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect;
(iii) all of the outstanding shares of Common Stock (including
the Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights, except as disclosed in
the Prospectus;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized, and when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will have been validly issued and will be fully paid and
non-assessable, and the issuance of such shares is not subject to any
preemptive or similar rights;
(v) this Agreement has been duly and validly authorized,
executed and delivered by the Company and by the Selling Stockholders
and is a valid and binding agreement of the Company and the Selling
Stockholders, enforceable against the Company and the Selling
Stockholders in accordance with its terms, subject to the
Enforceability Exceptions;
(vi) the authorized capital stock of the Company, including
the Common Stock, conforms in all material respects to the description
thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under
the Securities Act and, to such counsel's knowledge, no stop order
suspending its effectiveness has been issued and no proceedings for
that purpose are, to the knowledge of such counsel, pending before or
contemplated by the Commission;
(viii) the Company is not in violation of its Certificate of
Incorporation or By-laws and, to such counsel's knowledge, the Company
is not in default in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence
of indebtedness or in any other agreement, indenture or instrument
material to the conduct of the business of the Company, to which the
Company is a party or by which it or its property is bound;
(ix) the execution, delivery and performance of this Agreement
by the Company and the Selling Stockholders, compliance by the Company
and the Selling Stockholders with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require
any consent, approval, authorization or order of any court or
governmental agency or body (except such as may be required by the
24
<PAGE> 25
NASD or under federal or state securities laws in connection with the
purchase and distribution of the Shares by the Underwriters) and will
not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the Certificate of Incorporation,
By-laws or other organizational documents of the Company or of any of
its subsidiaries, or any agreement, indenture or other instrument known
to such counsel to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or their
respective properties is bound, or, to such counsel's knowledge,
violate or conflict with any laws, administrative regulations or
rulings or court decrees applicable to the Company or its property;
(x) to such counsel's knowledge, there is no legal or
governmental proceeding pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of its property is
subject which is required to be described in the Registration Statement
or the Prospectus and is not so described, or of any contract or other
document which is required to be described in the Registration
Statement or the Prospectus or is required to be filed as an exhibit to
the Registration Statement which is not described or filed as required;
(xi) the Company is not an "investment company" or a company
"controlled" by an "investment company," as defined in the Investment
Company Act of 1940, as amended;
(xii) to such counsel's knowledge, except otherwise set forth
in the Registration Statement, no holder of any security of the Company
has any right to require registration of shares of Common Stock or any
other security of the Company;
(xiii) to such counsel's knowledge, except as otherwise set
forth in the Registration Statement or such as are not material to the
business, prospects, financial condition or results of operation of the
Company and its subsidiaries taken as a whole, the Company and each of
its subsidiaries has good and marketable title, free and clear of all
liens, claims, encumbrances and restrictions except liens for taxes not
yet due and payable, to all property and assets described in the
Registration Statement as being owned by it;
(xiv) to such counsel's knowledge, all leases to which the
Company and each of its subsidiaries is a party are valid and binding
and no default has occurred or is continuing thereunder, with the
exception of those leases the violation of which would not, in the
aggregate, have a Material Adverse Effect;
(xv) to the best of such counsel's knowledge, the Company is
not infringing or otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary information or
materials, of others, and to the best of such counsel's knowledge there
are no infringements by others of any of the Company's patents, trade
secrets, trademarks, service marks or other proprietary information or
materials which in the judgment of such counsel could effect materially
the use thereof by the Company; and
25
<PAGE> 26
(xvi) to the best of such counsel's knowledge, the Company
owns or possesses sufficient licenses or other rights to use all
patents, trade secrets, trademarks, service marks or other proprietary
information or materials necessary to conduct the business now being
proposed to be conducted by the Company as described in the Prospectus.
(xvii) (A) the Registration Statement (including any
Registration Statement filed under Rule 462(b) under the Securities
Act, if any) and the Prospectus and any supplement or amendment thereto
(except for financial statements, schedules and reports thereon, and
other financial and statistical data included therein, as to which no
opinion need be expressed) comply as to form in all material respects
with the Securities Act, and (B) although counsel has not undertaken to
investigate or verify independently and is not passing upon, and does
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Prospectus or any amendment
or supplement thereto, nothing has come to the attention of such
counsel which has caused it to believe that (except for financial
statements, schedules and reports thereon, and other financial and
statistical data included therein as aforesaid) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, as amended or supplemented, if
applicable (except for financial statements, schedules and reports
thereon, and other financial and statistical data included therein as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(xviii) The Selling Stockholders have full legal right, power
and authority, and any approval required by law (other than any
approval imposed by the applicable state securities and Blue Sky laws)
to sell, assign, transfer and deliver the Shares to be sold by them in
the manner provided in this Agreement and the Custody Agreement;
(xix) Each Selling Stockholder has good and valid title to the
certificates for the Shares to be sold by such Selling Stockholder and,
upon delivery thereof, pursuant hereto and payment therefor, good and
valid title will pass to the Underwriters, severally, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever; and
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or the States of New York or
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Stockholders, and of government officials, in which case their opinion is to
state that they are so relying, without any independent investigation or
inquiry, and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters.
26
<PAGE> 27
(g) Legal Opinion of Counsel for the Underwriters. The Representatives
shall have received from Morrison & Foerster, LLP, counsel for the Underwriters,
their opinion or opinions, dated the Closing Dates, with respect to the validity
of the Shares, the Registration Statement and the Prospectus and such other
related matters as they may reasonably request, and the Company and the Selling
Stockholders shall have furnished to such counsel such documents as they may
request for the purpose of enabling them to pass upon such matters.
(h) Officers' Certificate. The Representatives shall have received a
certificate, dated the Closing Dates, of the Chief Executive Officer of the
Company and the Chief Financial Officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the knowledge of the
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act;
(ii) Neither any Preliminary Prospectus, as of its date, nor
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the delivery
of such certificate, included any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(iii) The representations and warranties of the Company in
this Agreement are true and correct in all material respects at and as
of the Closing Dates, and the Company has substantially complied with
all of the agreements and substantially performed or satisfied all of
the conditions on its part to be performed or satisfied at or prior to
the Closing Dates; and
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as
disclosed in or contemplated by the Prospectus, (A) there has not been
any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company, (B) the business and operations conducted by the Company
have not sustained a loss by strike, fire, flood, accident or other
calamity (whether or not insured) of such a character as to interfere
materially with the conduct of the business and operations of the
Company, (C) no legal or governmental action, suit, proceeding or
investigation is pending or threatened against the Company which is
material to the Company, whether or not arising from transactions in
the ordinary course of business, or which may materially and adversely
affect the transactions contemplated by this Agreement, (D) since such
dates and except as so disclosed, the Company has not incurred any
material liability or obligation, direct, contingent or indirect, made
any change in its capital stock (except pursuant to its Stock Incentive
Plan), made any material change in its short-term or funded debt or
repurchased or otherwise acquired any of the Company's capital stock,
(E) the Company has not declared or paid any dividend, or made any
other distribution, upon its outstanding capital stock payable to
Stockholders
27
<PAGE> 28
of record on a date prior to the Closing Dates, and (F) the Company has
not entered into any material transactions not in the ordinary course
of business.
(i) Certificate of Selling Stockholders. The Representatives shall have
received a certificate or certificates, dated the Closing Dates, of the
Attorneys-in-Fact on behalf of each of the Selling Stockholders to the effect
that as of the Closing Dates its representations and warranties in this
Agreement are true and correct as if made on and as of the Closing Dates, and
that it has performed all its obligations and satisfied all the conditions on
its part to be performed or satisfied at or prior to the Closing Dates.
(j) Additional Certificates. The Company and each of the Selling
Stockholders shall have furnished to the Representatives such additional
certificates as the Representatives may have reasonably requested as to the
accuracy, at and as of the Closing Dates, of the representations and warranties
made herein by them and as to compliance at and as of the Closing Dates by them
with their covenants and agreements herein contained and other provisions hereof
to be satisfied at or prior to the Closing Dates, and as to satisfaction of the
other conditions to the obligations of the Underwriters hereunder.
(k) Satisfaction. All opinions, certificates, letters and other
documents will be in compliance with the provisions hereunder only if they are
reasonably satisfactory in form and substance to the Representatives. The
Company will furnish to the Representatives such number of original and
conformed copies of such opinions, certificates, letters and other documents as
the Representatives shall reasonably request. If any of the conditions
hereinabove provided for in this Section 10 shall not have been satisfied when
and as required by this Agreement, this Agreement may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Dates, but SoundView shall be entitled to
waive any of such conditions.
(l) Nasdaq Listing. Prior to the Closing Date, the Stock to be issued
and sold by the Company shall have been duly authorized for listing by the
Nasdaq National Market upon official notice of issuance.
(m) Lock-up Agreements. On or prior to the Closing Date, the
Representatives shall have received from all directors, officers and beneficial
holders of the outstanding capital stock agreements, in form reasonably
satisfactory to SoundView Technology Group, Inc., stating that without the prior
written consent of SoundView Technology Group, Inc. on behalf of the
Underwriters, such person or entity will not, for a period of 180 days following
the commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of capital stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire capital
stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of capital stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of capital stock or such other securities, in cash or otherwise.
28
<PAGE> 29
10. Conditions of the Obligation of the Company. The obligation of the Company
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
11. Effective Date. This Agreement shall become effective upon execution and
delivery by all the parties hereto and the written or oral release of
notification of the effectiveness of the Registration Statement by the
Commission.
12. Termination.
(a) The Representatives shall have the right to terminate this
Agreement by giving notice to the Company as hereinafter specified at any time
at or prior to the First Closing Date or the Option Closing Date, as the case
may be, (a) if the Company or any Selling Stockholder shall have failed, refused
or been unable to perform any agreement on its part to be performed, or because
any other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in the sole reasonable judgment of the Representatives, is
material and adverse, or (b) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange, Nasdaq or the American Stock
Exchange or in the over-the-counter market by the NASD, or trading in securities
generally shall have been suspended on any such exchange or in the
over-the-counter market by the NASD, or if a banking moratorium shall have been
declared by federal or New York authorities, or (c) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (d) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in the
reasonable judgment of the Representatives makes it inadvisable or impracticable
to proceed with the offering, sale and delivery of the Shares, or (e) if there
shall have been an outbreak or escalation of hostilities or of any other
insurrection or armed conflict or the declaration by the United States of a
national emergency which, in the reasonable opinion of the Representatives,
makes it impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus. In the event of termination pursuant
to this Section 12(a) the Company shall remain obligated to pay costs and
expenses pursuant to Section 6, Section 7 and Section 13 hereof. If the Company
shall elect to prevent this Agreement from becoming effective as provided in
Section 11, the Company shall promptly notify the Representatives by telephone,
facsimile or telegraph, in each case confirmed by letter. If the Representatives
elect to prevent this Agreement from becoming effective as provided in Section
11 or to terminate this Agreement as provided in this Section 12(a), the
Representatives shall promptly notify the Company by telephone, facsimile or
telegraph, in each case confirmed by letter.
(b) In case either of the conditions specified in Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to the Representatives. Any such termination shall be without liability of the
Company to the Underwriters and without
29
<PAGE> 30
liability of the Underwriters to the Company; provided, however, that in the
event of any such termination the Company agrees to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 5 hereof.
13. Reimbursement of Underwriters. Notwithstanding any other provisions hereof,
if this Agreement shall not become effective by reason of any election of the
Company pursuant to Section 11 or shall be terminated by the Representatives
under Section 9 or Section 12(a), the Company will bear and pay the expenses
specified in Section 6 hereof and, in addition to its obligations pursuant to
Section 7 hereof, the Company will reimburse the reasonable out-of-pocket
expenses of the several Underwriters (including reasonable fees and
disbursements of counsel for the Underwriters) incurred in connection with this
Agreement and the proposed purchase of the Shares, and promptly upon demand the
Company will pay such amounts to the Representatives.
14. Substitution of Underwriters. If any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Shares hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate. If the remaining
Underwriters or substituted Underwriters are required hereby or agree to take up
all or part of the shares of Shares of a defaulting Underwriter or Underwriters
as provided in this Section 14, (a) the Company and the Selling Stockholders
shall have the right to postpone the Closing Dates for a period of not more than
seven (7) full business days in order that the Company and the Selling
Stockholders may effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (b) the respective numbers of shares to be purchased by the
remaining Underwriters or substituted Underwriters shall be taken as the basis
of their underwriting obligation for all purposes of this Agreement. Any action
taken under this Section 14 shall not relieve any defaulting Underwriter of its
liability to the Company, the Selling Stockholders or the other Underwriters for
damages occasioned by its default hereunder. Any termination of this Agreement
pursuant to this Section 14 shall be without liability on the part of any
non-defaulting Underwriter, the Selling Stockholders or the Company, except for
expenses to be paid or reimbursed pursuant to Section 6 and except for the
provisions of Section 7.
15. Notices. All communications hereunder shall be in writing and, (a) if sent
to the Underwriters, shall be mailed, delivered, transmitted by facsimile or
telegraphed and confirmed to the Representatives, c/o SoundView, 22 Gatehouse
Road, Stamford, Connecticut 06902 (facsimile: (203) 462-7257), except that
notices given to an Underwriter pursuant to Section 7
30
<PAGE> 31
hereof shall be sent to such Underwriter at the address furnished by the
Representatives, or (b) if sent to the Company, shall be mailed, delivered,
transmitted by facsimile or telegraphed and confirmed to the Company, 4250
Perimeter Park South, Suite 200, Atlanta, Georgia 30341, Attn: President
(facsimile: (770) 936-2424), with a copy to Morris, Manning & Martin, L.L.P.,
1600 Atlanta Financial Center, 3343 Peachtree Road, N.E., Atlanta, Georgia
30326, Attn: John C. Yates (facsimile (404) 365-9532) or (c) if sent to the
Selling Stockholders, shall be mailed, delivered, transmitted by facsimile or
telegraphed to the Selling Stockholders, c/o the Attorney-in-Fact, c/o __,
(facsimile: (__), with a copy to Morris, Manning & Martin, L.L.P., 1600 Atlanta
Financial Center, 3343 Peachtree Road, N.E., Atlanta, Georgia 30326, Attn: John
C. Yates (facsimile (404) 365-9532).
16. Successors. This Agreement shall inure to the benefit of and be binding upon
the several Underwriters, the Company and the Selling Stockholders and their
respective successors and legal representatives. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any person other
than the persons mentioned in the preceding sentence any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person, except that the representations, warranties,
covenants, agreements and indemnities of the Company and the Selling
Stockholders contained in this Agreement shall also be for the benefit of the
person or persons, if any, who control any Underwriter or Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, and the indemnities of the several Underwriters shall also be for the
benefit of each director of the Company, each of its officers who has signed the
Registration Statement and the person or persons, if any, who control the
Company or any Selling Stockholders within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
17. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflicts of laws.
18. Authority of Representatives. In connection with this Agreement, the
Representatives will act for and on behalf of the several Underwriters, and any
action taken under this Agreement by the Representatives will be binding on all
the Underwriters, and any action taken under this Agreement by any of the
Attorneys-in-Fact will be binding on all of the Selling Stockholders.
19. Partial Unenforceability. The invalidity or unenforceability of any section,
paragraph or provision of this Agreement shall not affect the validity or
enforceability of any other section, paragraph or provision hereof. If any
section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
20. Entire Agreement. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
21. General. In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in this
Agreement are for the
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<PAGE> 32
convenience of the parties only and will not affect the construction or
interpretation of this Agreement. This Agreement may be amended or modified, and
the observance of any term of this Agreement may be waived, only by a writing
signed by the Company, the Selling Stockholders and the Representatives.
22. Counterparts. This Agreement may be signed in two (2) or more counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
23. Attorney-in-Fact. Any person executing and delivering this Agreement as
Attorney-in-Fact for the Selling Stockholders represents by so doing that he has
been duly appointed as Attorney-in-Fact by such Selling Stockholder pursuant to
a validly existing and binding Power of Attorney which authorizes such
Attorney-in-Fact to take such action.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
TELEMATE.NET SOFTWARE, INC.
By:
-----------------------------------------
Name:
Title:
32
<PAGE> 33
SELLING STOCKHOLDERS NAMED IN SCHEDULE B
By:
-------------------------------------
Name:
As Attorney-in-Fact of
-------------
Agreed to and accepted as of the date first set forth above:
SOUNDVIEW TECHNOLOGY GROUP, INC.
J.C. BRADFORD & CO.
THE ROBINSON-HUMPHREY COMPANY, LLC
By: SoundView Technology Group, Inc.
By:
------------------------------------------------
Name:
Title:
33
<PAGE> 34
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Number of Option
Shares to be Shares to be
Name Purchased Purchased
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
SoundView Technology Group, Inc.
J.C. Bradford & Co.
The Robinson-Humphrey Company, LLC.
----------------------------------- -----------------------------------
TOTAL 3,500,000
=================================== ===================================
</TABLE>
<PAGE> 35
SCHEDULE B
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Firm Number of Option
Shares to be Shares to be
Name Sold Sold
- ----------------------------------------- ------------------------------ -------------------------------
<S> <C> <C>
David H. Couchman 0 90,000
============================== ===============================
Melanie Noble-Couchman 0 10,000
============================== ===============================
Richard L. Mauro 90,000 0
============================== ===============================
L. Mark Newton 40,000 0
============================== ===============================
Raphael McAbee-Reher 50,000 0
============================== ===============================
John P. O'Reilly 12,000 0
============================== ===============================
Sirrom Investments, Inc. 24,000 0
============================== ===============================
============================== ===============================
TOTAL 216,000 100,000
============================== ===============================
</TABLE>
<PAGE> 36
DRAFT OF JULY 21, 1999
SCHEDULE C
LOCK-UP AGREEMENT
SoundView Technology Group, Inc.
J.C. Bradford & Co.
The Robinson-Humphrey Company, LLC
c/o SoundView Technology Group, Inc.
22 Gatehouse Road
Stamford, Connecticut 06902
Ladies and Gentlemen:
The undersigned is a director, officer and/or securityholder of
TELEMATE.NET SOFTWARE, Inc. (the "Company") and wishes to facilitate the
proposed initial public offering (the "Offering") of the Company's common stock
("Common Stock") pursuant to a registration statement on Form S-1 (the
"Registration Statement") to be filed with the Securities and Exchange
Commission (the "SEC").
The undersigned recognizes and agrees that the Offering will benefit
the undersigned as a director, officer or securityholder of the Company. In
consideration of the foregoing, and in order to induce the several underwriters
to act as such in connection with the Offering, the undersigned hereby
irrevocably agrees not to, directly or indirectly, offer, sell, contract to
sell, transfer the economic risk of ownership in, make any short sale, pledge,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended, grant any option to sell,
transfer or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock, or publicly announce the undersigned's intention to do any
of the foregoing, without the prior written consent of SoundView Technology
Group, Inc., ("SoundView") for a period commencing on the date hereof and
terminating one hundred eighty (180) days after the effective date of the
Registration Statement (the "Lock-Up Period"); provided, however, that shares of
Common Stock purchased by the undersigned in the public market after the
Offering, and any shares of Common Stock issuable upon exercise of [EMPLOYEE]
stock options issued in accordance with the terms of the Company's [1999] Stock
Incentive Plan, as disclosed in the Registration Statement, shall not be subject
to this agreement.
Notwithstanding the foregoing, if the undersigned is an individual, he
or she may transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock either during his or her lifetime
or on death by will or intestacy to his or her immediate family or to a trust if
the beneficiaries of such trust are exclusively the undersigned and/or a member
or members of his or her immediate family; provided, however, that prior to any
such transfer each transferee shall execute an agreement, satisfactory to
SoundView, pursuant to which each transferee shall agree to receive and hold
such shares of Common Stock,
<PAGE> 37
or securities convertible into or exchangeable or exercisable for Common Stock,
subject to the provisions hereof, and there shall be no further transfer except
in accordance with the provisions hereof. In addition, if the undersigned is a
partnership, the partnership may transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock to a
partner of such partnership, to a retired partner of such partnership, or to the
estate of any such partner or retired partner, and any such partner who is an
individual may transfer such shares of Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock by gift, will or intestacy
to a member or members of his or her immediate family; provided, however, that
prior to any such transfer each transferee shall execute an agreement,
satisfactory to SoundView, pursuant to which each transferee shall agree to
receive and hold such shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, subject to the provisions hereof,
and there shall be no further transfer except in accordance with the provisions
hereof. For purposes of this paragraph, "immediate family" shall mean spouse,
lineal descendant, father, mother, brother or sister of the transferor.
In addition, the undersigned agrees that, without the prior written
consent of SoundView, the undersigned will not, during the Lock-Up Period, make
any demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
The undersigned confirms that he or she understands that the
underwriters of the Offering and the Company will rely upon the representations
set forth in this agreement in proceeding with the Offering. The undersigned
further confirms that this agreement is irrevocable and shall be binding upon
the undersigned's heirs, legal representatives, successors and assigns so long
as the closing of the Offering occurs on or prior to __, 1999. The undersigned
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of Common Stock or other
securities of the Company held by the undersigned except in compliance with this
agreement.
Dated: ___________, __ 1999.
Name of Securityholder
By:
----------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 5.1
[MORRIS, MANNING & MARTIN LETTERHEAD]
ATTORNEYS AT LAW
1600 ATLANTA FINANCIAL CENTER
3343 PEACHTREE ROAD, N.E.
ATLANTA, GA 30326-1044
TELEPHONE 404-233-7000
FACSIMILE 404-365-9532
September 2, 1999
Telemate.Net Software, Inc.
4250 Perimeter Park South
Suite 200
Atlanta, Georgia 30341
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for Telemate.Net Software, Inc., a Georgia
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
S-1 (File No. 333-81443) (the "Registration Statement"), of a proposed offering
of an aggregate of 3,500,000 shares (the "Shares") of the Company's authorized
common stock, par value $.01 per share (the "Common Stock"), of which 3,284,000
Shares are to be sold by the Company and 216,000 Shares are to be sold by
certain selling shareholders (the "Selling Shareholders") named in the
Registration Statement. In addition, the Company and certain of the Selling
Shareholders have granted to the underwriters an option to purchase up to
525,000 shares of Common Stock to cover over-allotments, if any (the
"Over-Allotment Shares").
We have examined and are familiar with originals or copies (certified
or otherwise identified to our satisfaction) of such documents, corporate
records, and other instruments relating to the incorporation of the Company and
to the authorization and issuance of the outstanding shares of Common Stock, the
Shares and the Over-Allotment Shares to be sold by the Company and the Selling
Shareholders, as appropriate, as we have deemed necessary and advisable.
Based upon the foregoing and having regard for such legal
considerations that we have deemed relevant, it is our opinion that:
1. The 216,000 Shares to be sold by the Selling Shareholders
are legally and validly issued, fully paid and nonassessable.
The 3,284,000 Shares to be issued and sold by the Company
will be, upon issuance, sale and delivery as contemplated in
the Registration Statement, legally and validly issued, fully
paid and nonassessable.
2. The Over-Allotment Shares to be sold by the Selling
Shareholders upon the exercise of the over-allotment option by
the Underwriters are legally and validly issued, fully paid
and nonassessable, and the Over-Allotment Shares to be sold by
the Company upon the exercise of the over-allotment option by
the Underwriters will be, upon
<PAGE> 2
September 2, 1999
Page 2
issuance, sale and delivery as contemplated in the
Registration Statement, legally and validly issued, fully paid
and nonassessable.
We hereby consent to the filing of this Opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in the Registration Statement.
Respectfully,
MORRIS, MANNING & MARTIN, L.L.P.
/s/ John C. Yates, a Partner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors and Shareholders
Telemate.Net Software, Inc.:
The audits referred to in our report dated June 18, 1999, except as to Note 1c
which is as of September 2, 1999, included the related financial statement
schedule as of December 31, 1998, and for each of the years in the three-year
period ended December 31, 1998, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, this financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Atlanta, GA
September 2, 1999
/s/ KPMG LLP
KPMG LLP
<PAGE> 1
Exhibit 99.1
Consent
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned
hereby consents to all references to him in the Registration Statement on Form
S-1, including any amendments thereto (each a "Registration Statement") of
Telemate.Net Software, Inc., and the prospectus included therein, including,
without limitation, any references under the heading "Management" to the
undersigned serving as a future director of Telemate.Net Software, Inc. I also
grant my permission to include a copy of this consent as a part of any
Registration Statement.
September 1, 1999 /s/ Murali Anantharaman
------------------------------
Murali Anantharaman
<PAGE> 1
Exhibit 99.2
AFFIDAVIT
A. AUTHORIZED REPRESENTATIVE: I HEREBY AFFIRM THAT I am the Chief
Executive Officer and President and duly authorized representative of
Telemate.Net Software, Inc. (the "Company") and that I possess the
legal authority to make this Affidavit on behalf of myself and the
Company.
B. CERTIFICATION OF OMISSION OF CONSENT: I FURTHER AFFIRM THAT the Company
has identified Mr. James C. Davis as a future director of the Company.
Pursuant to Rule 438 of Regulation C under the Securities Act of 1933,
as amended, under which a person chosen to become a director is to file
a consent with a registration statement, the Company made all
reasonable efforts to contact Mr. Davis, but has been unable to contact
Mr. Davis to obtain his consent. The Company believes Mr. Davis is
travelling. It is therefore impractical for the Company to obtain an
executed consent from Mr. Davis to file with the registration
statement. The Company is continuing its efforts to locate Mr. Davis to
obtain such consent, and when such consent is obtained, shall forthwith
file Mr. Davis' consent with the Securities and Exchange Commission.
C. ACKNOWLEDGMENT: I ACKNOWLEDGE THAT this Affidavit is to be furnished to
the Securities and Exchange Commission.
I DO SOLOMNLY DECLARE AND AFFIRM UNDER THE PENALTIES OF PERJURY THAT
THE CONTENTS OF THIS AFFIDAVIT ARE TRUE AND CORRECT TO THE BEST OF MY KNOWLEDGE,
INFORMATION AND BELIEF.
TELEMATE.NET SOFTWARE, INC.
/s/ Richard L. Mauro
--------------------------------------------
By: Richard L. Mauro
Chief Executive Officer and President
(Authorized Representative and Affiant)
Date: September 2, 1999
<PAGE> 1
Exhibit 99.3
Consent
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned
hereby consents to all references to him in the Registration Statement on Form
S-1, including any amendments thereto (each a "Registration Statement") of
Telemate.Net Software, Inc., and the prospectus included therein, including,
without limitation, any references under the heading "Management" to the
undersigned serving as a future director of Telemate.Net Software, Inc. I also
grant my permission to include a copy of this consent as a part of any
Registration Statement.
September 1, 1999 /s/ J. Lawrence Bradner
--------------------------------
J. Lawrence Bradner
