<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
WITNESS SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 23-2518693
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
1105 SANCTUARY PARKWAY
ALPHARETTA, GEORGIA 30004
(770) 754-1900
(Address, including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
---------------------
DAVID B. GOULD
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
WITNESS SYSTEMS, INC.
1105 SANCTUARY PARKWAY
ALPHARETTA, GEORGIA 30004
(770) 754-1900
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN C. YATES, ESQ. BRYAN E. DAVIS, ESQ.
JEFFREY L. SCHULTE, ESQ. MARC L. HARRISON, ESQ.
VIPANJ B. PATEL, ESQ. ASHLEY E. HUFFT, ESQ.
MORRIS, MANNING & MARTIN, LLP ALSTON & BIRD LLP
1600 ATLANTA FINANCIAL CENTER ONE ATLANTIC CENTER
3343 PEACHTREE ROAD, NE 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30326-1044 ATLANTA, GEORGIA 30309-3424
</TABLE>
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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $0.01 per share................... $60,000,000 $16,680
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 BECOMES EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 22, 2000
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by Witness Systems, Inc.
We are selling shares of common stock. The estimated initial
public offering price is between $ and $ per share.
------------------
Prior to this offering, there has been no public market for the common
stock. The shares of common stock have been proposed to be listed for quotation
on the Nasdaq National Market under the symbol WITS.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Witness Systems, before expenses................ $ $
</TABLE>
Witness Systems has granted the underwriters an option for a period of 30
days to purchase up to additional shares of common stock.
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------
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.
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
, 2000
<PAGE> 3
Artwork Depicted in Prospectus
1. Inside front page gate-fold portrays the following: Title bar at the top of
page states: "Recording, evaluating & analyzing" underneath which is an
indented title bar stating "Multimedia Customer Interactions". On the far
left of the page a column of text states:
"For companies striving to optimize the effectiveness of their
relationships across customer "touch points," such as Web chat and
telephone interactions, Witness Systems allows organizations to record
customer contacts and analyze their customer relationship management, CRM
processes. Conventionally adopted to evaluate the performance of customer
sales/service representatives within contact centers, organizations are
increasingly using software from Witness Systems to optimize their customer
relationships.
As call centers continue evolving into multimedia contact centers,
RECORDING, EVALUATING AND ANALYZING MULTIMEDIA CUSTOMER INTERACTIONS IS FAST
BECOMING MISSION CRITICAL, especially as they are confronted increasingly
with the challenges of Internet business. Smart companies are recording
customer interactions, and then analyzing and exploring that information for
a more intimate understanding of the customer, creating a competitive
advantage.
We believe our solutions form the information backbone of the customer
interaction center evaluating departments, systems, and people throughout
the enterprise. For a growing company with a single installation or global
organizations with multiple deployments around the world, Witness
Systems has the product depth and flexibility to meet their needs."
In the center of the page are three concentric circles each with a line of
text. The text in the center circle states: "Witness System". On the top the
first layered circle text states: "Performance Analyzer". On the left side
of the second layered circle text states: "telephone...Web chat...E-mail...
E-commerce." On the right side of the third concentric circle text states:
"optimizing customer relationships." Three boxes of text extend from the
left side of the circle diagram. The text in the top box states:
"Customers". The text in the second box states "Campaigns". The text in the
third and bottom box states "Products". Below the bottom box of text is the
stylized Witness Systems logo. Underneath the logo are three lines of text
stating "WITNESS SYSTEMS INC," "www.witsys.com," and "(c) 1999 Witness
Systems Inc." Four triangles extend from the right side of the circle
diagram. At the end of the first triangle text states: "improve customer
loyalty. At the end of the second triangle text states: "increase revenue
opportunities." At the end of the third triangle text states: "enhance
profitability." At the end of the fourth triangle text states "improve
quality of services." On the top right corner of the page is the stylized
Witness logo. Lightly shaded strings of numerals are embedded in the
background of the page.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 36
Management.................................................. 50
Related Party Transactions.................................. 58
Principal Stockholders...................................... 60
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 65
Underwriting................................................ 67
Legal Matters............................................... 69
Experts..................................................... 69
Additional Information...................................... 70
Index to Consolidated Financial Statements.................. F-1
</TABLE>
In this prospectus, "Witness Systems," "us," and "our" refer to Witness
Systems, Inc. and its subsidiaries, unless the context otherwise requires.
WITNESS(R) and the WITNESS logo are our registered trademarks. This
prospectus also includes trademarks, service marks and trade names of other
companies.
<PAGE> 5
PROSPECTUS SUMMARY
The summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all the information you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the financial statements, before making
an investment decision.
WITNESS SYSTEMS
We are a leading provider of recording and analysis software that enables
companies to enhance their customer interactions across multiple communications
media. Our software is designed to enable companies to optimize their customer
relationship management, or CRM. As a result, we believe our customers are able
to generate additional revenue opportunities, improve profitability, enhance
customer retention and achieve greater customer intimacy.
Our WITNESS software is designed to enable customer contact centers within
a company to record and evaluate complete customer interactions through multiple
communications media, such as telephone and Web chat. Our software records
customer service representative, or CSR, voice interactions with a customer as
well as the CSR's corresponding computer desktop activities, such as data entry,
screen navigation and data retrieval. By capturing both voice and computer
desktop activity and synchronizing them during replay, a company can observe and
analyze complete customer interactions as they actually occurred. Supporting the
need for Web-based customer interactions driven by the growth of the Internet
and eCommerce, WITNESS enables companies to also capture, evaluate and analyze
Web chat sessions. In addition, our software allows companies to selectively
record and analyze customer interactions based on business criteria which they
define, such as key customers, important marketing campaigns, specific products
and selected CSRs.
We currently provide our software to an extensive base of large companies
with multiple contact centers, including American Express, Bank of America, Bell
Atlantic Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS,
Federal Express, Federated Department Stores, General Motors/Saturn, GTE, MCI
WorldCom, Merck-Medco, Pepsi, Sabre, Southern Company, VISA, Wells Fargo and
Xerox. As of November 1, 1999, we had licensed our software to over 100
customers at over 300 sites.
THE MARKET OPPORTUNITY
The rapid growth of the Internet and eCommerce permits customers to easily
change vendors at relatively low cost, thereby increasing the importance
companies place on their customer relationships. Because companies are
increasingly focused on attracting and retaining customers, companies are
seeking CRM products and services that enhance their direct customer
interactions. According to a recent press release, AMR Research, Inc. predicts
that the market for CRM-related technology will grow at a compound annual rate
of 49% over the next five years, exceeding $16.8 billion by 2003.
To understand and improve customer relationships, companies must first
improve specific business processes which involve a high degree of direct
customer interaction. Today, a majority of a company's direct customer
interactions occur through contact centers. PELORUS Group estimates that by the
end of 2003, the number of installed call center systems will exceed 117,000,
with the number of agents reaching approximately 5.3 million. As a result of
this widespread market adoption, companies have increased their focus on
developing and improving the efficiency of their contact center operations.
While a number of applications have emerged to attempt to address the need
to better manage increasingly complex types of customer interactions, such as
telephone, Web chat and e-mail, we believe that most currently available
solutions do not provide active recording, evaluation and analysis of CSR
performance. As a result, we believe that there is a significant opportunity for
a comprehensive, integrated solution which optimizes a company's customer
interactions.
1
<PAGE> 6
OUR SOLUTION
We believe our software provides our customers with the following key
business benefits:
- Increases revenue opportunities. Our software enables companies to
customize sales and marketing efforts to individual customer preferences,
improve the selling techniques of CSRs and sell additional complementary
or higher-end products and services to existing customers.
- Improves profitability. Our software enables companies to increase
profitability by improving the efficiency of CSRs and by reducing costs
associated with customer and CSR turnover.
- Enhances customer retention. Using our software, companies can develop
more intimate knowledge of their customers, which should improve the
overall quality of the products and services being delivered to customers
and facilitate longer-term, more profitable customer relationships.
We believe that we are able to provide these key business benefits through
the innovative features of our software solution, which include the following:
- Enables synchronized replay of voice and computer desktop data. Our
software captures both voice and computer desktop activity and enables
synchronized replay, which allows companies to observe and analyze
complete customer interactions as they actually occurred.
- Records based on company-selected criteria. Our software allows
companies to selectively record and analyze customer interactions based
on business criteria which they define, such as key customers, important
marketing campaigns, specific products and selected CSRs.
- Provides CSR performance analysis and feedback. Our software facilitates
the evaluation and analysis of CSR performance through easy-to-use
reports, graphs and tables.
- Integrates with third party software and hardware. Our software is
designed to integrate with a variety of third party software, such as CRM
and enterprise resource planning applications, and with existing
telephony and computer network hardware and software.
- Provides an open architecture that scales to support small to large
installations. Our software is developed to operate on the Windows NT
platform and is compatible with standard voice cards and databases. It is
also designed to support the needs of small single site installations, as
well as large multi-site installations.
- Enables rapid deployment. Our software can typically be used in
production at a customer's initial site within 30 to 45 days, and at
additional sites for that customer in five to seven days.
OUR STRATEGY
Our objective is to be the leading provider of software that enables
companies to optimize their customer interactions across a variety of
communications media, including telephone, Web chat, eCommerce, Internet
self-service and e-mail. Key elements of our strategy include:
- extend the breadth and depth of our product offerings;
- increase sales to existing and new customers;
- expand our network of application software and Internet infrastructure
business alliances; and
- expand our international presence.
Our headquarters are located at 1105 Sanctuary Parkway, Suite 210,
Alpharetta, Georgia 30004, our telephone number is (770) 754-1900 and our Web
site address is www.witsys.com. We were originally incorporated in Georgia in
1988 and reincorporated in Delaware in 1997. Information contained on our Web
site does not constitute part of this prospectus, and you should rely only on
the information contained in this prospectus in deciding whether to invest in
our common stock.
2
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C> <C>
Common stock offered by Witness Systems................. shares
Common stock to be outstanding after this offering...... shares
Use of proceeds......................................... For repayment of debt, working capital,
product development, expansion of sales
and marketing capabilities and
potential acquisitions of products,
technologies and businesses. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.................. WITS
</TABLE>
The number of shares to be outstanding after this offering is based on the
number of shares outstanding as of November 1, 1999 and does not include the
following:
- 1,370,830 shares of common stock issuable under options outstanding as of
November 1, 1999 with a weighted average exercise price of $2.78 per
share;
- 85,000 shares of common stock that could be issued upon the exercise of
warrants outstanding as of November 1, 1999 with a weighted average
exercise price of $4.65 per share; and
- 294,579 shares of common stock that could be issued under our stock
incentive plan. On November 18, 1999, we reserved for issuance, subject
to our stockholders' approval, an additional 865,200 shares of common
stock under our amended and restated stock incentive plan and 550,000
shares of common stock under our employee stock purchase plan.
---------------
Except as otherwise indicated, all information in this prospectus:
- reflects the payment of preferred stock dividends in the form of
additional shares of our preferred stock and the conversion of each
outstanding share of our preferred stock into one share of our common
stock, which will occur immediately before the completion of this
offering;
- reflects a for stock split, which will occur immediately
before the completion of this offering;
- reflects the amendment and restatement of our certificate of
incorporation and bylaws, which will occur immediately before the
completion of this offering;
- assumes no exercise of the underwriters' over-allotment option; and
- assumes the initial public offering price of our common stock will be
$ per share.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the consolidated financial data for our
business. You should read this information together with the consolidated
financial statements and the related notes appearing at the end of this
prospectus and the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds." For an
explanation of the determination of the number of shares used to compute
historical and pro forma basic and diluted net loss per share , see note 1(l) of
the notes to our consolidated financial statements. The pro forma consolidated
balance sheet data summarized below gives effect to the payment of preferred
stock dividends in the form of additional shares of our preferred stock and the
conversion of each outstanding share of our preferred stock into one share of
our common stock, which will occur immediately before the completion of this
offering as if the conversion occurred on September 30, 1999. The pro forma as
adjusted consolidated balance sheet data summarized below also reflects the sale
of the common stock offered by us at an assumed initial offering price of $
per share, after deducting underwriting discounts and estimated offering
expenses payable by us, and our receipt and application of the net proceeds from
the offering.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License............................... $ 764 $ 3,775 $ 8,507 $ 5,595 $10,811
Services.............................. 425 1,138 2,444 1,657 4,079
Hardware.............................. 632 1,271 2,171 1,750 46
------- ------- ------- ------- -------
Total revenues................ 1,821 6,184 13,122 9,002 14,936
------- ------- ------- ------- -------
Gross profit............................ 249 3,242 7,804 4,926 12,036
Acquired in-process research and
development........................... -- -- -- -- 3,506
Operating loss.......................... (2,195) (2,275) (4,913) (4,053) (6,240)
Net loss................................ $(2,191) $(2,213) $(4,944) $(4,079) $(6,560)
======= ======= ======= ======= =======
Net loss applicable to common
stockholders.......................... $(2,191) $(2,297) $(5,446) $(4,156) $(7,650)
======= ======= ======= ======= =======
Historical net loss per share -- basic
and diluted........................... $ (0.38) $ (0.57) $ (1.41) $ (1.03) $ (2.13)
======= ======= ======= ======= =======
Shares used in computing historical net
loss per share -- basic and diluted... 5,726 4,021 3,869 4,025 3,596
======= ======= ======= ======= =======
Pro forma net loss per share -- basic
and diluted........................... $ (0.66) $ (0.77)
======= =======
Shares used in computing pro forma net
loss per share -- basic and diluted... 7,444 8,495
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 52 $ 52 $
Working capital deficit..................................... (2,248) (2,248)
Total assets................................................ 8,919 8,919
Long-term debt, less current portion........................ 2,210 2,210
Stockholders' (deficit) equity.............................. (24,672) (2,559)
</TABLE>
4
<PAGE> 9
RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks, as well as other risks and uncertainties that are not yet
identified or that we currently believe are immaterial, could harm our business,
financial condition and results of operations and could result in a complete
loss of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE NOT ACHIEVED PROFITABILITY AND WILL CONTINUE TO INCUR NET LOSSES FOR THE
NEXT SEVERAL QUARTERS AND POSSIBLY LONGER
We have incurred substantial losses since our inception and expect to
continue to suffer losses for the next several quarters and possibly longer. In
every fiscal period since we began operations, our business has not experienced
sufficient cash flow to fund our operations without acquiring capital from other
sources. As a result of our accumulated operating losses, as of September 30,
1999, we had an accumulated deficit of approximately $24.7 million. In addition,
we expect to continue to devote substantial resources to research and
development, professional services and sales and marketing activities. As a
result, we will need to generate significant revenues to achieve and sustain
profitability in any future period, and we may not be able to do so. If we fail
to achieve profitability within the time frame expected by investors, it may
materially and adversely affect the market price of our stock.
OUR QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS ARE LIKELY TO FLUCTUATE,
WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE
Our quarterly revenues, expenses and operating results could vary
significantly from period to period. In particular, we derive a significant
portion of our software license revenue in each quarter from a small number of
relatively large orders. A delay in the recognition of revenues from one of
these orders may cause our results of operations during a quarter to be lower
than we expect. Furthermore, a significant portion of our revenues are often
recognized near quarter end. The delay or failure to close anticipated sales in
a particular quarter could reduce our revenues in that quarter and subsequent
quarters over which revenues for the sale would likely be recognized. In
addition, because our revenues from implementation, maintenance and training
services largely correlates with our license revenues, a decline in license
revenues could also cause a decline in our services revenues in the same quarter
or in subsequent quarters. Our revenues, expenses and operating results may vary
significantly in response to the risk factors described in this section, as well
as the following factors, some of which are beyond our control:
- a decrease in demand for our software or, more generally, for products
that record and analyze the interactions between a business and its
customers;
- announcements or introductions of new products and services by our
competitors;
- product pricing decisions by our competitors;
- our ability to develop, market and manage new software, software
enhancements and services;
- the deferral of orders for our software or delays in the implementation
of our software from one quarter to a later quarter;
- how quickly we are able to develop new software, software enhancements
and services that our customers require;
- how much money we have to spend to improve our software, services and
operations;
5
<PAGE> 10
- customer delays in purchasing our software or services in late 1999 and
early 2000 due to Year 2000 concerns;
- the lengthiness and unpredictability of sales cycles for our software;
- the mix of revenue generated by software licenses and related services;
- the timing and size of our capital expenditures and changes in our
working capital; and
- general economic factors and changes in technology that could cause our
existing and potential customers to decrease what they spend on customer
relationship management software.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results may not be a good indication of our future
performance, and you should not rely on them to predict our future performance
or the future performance of our stock price. If our future revenues or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock would likely decline.
SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE MAY AFFECT OUR QUARTERLY REVENUES
The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenues. We believe that these fluctuations
are caused in part by customer buying patterns, which are influenced by year-end
budgetary pressures and by sales force commission structures. As our revenues
grow, seasonal fluctuations in our revenues may become more evident.
WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR REVENUES,
PROFITABILITY AND MARKET SHARE
The market for products that record and analyze customer interactions is
intensely competitive and experiences rapid changes in technology. We believe
our principal competitors include, but are not limited to:
- quality monitoring suppliers to the contact center industry;
- traditional call-logging vendors;
- systems integrators and consulting firms; and
- new, larger and more established entities that may acquire, invest
in or form joint ventures with providers of recording or performance
enhancing software solutions.
Many of our current and potential competitors have longer operating
histories, more established business relationships, larger customer bases, a
broader range of products and services, greater name recognition and
substantially greater financial, technical, marketing, personnel, management,
service, support and other resources than we do. This could allow our current
and potential competitors to respond more quickly than we can to new or emerging
technologies and changes in customer requirements, better take advantage of
acquisitions and other opportunities, devote greater resources to the marketing
and sale of their products and services and adopt more aggressive pricing
policies. In addition, many of our competitors market their products through
resellers and companies that integrate their technology and products with those
of the competitor. These resellers and technology partners of our competitors
often have strong business relationships with our customers and potential
customers. Our competitors may use these business relationships to market and
sell their products and compete for customers with us. We cannot assure you that
our competitors will not offer or develop products and services that are
superior to ours.
In addition, we have developed, and intend to continue to develop,
relationships with companies that resell our software and companies that provide
us with customer referrals or leads.
6
<PAGE> 11
We engage in joint marketing and sales efforts with these companies, and rely on
them for recommendations of our software during the evaluation stage of the
purchase process. When we enter into agreements with these companies, the
agreements are not exclusive and may ordinarily be terminated by either party.
Some of these companies have similar, and often more established, relationships
with our competitors, and may recommend the products and services of our
competitors to customers instead of our software and services. In addition,
through their relationships with us, these companies could learn about our
software and the market for our software and services and could develop and sell
competing products and services. As a result, our relationships with these
companies could lead to increased competition for us.
Our software must integrate with software and hardware solutions provided
by a number of our existing and potential competitors. These competitors or
their business partners could alter their products so that our software no
longer integrates well with them, or they could delay or deny our access to
software releases that allow us to timely adapt our software to integrate with
their products. They could thus effectively prevent us from modifying our
software to keep pace with the changing technology of their products. If we
cannot adapt our software to changes in our competitors' technology, it may
significantly impair our ability to compete effectively, particularly if our
software must integrate with the software and hardware solutions of our
competitors.
We expect that competition will increase as other established and emerging
companies enter our market and as new products, services and technologies are
introduced. Increased competition may result in price reductions, lower gross
margins and loss of our market share. This could materially and adversely affect
our business, financial condition and results of operations.
OUR SOFTWARE HAS A LONG SALES CYCLE WHICH MAKES IT DIFFICULT TO PLAN OUR
EXPENSES AND FORECAST OUR RESULTS
Although it typically takes three to six months from the time we qualify a
sales lead until we sign a contract with the customer, we occasionally
experience a longer sales cycle. It is therefore difficult to predict the
quarter in which a particular sale will occur. If our sales cycle unexpectedly
lengthens for one or more large orders or a significant number of small orders,
it would adversely affect the timing of our revenues and the timing of our
corresponding expenditures. This could harm our ability to meet our financial
forecasts for a given quarter. Our customers' decisions regarding their purchase
of our software and services is relatively long due to several factors,
including:
- the complex nature of our software;
- our need to educate potential customers about the uses and benefits of
our software;
- the investment of money and other resources required by customers to
purchase and implement our software;
- customers' budget cycles and operating activities, which affect the
timing of their purchases;
- the competitive evaluation and internal approval process many of our
customers undertake before purchasing our software and services;
- delayed purchases due to announcements or planned introductions of new
software or software enhancements by us or our competitors; and
- the length of time some of our larger customers require to make a
decision to purchase our software and services.
7
<PAGE> 12
IF WE FAIL TO DEVELOP NEW SOFTWARE OR IMPROVE OUR EXISTING SOFTWARE TO MEET OR
ADAPT TO THE CHANGING NEEDS AND STANDARDS OF OUR TARGET MARKET, SALES OF OUR
SOFTWARE AND SERVICES MAY DECLINE
Our future success depends upon our ability to develop and introduce new
software and software enhancements which meet the needs of companies seeking to
record and analyze their interactions with customers. To achieve increased
market acceptance of our software and services, we must, among other things,
continue to:
- improve our existing software and introduce new software solutions;
- incorporate new technology into our software and services on a timely and
cost-effective basis;
- keep pace with the products and services of our competitors;
- satisfy the changing requirements of our current and potential customers;
- improve the effectiveness of our software, particularly in
implementations involving very large databases and large numbers of
simultaneous users;
- enhance our software's ease of administration;
- improve our software's ability to extract data from existing software
systems; and
- adapt to rapidly changing computer operating system, database and
software platform standards and Internet technology.
We may require substantial product development expenditures and lead-time
to keep pace and ensure compatibility with new technology in our industry. If we
fail to develop and introduce new software and enhancements for our existing
software, our software and services may not achieve market acceptance and we may
be unable to attract new customers. We may also lose existing customers, to whom
we seek to sell additional software and services. Also, we have only recently
released our WITNESS software that permits recording and analysis of Web chat
interactions. To date, we have not received any revenues from our Web chat
enabled software and cannot assure you that we will derive revenues from it in
the future.
We believe that our future success also depends upon the continued ability
of our software to work with the products and other technologies offered by
other software and hardware companies. New products may not be compatible with
our software, but may be compatible with the products of our competitors. In
addition, industry standards may not be established, or we may not be able to
conform to new standards in a timely fashion to remain competitive. Our failure
to conform to prevailing technology standards in our industry could limit our
ability to compete and adversely affect our business.
IF THE MARKET IN WHICH WE SELL OUR SOFTWARE AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, WE WILL BE UNABLE TO CONTINUE OUR GROWTH
The market for CRM software, including software that records and analyzes
customer interactions, is still emerging. If the market for this software does
not grow as quickly or become as large as we anticipate, we may not be able to
continue our growth or may grow more slowly than expected. Continued growth in
demand for this software remains uncertain because our potential customers may:
- not understand the benefits of using CRM software generally or, more
specifically, software which records and analyzes the interactions
between a business and its customers;
- not achieve favorable results using this software;
- experience technical difficulty in implementing this software; or
8
<PAGE> 13
- use alternative methods to solve the same business problems this software
is intended to address.
In addition, our software is designed to address the needs of contact
centers. If the number of contact centers does not increase as we expect, or if
it grows more slowly than we anticipate, we may not be able to continue our
growth or may grow more slowly than expected.
WE RELY HEAVILY ON SALES OF OUR WITNESS SOFTWARE
Our financial performance has depended, and will continue to depend, on our
ability to develop and maintain market acceptance of our WITNESS software and
new and enhanced versions of it. Substantially all of our revenues have been
derived from sales of our WITNESS software, and we expect revenues from WITNESS
to continue to account for substantially all of our revenues for the foreseeable
future. As a result, factors which adversely affect the pricing or demand for
WITNESS, such as competitive pressures, technological change or evolution in
customer preferences, could materially and adversely affect our business,
financial condition and results of operations. Many of these factors are beyond
our control and difficult to predict.
IF OUR INTERNAL PROFESSIONAL SERVICES EMPLOYEES DO NOT PROVIDE INSTALLATION
SERVICES EFFECTIVELY AND ACCORDING TO SCHEDULE, IT COULD HARM OUR BUSINESS
Customers that license our products ordinarily purchase installation,
training and maintenance services, which they typically obtain from our internal
professional services organization. We believe that the speed and quality of
installation services is a competitive factor in our industry. If our
installation services are not satisfactory to our customers, the customers may
choose to not use our implementation services to install software they license
from us. In addition, these customers may determine that they will not license
our software and instead will use the products and services of one of our
competitors. If this happens, we would lose licensing and services revenues from
these customers, and it would likely harm our reputation in the industry in
which we compete. This could materially and adversely affect our business,
financial condition and results of operations.
IF WE NEED ADDITIONAL FINANCING TO MAINTAIN OR EXPAND OUR BUSINESS, IT MAY NOT
BE AVAILABLE ON FAVORABLE TERMS, OR AT ALL
Although we believe that the net proceeds from this offering, together with
our current cash and borrowing capacity, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months, we expect to incur net losses for the foreseeable future and
may need additional funds to expand or meet all of our operating needs. If we
need additional financing, we cannot be certain that it will be available to us
on favorable terms, or at all. Further, if we raise additional funds by issuing
equity securities, your ownership interest could be significantly diluted, and
any additional equity securities we issue may have rights, preferences or
privileges senior to your rights. Also, the terms of any additional financing we
obtain may significantly limit our future financing and operating activities. If
we need funds and cannot raise them on acceptable terms, we may be forced to
sell assets or seek to refinance our outstanding obligations. We may also be
unable to:
- develop and enhance our software to remain competitive;
- take advantage of future opportunities, such as acquisitions; or
- respond to changing customer needs and our competitors' innovations.
Any of these events could significantly harm our business and financial
condition and limit our growth.
9
<PAGE> 14
IF WE DO NOT CONTINUE TO EXPAND THE DISTRIBUTION OF OUR PRODUCTS THROUGH DIRECT
AND INDIRECT SALES CHANNELS, OUR BUSINESS WILL SUFFER
To expand our market share and revenues, attract new customers and increase
sales to existing customers, we will need to expand our direct and indirect
channels of distribution. Although we have historically received more that 90%
of our revenues from direct sales, we will require an increase in our direct
sales to achieve our growth plans. To accomplish this, we will need to expand
our direct sales force by hiring additional sales personnel and management, and
increase the number of relationships we have with companies that provide us with
customer referrals or leads for new business. We cannot assure you that we will
be able to hire the necessary sales personnel and management on reasonable
terms, or at all. Moreover, we will be required to train any new personnel, and
the new personnel may not reach full productivity for a long period of time.
We also intend to derive revenues from our indirect sales channel through
relationships with companies that resell our software. In particular, we intend
to use resellers to increase our sales internationally and to market our
software to small and medium contact centers.
To date, we have entered into agreements with only a small number of
companies that resell our software and companies that provide us with customer
referrals. When we enter into agreements with these companies, they are not
exclusive and may ordinarily be terminated by either party. Some of these
companies have similar, and often more established, relationships with our
competitors, and may recommend the products and services of our competitors to
customers instead of our software and services. We cannot assure you that we
will be able to maintain these relationships or that we will be able to
establish similar relationships with additional companies on a timely basis, or
at all. In addition, we cannot be certain that these distribution partners will
devote adequate resources to selling our software and services. If we are unable
to maintain and expand our direct sales force and indirect distribution
channels, our business will suffer.
OUR FAILURE TO PROPERLY MANAGE OUR RAPID GROWTH COULD STRAIN OUR RESOURCES AND
ADVERSELY AFFECT OUR BUSINESS
Our business could suffer if we fail to effectively manage our growth. Our
revenues increased approximately 66% in the nine month period ended September
30, 1999 from the same period the previous year. During the nine months ended
September 30, 1999, the number of our employees increased from 96 to 155. This
growth in our revenues and number of employees has placed, and will continue to
place, a significant strain on our management, personnel, systems, controls and
other resources. To manage growth effectively, we must:
- accurately predict the growth in demand for our software and expand our
capacity and implementation services to meet that demand;
- expand and improve our operating and financial systems, procedures and
controls;
- attract, train, motivate, manage and retain key personnel;
- expand our facilities;
- successfully integrate the operations and personnel of any businesses we
acquire; and
- respond quickly and effectively to unanticipated changes in our industry.
10
<PAGE> 15
IF WE FAIL TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS, OUR REVENUE GROWTH
AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED
We intend to continue to expand our international operations in the future
through internal business expansion and strategic business relationships. In
addition to general risks associated with international expansion, such as
foreign currency fluctuations and political and economic instability, our plans
to expand internationally may be adversely affected by a number of risks,
including:
- limited development of an international market for our software and
services;
- the challenges we face in expanding and training our international sales
force and support operations;
- expenses associated with customizing products for multiple countries;
- longer payment cycles, different accounting procedures and difficulties
in collecting accounts receivable; and
- multiple, conflicting and changing governmental laws and regulations
governing intellectual property, call monitoring and the recording of
employees.
WE MAY FACE NEW AND DIFFERENT COMPETITIVE PRESSURES AS WE FURTHER EXPAND INTO
FOREIGN MARKETS, AND WE MAY NOT BE ABLE TO RESPOND EFFECTIVELY TO THESE
PRESSURES
As we further expand our operations outside the United States, we will face
new competitors and competitive environments. In addition to the risks
associated with our domestic competitors, foreign competitors may pose an even
greater risk, as they may possess a better understanding of their local markets
and better working relationships with local infrastructure providers and others.
We may not be able to obtain similar levels of local knowledge or similar
relationships in foreign markets, which could place us at a significant
competitive disadvantage.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY WOULD HARM OUR BUSINESS
Our success depends to a significant degree upon the legal protection of
our software and other proprietary technology rights. We rely on a combination
of patent, trade secret, copyright and trademark laws and confidentiality and
non-disclosure agreements with employees and third parties to establish and
protect our proprietary rights. These measures may not be sufficient to protect
our proprietary rights, and we cannot be certain that third parties will not
misappropriate our technology and use it for their own benefit. Also, most of
these protections do not preclude our competitors from independently developing
products with functionality or features substantially equivalent or superior to
our software. Any failure to protect our intellectual property could have a
material adverse effect on our business.
We currently have three registered trademarks, one patent generally
relating to our voice and data synchronization technology and data capture
technique and seven pending copyright registrations protecting our software
source code. We cannot assure you that we will file further patent, trademark or
copyright applications, that any future applications will be approved, that any
existing or future patents, trademarks or copyrights will adequately protect our
intellectual property or that any existing or future patents, trademarks or
copyrights will not be challenged by third parties. Furthermore, one or more of
our existing or future patents, trademarks or copyrights may be found to be
invalid or unenforceable. We are currently evaluating whether to revise one
aspect of the patent for our synchronization techniques. If we are unsuccessful,
we may not be able to enforce any aspect of that patent against third parties
who infringe it. We also have two patent applications pending in the United
States Patent and Trademark Office. There is no guarantee that our pending
applications will result in issued patents or, if issued, that they will provide
us with any competitive advantages.
11
<PAGE> 16
Moreover, the laws of other countries in which we market our products may
afford little or no effective protection of our proprietary technology. If we
resort to litigation to enforce our intellectual property rights, the
proceedings could be burdensome and expensive, would likely divert valuable
management and product development resources and could involve a high degree of
risk, regardless of whether we win or lose the litigation.
We rely on technology licensed from third parties, including databases,
application programming interfaces, developmental tools and software necessary
to integrate our software with third party technology and products. In addition,
third party products are bundled with our software. If we lose access to this
technology, or if it is not available to us on reasonable terms, it could cause
delays in our development and introduction of new and enhanced software until we
can obtain equivalent or replacement technology, if available, or develop this
technology internally, if feasible. If we lost access to technology that is
bundled with our software, this would require us to modify or redesign our
software and could cause a delay in our ability to market and sell our current
software, or a delay in our ability to develop, market and sell new or enhanced
software. This delay or a failure to obtain replacement technology could have a
material adverse effect on our business, financial condition and results of
operations.
CLAIMS BY OTHER COMPANIES THAT OUR SOFTWARE INFRINGES THEIR INTELLECTUAL
PROPERTY COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION
If any of our software violates the intellectual property rights of others,
we may be required to reengineer or redevelop our software, seek to obtain
licenses from third parties to continue offering our software without
substantial reengineering, or conduct studies of such intellectual property
rights so as to evaluate whether such intellectual property rights are valid or
enforceable. Any efforts to reengineer our software or obtain licenses from
third parties may not be successful, could be extremely costly and would likely
divert valuable management and product development resources. Any efforts to
study the intellectual property rights of third parties may not be successful
and could reveal that such intellectual property rights are valid and
enforceable, could be extremely costly and would likely divert valuable
management and product development resources.
In addition, in the rapidly developing technological environment in which
we operate, third parties may have filed a number of patent applications, many
of which are confidential when filed. If our software is found to violate these
patents when they are issued or any other intellectual property of others, we
may become subject to claims for infringement. An infringement claim against us
could result in the loss of our proprietary rights and, whether meritorious or
not, could be time-consuming, result in costly litigation or require us to pay
damages or enter into royalty or licensing agreements on terms that are
unfavorable to us. Royalty or licensing agreements might not be available to us
on reasonable terms or at all. As a result, any infringement claim could
materially and adversely affect our business, financial condition and results of
operations.
Approximately two years ago, we were accused of infringing a patent owned
by a third party. We undertook to study the matter, concluded that the asserted
patent was not infringed, and informed the third party of our belief that the
patent was not infringed. Following an exchange of correspondence between
September 1996 and January 1998, nothing further was heard from the patent
owner.
Although we have not exchanged correspondence with this third party since
January 1998, we cannot assure you that a renewed claim of infringement by this
third party, either with respect to the patent referred to above or another
patent or other intellectual property, or a claim of infringement by a different
patent or other intellectual property owner, will not be asserted against us in
the future. Furthermore, we expect that we and other participants in our
industry and related industries will be increasingly subject to infringement
claims as the number of competitors with patent and other intellectual property
portfolios in these industries grows. Although patent and intellectual property
disputes may be settled through licensing or similar arrangements, costs
12
<PAGE> 17
associated with these arrangements may be substantial and we cannot assure you
that necessary licenses or similar arrangements will be made available to us on
a reasonable basis or at all. Accordingly, if we become subject to an adverse
determination in a judicial or administrative proceeding or we fail to obtain
necessary licenses it could prevent us from producing and selling our software.
This would have a material adverse effect on our business, financial condition
and results of operations.
In addition, if we decide to, or are forced to, litigate any of these
claims, the litigation could be expensive and time-consuming, could divert our
management's attention from other matters, and could otherwise materially and
adversely affect our business, financial condition and results of operations,
regardless of the outcome of the litigation. Litigation and intellectual
property claims against us could also disrupt our sale of software.
Additionally, it could lead to claims by third parties against our customers and
others using our software. Our customers and these other users of our software
would likely hold us responsible for these claims and any resulting harm they
suffer.
GOVERNMENT REGULATION OF CALL MONITORING COULD ADVERSELY AFFECT US
As the telecommunications industry continues to evolve, state, federal and
foreign governments may increasingly regulate the monitoring of
telecommunications and call monitoring and recording products, such as our
software. We believe that increases in regulation could come in the form of a
number of different kinds of laws, including privacy and employment regulations.
The adoption of new laws governing the use of our software or changes made to
existing laws could cause a decline in the use of our software and could result
in increased expenses for us, particularly if we are required to modify our
software to accommodate these new or changing laws. Moreover, new laws or
changes to existing laws could subject us and our customers to liability. In
addition, whether or not these laws are adopted, if we do not adequately address
the privacy concerns of consumers, companies may be hesitant to use our
software. If any of these events occur, it could materially and adversely affect
our business.
OUR PRODUCTS MAY FAIL TO PERFORM PROPERLY, WHICH MAY CAUSE US TO INCUR
ADDITIONAL EXPENSES OR LOSE SALES
Software products as complex as ours may contain undetected errors, or
bugs, which result in product failures, or otherwise fail to perform in
accordance with our customers' expectations. Furthermore, the hardware, software
and network systems generally used in conjunction with our software,
particularly telephone standards and protocols, change rapidly. The evolution of
these standards may cause our products to function slowly or improperly. Poor
product performance may necessitate redevelopment of our product or other costly
reengineering measures which may divert our management and product development
resources and funds. Any errors or defects that are discovered after we release
new or enhanced software could cause us to lose revenue, cause a delay in the
market acceptance of our software, damage our customer relationships and
reputation and increase our service and warranty costs.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, IT WOULD CAUSE US TO INCUR
INCREASED EXPENSES AND COULD HARM OUR BUSINESS
Our future success will depend in large part on our ability to hire, train,
retain and motivate a sufficient number of qualified personnel, particularly in
sales, marketing, research and development, service and support. Competition for
personnel with the technological and other capabilities we require is intense,
and turnover of technical personnel is particularly high in our industry. If we
are unable to attract and retain qualified personnel or if we experience high
personnel turnover, it would increase our costs of operations and could
materially and adversely affect our business.
Our future success also depends upon the continued service of our executive
officers, particularly our Chairman, President and Chief Executive Officer,
David Gould. We have an
13
<PAGE> 18
employment agreement with Mr. Gould and non-compete agreements with all of our
executive officers. However, any of our executive officers and other employees
could terminate his or her relationship with us at any time. The loss of the
services of our executive officers or other key personnel could materially and
adversely affect our business. In addition, if one or more of our executive
officers or key employees were to join one of our competitors or otherwise
compete with us, it could harm our business.
WE MAY MAKE ACQUISITIONS OR INVESTMENTS THAT ARE NOT SUCCESSFUL AND THAT
ADVERSELY AFFECT OUR ONGOING OPERATIONS
We may acquire or make investments in companies, products, services and
technologies which complement our software and services. We have very limited
experience in these activities. As a result, our ability to identify prospects,
conduct acquisitions and to properly manage the integration of acquisitions is
unproven. If we fail to properly evaluate and execute acquisitions or
investments, it may seriously harm our business and operating results. In making
or attempting to make acquisitions or investments, we face a number of risks,
including:
- the difficulty of identifying and hiring one or more senior executives
with acquisition experience;
- the difficulty of identifying suitable acquisition or investment
candidates and negotiating acceptable terms for acquisitions and
investments;
- our need for additional debt or equity financings to complete any
acquisitions;
- the terms of any additional financing used to fund an acquisition may
significantly limit our future financing and operating activities;
- the potential distraction of our management, diversion of our resources
and disruption of our business;
- the difficulty of successfully integrating acquisitions;
- our retention and motivation of key employees of the acquired companies;
- our entry into geographic markets in which we have little or no prior
experience;
- competition for acquisition opportunities with competitors that are
larger than us or have greater financial and other resources than we
have;
- our inability to accurately forecast the financial impact of an
acquisition or investment; and
- our inability to maintain good relations with the customers and suppliers
of the acquired company.
In addition, if we make acquisitions using convertible debt or equity
securities, our existing stockholders may be diluted, which could cause the
market price of our stock to decline.
YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES AND COSTS
AND AFFECT THE TIMING OF OUR REVENUES
The Year 2000 computer problem refers to the potential for system and
processing failures of date related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This
problem could result in miscalculations, data corruption, system failures or
disruptions of operations. We are
14
<PAGE> 19
subject to potential Year 2000 problems affecting the systems and technology on
which we depend, including:
- the internal systems, software and other technology we use in our
business;
- the products and other technology produced by others which is integrated
with our software;
- the systems of our customers and our vendors; and
- other technology and products employed by our customers which is used in
connection with our software.
Furthermore, we cannot assure you that our software will be Year 2000
compliant. Moreover, because our software is used in connection with other
products, Year 2000 problems affecting these products could cause our software
to fail. If Year 2000 problems cause the failure of any of the technology,
software or systems described above, we could lose customers, suffer significant
disruptions in our business, lose revenues and incur substantial liabilities and
expenses. We could also become involved in costly litigation resulting from Year
2000 problems. This could materially and adversely affect our business,
financial condition and results of operations.
This year, a significant number of companies, including some of our current
customers, are devoting a substantial amount of their information technology
resources to testing systems for Year 2000 compliance and fixing existing Year
2000 problems. As a result, many of our existing and potential customers may
delay the purchase and installation of our software. Consequently, we may have
lower than expected licensing and services revenues during 2000.
RISKS RELATED TO THIS OFFERING
THIS IS OUR INITIAL PUBLIC OFFERING, AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING OR THAT AN ACTIVE PUBLIC MARKET FOR
OUR SHARES WILL DEVELOP
Before this offering, you could not buy or sell our common stock publicly.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price negotiated between us and representatives of the underwriters, which may
not indicate future market price. The price of our common stock that will
prevail in the market after this offering may be lower than the price you pay.
As a result, you may not be able to sell your stock for a price equal to or
greater than the initial offering price. In addition, as this is our initial
public offering, the number of shares available for public sale will be
relatively small, and we cannot predict how liquid the market for our shares
will be. An active public market for our common stock may not develop or be
sustained after the offering.
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE VOLATILE, AND YOU MAY
EXPERIENCE INVESTMENT LOSSES
The market price of our common stock may fluctuate significantly in
response to the following and other factors, some of which are beyond our
control:
- variations in our quarterly operating results;
- announcements of significant contracts, technological innovations or new
products or services by us or our competitors;
- changes in financial estimates by securities analysts;
- the operating and stock price performance of other companies in our
industry; and
- fluctuations in stock market price and volume, which are particularly
common among securities of software and other technology companies.
15
<PAGE> 20
Further, the stock markets, and in particular the Nasdaq National Market on
which we intend to list our common stock, have experienced extreme price and
volume fluctuations that have affected the market prices of equity securities of
many technology companies. These fluctuations often have been unrelated or
disproportionate to the operating performance of the companies. Because our
business is technology related, the price of our common stock could fluctuate
widely if the market price of equity securities of other technology companies
becomes volatile. In the past, following periods of downward volatility in the
market price of a company's securities, class action litigation has often been
brought against that company. If such an action is brought against us, it would
be expensive and would divert our management's attention and our other
resources.
OUR MANAGEMENT AND AFFILIATES CONTROL A LARGE PERCENTAGE OF OUR VOTING STOCK AND
COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL
AFTER THIS OFFERING
After this offering, our executive officers and directors and members of
their families will together control approximately % of our outstanding
common stock. As a result, these stockholders, if they act together, will be
able to control all matters requiring stockholder approval, including the
election of our directors and the approval of significant corporate transactions
involving us. This control may have the effect of delaying, preventing or
deterring a change in control of Witness Systems and could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of any sale or acquisition.
FUTURE SALES OF COMMON STOCK AND THE RIGHTS OF SOME OF OUR STOCKHOLDERS TO
REGISTER SALES OF THEIR STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
STOCK
Sales of a substantial number of shares of our common stock after this
offering, or the perception by the market that those sales could occur, could
cause the market price of our common stock to decline or could make it more
difficult for us to raise funds through the sale of equity in the future. The
shares of common stock being sold in this offering will generally be freely
tradable without restriction. The remaining shares of common
stock outstanding will be restricted securities as defined in Rule 144 under the
Securities Act. Except as described in the next paragraph, the holders of these
shares of common stock may sell them in the future without registration under
the Securities Act if they comply with Rule 144, Rule 701 or any other
applicable exemption under the Securities Act.
We, our directors and executive officers and some of our stockholders have
agreed with the underwriters not to sell any common stock or securities
convertible into or exchangeable for common stock for 180 days after the date of
this prospectus, subject to some exceptions. When these lock-up agreements
expire, shares of common stock will be eligible for resale in the
future without registration under the Securities Act if the holders of the
common stock comply with Rule 144, Rule 701 or any other applicable exemption
under the Securities Act. Hambrecht & Quist may agree to release any or all of
the shares of common stock from these lock-up agreements at any time.
Some of our existing stockholders have the right to require us to register
under the Securities Act up to shares of their common stock at
any time. Of these shares, are subject to the lock-up agreements
described above. Once we register these shares, they can be freely sold in the
public market, subject to these lock-up agreements.
Within 90 days after the date of this prospectus, we intend to register
under the Securities Act approximately shares of our common stock
issuable on the exercise of stock options, of which approximately
shares will then be issuable and freely tradable upon the
exercise of vested options. Of the shares issuable upon the
exercise of stock options, are subject to the lock-up agreements
described above. Once we register these shares, they can be freely sold in the
public market upon issuance, subject to those lock-up
16
<PAGE> 21
agreements. You should read "Shares Eligible for Future Sale" for a more
detailed description of these risks.
WE HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING AND MAY USE
THEM IN WAYS WITH WHICH YOU DISAGREE AND WHICH MAY NEGATIVELY AFFECT OUR
FINANCIAL CONDITION
We expect to receive net proceeds of approximately $ from this
offering, after deducting underwriting discounts and commissions and estimated
expenses. We intend to use approximately $ of the net proceeds to
repay outstanding debt, including accrued interest and any other amounts due to
the lender. The remaining net proceeds from the sale of common stock will become
part of our general working capital upon completion of this offering, and we may
use these funds in a variety of ways, including funding product development,
expanding our sales and marketing capabilities and pursuing acquisitions of
products, technologies and businesses. We have broad discretion over how these
proceeds are used and could spend the proceeds in ways with which you may not
agree. We cannot assure you that the proceeds will be invested in a way that
yields a favorable, or any, return for us.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER PRICE
FOR OUR COMMON STOCK THAN EXISTING STOCKHOLDERS
The initial public offering price will be substantially higher than the
book value per share of our outstanding common stock and the price per share
paid by existing stockholders. If you buy our common stock in this offering, the
shares you buy will experience an immediate and substantial dilution in tangible
book value per share. The shares of common stock owned by our existing
stockholders will receive a material increase in the tangible book value per
share. The dilution to investors in this offering will be approximately
per share. For more information about this dilution, see
"Dilution."
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AS WELL AS DELAWARE LAW, MAY
PREVENT OR DELAY A FUTURE TAKEOVER
Our amended and restated certificate of incorporation and bylaws contain
provisions which could make it harder for a third party to acquire us without
consent of our board of directors. For example, if a potential acquiror were to
make a hostile bid for us, the acquiror would not be able to call a special
meeting of stockholders to remove our board of directors or act by written
consent without a meeting. In addition our board of directors has staggered
terms which makes it difficult to remove all our directors at once. The acquiror
would also be required to provide advance notice of its proposal to remove
directors at an annual meeting.
Our board of directors has the ability to issue preferred stock which would
significantly dilute the ownership of a hostile acquiror. In addition, Delaware
law limits business combination transactions with 15% stockholders that have not
been approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation.
As a result of these provisions, our board of directors could choose not to
negotiate with an acquiror if it does not believe an acquisition is in our
strategic interests. These provisions may apply even if the acquiror's offer is
considered beneficial to our stockholders. Moreover, if the acquiror is
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition, you could lose the opportunity to sell your
shares at a favorable price.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that are subject
to risks and uncertainties. Many of these forward-looking statements refer to
our plans, objectives, expectations and intentions, as well as our future
financial results. You can identify these forward-looking statements by
forward-looking words such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates" and similar expressions. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual
17
<PAGE> 22
results to differ materially from those expressed or implied by these
forward-looking statements, including our plans, objectives, expectations and
intentions and other factors discussed under "Risk Factors" and other factors
identified by cautionary language used elsewhere in this prospectus. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this prospectus could
materially and adversely affect our business, financial condition and results of
operations.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $ million from the
sale of shares of common stock, assuming a public offering price
of $ per share and after deducting underwriting discounts and
commissions of $ million and estimated expenses of approximately
$ million.
We intend to use approximately $ million of the net proceeds from
this offering to repay outstanding debt, including accrued interest and any
other amounts due to the lender. We will use the remaining net proceeds
primarily for working capital and other general corporate purposes, including
funding product development and expanding our sales and marketing capabilities.
In addition, we may use a portion of the net proceeds for further development of
our product lines through acquisitions of products, technologies and businesses.
Currently, however, we have no commitments or agreements regarding any
acquisitions. The amount of net proceeds that we actually expend for working
capital purposes will vary significantly depending on a number of factors,
including our future revenue growth, if any, the amount of cash we generate from
operations and the progress of our product development efforts. We will have
significant discretion in applying the net proceeds of this offering. Pending
the uses described above, we will invest the net proceeds in short-term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock, and we
do not anticipate declaring or paying any cash dividends for the foreseeable
future. We currently expect to retain all earnings, if any, for investment in
our business. In addition, the terms of our current credit facility prohibit us
from paying cash dividends without our lender's consent.
18
<PAGE> 23
CAPITALIZATION
The following table describes our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis which gives effect to the payment of preferred stock
dividends in the form of additional shares of our preferred stock and the
conversion of each outstanding share of our preferred stock into one
share of our common stock, which will occur immediately before the
completion of this offering as if the conversion occurred on September
30, 1999; and
- on a pro forma as adjusted basis to further reflect the sale of the
common stock offered by us at an assumed offering price of $ per
share, after deducting underwriting discounts and estimated offering
expenses payable by us, and our receipt and application of the net
proceeds from this offering as if the sale of common stock and receipt of
proceeds occurred on September 30, 1999.
You should read this table together with the consolidated financial
statements and the related notes appearing at the end of this prospectus and the
information under "Management's Discussion and Analysis of Financial Condition
and Resulting Operations" and "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current portion................. $ 3,112 $ 3,112 $0
Convertible preferred stock:
Series A; 4,000,000 shares authorized, 3,184,000 issued
and outstanding, actual; no shares authorized, issued
and outstanding, pro forma and pro forma as
adjusted............................................. 8,319 -- --
Series B; 1,231,954 shares authorized, 1,181,954 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma and pro forma as
adjusted............................................. 5,479 -- --
Series C; 1,500,000 shares authorized, 1,325,028 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma and pro forma as
adjusted............................................. 8,315 -- --
Stockholders' (deficit) equity:
Preferred stock, par value $0.01; no shares authorized,
issued and outstanding, actual; 10,000,000
authorized, pro forma and pro forma as adjusted; no
shares issued or outstanding, pro forma and pro forma
as adjusted.......................................... -- -- --
Common stock, par value $0.01; 15,000,000 shares
authorized; 5,723,424 issued and 3,812,433 shares
outstanding, actual; 11,495,059 shares issued and
9,584,068 shares outstanding, pro forma;
shares issued and shares
outstanding, pro forma as adjusted................... 57 115
Additional paid-in capital.............................. 5,122 27,177
Accumulated deficit..................................... (20,336) (20,336)
Stockholders notes receivable........................... (2,594) (2,594)
Treasury stock, 1,910,991 common shares at cost......... (6,921) (6,921)
-------- -------- --
Total stockholders' (deficit) equity............ (24,672) (2,559)
-------- -------- --
Total capitalization............................ $ 553 $ 553
======== ======== ==
</TABLE>
The number of shares of common stock outstanding as of September 30, 1999
does not reflect: 1,455,830 shares issuable under options and warrants
outstanding as of November 1, 1999 with a weighted average exercise price of
$2.89 per share, and 294,579 shares of common stock reserved for issuance under
our stock incentive plan. On November 18, 1999, we reserved for issuance,
subject to our stockholders' approval, an additional 865,200 shares of common
stock under our amended and restated stock incentive plan and 550,000 shares of
common stock under our employee stock purchase plan.
19
<PAGE> 24
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was $
million, or $ per share of common stock. We have calculated this amount
by:
- subtracting our total liabilities from our pro forma total tangible
assets; and
- then dividing the difference by the total pro forma number of shares of
common stock outstanding, after giving effect to the payment of preferred
stock dividends in the form of additional shares of our preferred stock
and the conversion of each outstanding share of our preferred stock into
one share of our common stock, which will occur immediately before
completion of this offering.
If we give effect to our receipt of the net proceeds from our sale of
shares of common stock at an assumed initial public offering price of
$ per share, our adjusted pro forma net tangible book value as of
September 30, 1999 would have been approximately $
million, or $ per share. This amount represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
----------
Pro forma net tangible book value as of September 30,
1999................................................... $
----------
Pro forma increase in net tangible book value attributable
to this offering....................................... $
----------
Pro forma net tangible book value after the offering...... $
----------
Dilution to new investors................................... $
==========
</TABLE>
The following table summarizes, on an as adjusted pro forma basis, as of
September 30, 1999, the total number of shares of common stock purchased from
us, the total consideration paid and the average price per share paid by
existing stockholders and to be paid by new investors in this offering at an
assumed initial offering price of $ per share, before deducting estimated
underwriting discounts and offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------ ------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... $
New investors...............
-------- ----- -------- ------
Total............. 100.0% $ $100.0%
======== ===== ======== ======
</TABLE>
If the underwriters exercise their over-allotment option in full, the
number of shares held by existing stockholders will decrease to ,
or % of the total shares outstanding, and the number of shares held by new
investors will increase to , or % of the total shares
outstanding.
The above computations exclude 1,455,830 shares of common stock issuable
upon the exercise of options and warrants outstanding as of November 1, 1999 at
a weighted average exercise price of $2.89 per share, and 294,579 shares of
common stock reserved for issuance under our stock incentive plan. From
September 30, 1999 through November 1, 1999, options were exercised to purchase
an aggregate of 371 shares of common stock. On November 18, 1999, we reserved
for issuance, subject to our stockholders' approval, an additional 865,200
shares of common stock under our amended and restated stock incentive plan and
550,000 shares of common stock under our employee stock purchase plan. If any of
those options and warrants are exercised, new investors will experience further
dilution. For more information about our stock option plans, see
"Management -- Option Plans."
20
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
appearing at the end of this prospectus and the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Use of Proceeds". For an explanation of the determination of the number of
shares used to compute historical and pro forma basic and diluted net loss per
share, see note 1(l) of the notes to our consolidated financial statements.
The statement of operations data for the years ended December 31, 1996,
1997 and 1998 and for the nine months ended September 30, 1999 and the balance
sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived
from, and are qualified by reference to, our consolidated financial statements
included at the end of this prospectus, which have been audited by KPMG LLP. The
statement of operations data for the year ended December 31, 1995 and the
balance sheet data as of December 31, 1996 are derived from, and are qualified
by reference to, our consolidated financial statements which are not included in
this prospectus and which have been audited by KPMG LLP. The statement of
operations data for the year ended December 31, 1994 and the balance sheet data
as of December 31, 1994 and 1995 are derived from our unaudited consolidated
financial statements, which are not included in this prospectus. The statement
of operations data for the nine months ended September 30, 1998 is unaudited and
is included with the consolidated financial statements included in this
prospectus. In the opinion of our management, the unaudited consolidated
financial statements have been prepared on a basis consistent with the annual
audited consolidated financial statements which appear elsewhere in this
prospectus, and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of our financial position and
results of operations for these unaudited periods. Our historical results are
not necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
----------- ------ ------- ------- ------- ----------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License..................................... $ 300 $ 444 $ 764 $ 3,775 $ 8,507 $ 5,595 $10,811
Services.................................... 177 161 425 1,138 2,444 1,657 4,079
Hardware.................................... 246 357 632 1,271 2,171 1,750 46
------ ------ ------- ------- ------- ------- -------
Total revenues.......................... 723 962 1,821 6,184 13,122 9,002 14,936
------ ------ ------- ------- ------- ------- -------
Cost of revenues:
License..................................... 8 10 30 164 310 218 258
Services.................................... 138 130 622 1,204 2,526 1,863 2,596
Hardware.................................... 235 315 920 1,574 2,482 1,995 46
------ ------ ------- ------- ------- ------- -------
Total cost of revenues.................. 381 455 1,572 2,942 5,318 4,076 2,900
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 342 507 249 3,242 7,804 4,926 12,036
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 72 93 291 2,016 6,147 4,236 7,409
Research and development.................... 114 264 1,095 1,817 3,529 2,385 4,140
General and administrative.................. 163 401 1,058 1,684 2,141 1,458 2,556
Charge for termination of distribution
agreement................................. -- -- -- -- 900 900 --
Acquired in-process research and
development............................... -- -- -- -- -- -- 3,506
Other personnel costs....................... -- 621 -- -- -- -- 665
------ ------ ------- ------- ------- ------- -------
Operating loss.......................... (7) (872) (2,195) (2,275) (4,913) (4,053) (6,240)
Interest income (expense), net................ 5 9 4 62 (31) (26) (320)
------ ------ ------- ------- ------- ------- -------
Loss before provision for income taxes........ (2) (863) (2,191) (2,213) (4,944) (4,079) (6,560)
Provision for income taxes.................... -- -- -- -- -- -- --
------ ------ ------- ------- ------- ------- -------
Net loss...................................... (2) (863) (2,191) (2,213) (4,944) (4,079) (6,560)
Preferred stock dividends and accretion....... -- -- -- (84) (502) (77) (1,090)
------ ------ ------- ------- ------- ------- -------
Net loss applicable to common stockholders.... $ (2) $ (863) $(2,191) $(2,297) $(5,446) $(4,156) $(7,650)
====== ====== ======= ======= ======= ======= =======
Historical net loss per share -- basic and
diluted..................................... $ -- $(0.17) $ (0.38) $ (0.57) $ (1.41) $ (1.03) $ (2.13)
====== ====== ======= ======= ======= ======= =======
Shares used in computing historical net loss
per share
-- basic and diluted.......................... 3,433 4,957 5,726 4,021 3,869 4,025 3,596
====== ====== ======= ======= ======= ======= =======
Pro forma net loss per share -- basic and
diluted..................................... $ (0.66) $ (0.77)
======= =======
Shares used in computing pro forma net loss
per share
-- basic and diluted.......................... 7,444 8,495
======= =======
</TABLE>
21
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -------------
1994 1995 1996 1997 1998 1999
---- ----- ------- ------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $ 99 $ 84 $ 69 $ 2,092 $ 912 $ 52
Working capital (deficit).................... 343 (142) (2,399) (2,506) (3,331) (2,248)
Total assets................................. 365 316 1,108 3,966 5,026 8,919
Long-term debt, less current portion......... -- -- -- -- 1,102 2,210
Total stockholders' equity (deficit)......... 143 (69) (2,260) (8,241) (15,551) (24,672)
</TABLE>
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our Consolidated
Financial Statements and Notes. Our discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Our actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
We are a leading provider of recording and analysis software that enables
companies to enhance their customer interactions across multiple communications
media. Our WITNESS software is designed to enable customer contact centers
within a company to record and evaluate complete customer interactions through
one or more communications media, such as telephone and Web chat. The key
benefits of our products include increased revenues from improved customer
interactions, improved profitability from increased customer service
representative, or CSR, and supervisor productivity and reduced turnover and
enhanced customer retention through greater customer intimacy. Our software is
designed to integrate with a variety of third party software, such as CRM and
enterprise resource planning applications, and with existing telephony and
computer network hardware and software. The majority of our customers are
companies with one or more contact centers that handle voice and data customer
interactions for outbound sales and marketing operations, inbound
service/support lines, or both. We utilize our direct sales organization and a
variety of strategic marketing alliances to reach our target customer base.
SOURCES OF REVENUES AND REVENUE RECOGNITION POLICY
We generate revenues principally from licensing our software products
directly to customers and providing related professional services, including
software installation, training and maintenance. During the nine months ended
September 30, 1999, approximately 95% of our revenues were derived from sales
within the United States through our direct sales force. Prior to 1999,
substantially all of our revenues were derived from sales within the United
States. Our license agreements generally provide that customers pay a software
license fee for one or more software products for a specified number of users.
The amount of the license fee varies based on which software product is
licensed, the number of software products licensed and the number of users
licensed. Customers can subsequently pay additional license fees to allow
additional users to use previously licensed software products or to license
additional software products. Each software product included in the WITNESS
software contains the same core functionality, allowing for easy integration of
additional software products as they are licensed from us. Customers that
license software products receive the software on compact disc.
We recognize license revenues in accordance with the provisions of American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, "Software Revenue Recognition" and SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2." Pursuant to the requirements of SOP 97-2, we
recognize license revenues when all the following conditions are met:
- we have signed a noncancellable license agreement with the customer;
- we have delivered the software product to the customer;
- the amount of fees to be paid by the customer is fixed or determinable;
and
- we believe that collection of these fees is probable.
23
<PAGE> 28
Customers generally purchase installation and training services. Customers
generally purchase these services directly from us through our internal
professional services organization on either a fixed fee or a time and materials
basis. Revenues on installation and training services are recognized upon
performance of the related services.
Customers also generally purchase maintenance contracts that provide
software upgrades and technical support over a stated term, generally twelve
months. Revenues on maintenance are recognized ratably over the terms of the
maintenance contracts, which are usually one year.
COST OF REVENUES AND OPERATING EXPENSES
Our cost of license revenues primarily consists of license fees due to
third parties for royalties and packaging costs. Our cost of services revenues
includes salaries and related expenses for our installation, training and
maintenance personnel and allocations of facilities, communications and
depreciation expenses. Our cost of hardware revenues consisted of purchases of
hardware. We discontinued sales of hardware during the first quarter of 1999.
Our operating expenses are classified into three general categories: sales and
marketing, research and development and general and administrative. We classify
all charges to these operating expense categories based on the nature of the
expenditures. We allocate the costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services. These allocated
charges include facility rent for corporate offices, communication charges and
depreciation expenses for office furniture and equipment. We anticipate that our
operating expenses will increase substantially in future quarters as we increase
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. Accordingly, we expect to incur
additional losses for the foreseeable future. In addition, our limited operating
history makes it difficult for us to predict future operating results, and,
accordingly, there can be no assurance that we will achieve or sustain revenue
growth or profitability.
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.
We had 159 full-time employees at November 1, 1999, up from 25, 74 and 111,
at December 31, 1996, 1997 and 1998, respectively. This rapid growth places a
significant demand on our management and operational resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. In addition, we expect that
future expansion will continue to challenge our ability to hire, train, motivate
and manage our employees. Competition is intense for highly qualified technical,
sales and marketing and management personnel. If our total revenue does not
increase relative to our operating expenses, our management systems do not
expand to meet increasing demands, we fail to attract, assimilate and retain
qualified personnel or our management otherwise fails to manage our expansion
effectively, there would be a material adverse effect on our business, financial
condition and operating results.
24
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1996 1997 1998 1998 1999
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................. 42.0% 61.0% 64.8% 62.2% 72.4%
Services................................. 23.3 18.4 18.7 18.4 27.3
Hardware................................. 34.7 20.6 16.5 19.4 0.3
------ ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License.................................. 1.6 2.7 2.4 2.4 1.7
Services................................. 34.2 19.4 19.2 20.7 17.4
Hardware................................. 50.5 25.5 18.9 22.2 0.3
------ ----- ----- ----- -----
Total cost of revenues.............. 86.3 47.6 40.5 45.3 19.4
------ ----- ----- ----- -----
Gross profit........................ 13.7 52.4 59.5 54.7 80.6
Operating expenses:
Sales and marketing...................... 16.0 32.6 46.8 47.1 49.6
Research and development................. 60.1 29.4 26.9 26.5 27.7
General and administrative............... 58.1 27.2 16.3 16.2 17.1
Charge for termination of distribution
agreement.............................. -- -- 6.9 10.0 --
Acquired in-process research and
development............................ -- -- -- -- 23.5
Other personnel costs.................... -- -- -- -- 4.5
------ ----- ----- ----- -----
Operating loss...................... (120.5) (36.8) (37.4) (45.0) (41.8)
Interest income (expense), net.............. 0.2 1.0 (0.3) (0.3) (2.1)
------ ----- ----- ----- -----
Loss before provision for income
taxes............................. (120.3) (35.8) (37.7) (45.3) (43.9)
Provision for income taxes.................. -- -- -- -- --
------ ----- ----- ----- -----
Net loss............................ (120.3)% (35.8)% (37.7)% (45.3)% (43.9)%
====== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues
Total revenues increased from $9.0 million in the nine months ended
September 30, 1998 to $14.9 million in the nine months ended September 30, 1999,
representing a 66% increase, principally due to growth in our license revenue.
License revenues increased from $5.6 million in the nine months ended September
30, 1998 to $10.8 million in the nine months ended September 30, 1999,
representing a 93% increase. The increase in license revenues was a result of a
number of factors, including a growing market awareness of our products, an
expanded sales force and add-on sales associated with our existing customer
base. As a percentage of total revenues, license revenues increased from 62.2%
in the nine months ended September 30, 1998 to 72.4% in the nine months ended
September 30, 1999.
Services revenues increased from $1.7 million in the nine months ended
September 30, 1998 to $4.1 million in the nine months ended September 30, 1999,
representing a 146% increase. Installation and training revenues increased
primarily from the increase in license revenues. Maintenance revenues increased
from growth in our customer base. As a percentage of total
25
<PAGE> 30
revenues, services revenues increased from 18.4% in the nine months ended
September 30, 1998 to 27.3% in the nine months ended September 30, 1999.
Hardware revenues decreased from $1.8 million in the nine months ended
September 30, 1998 to $46,000 in the nine months ended September 30, 1999,
representing a 97% decrease. We discontinued the sale of hardware during the
first quarter of 1999. As a percentage of total revenues, hardware revenues
decreased from 19.4% in the nine months ended September 30, 1998 to 0.3% in the
nine months ended September 30, 1999.
Cost of Revenues
Total cost of revenues decreased from $4.1 million for the nine months
ended September 30, 1998 to $2.9 million for the nine months ended September 30,
1999, primarily due to our discontinuance of hardware sales. Also, we improved
our services margin primarily through improved project management. Cost of
revenues as a percentage of total revenues decreased from 45.3% for the nine
months ended September 30, 1998 to 19.4% for the nine months ended September 30,
1999, primarily due to our discontinuance of hardware sales. We expect, however,
that over time the total cost of revenues as a percentage of total revenues will
increase as the percentage of license revenues as a percentage of total revenues
decreases.
Cost of license revenues increased from $218,000 for the nine months ended
September 30, 1998 to $258,000 for the nine months ended September 30, 1999, due
to increased royalties for third party software caused by an increase in license
revenues. Cost of license revenues decreased from 2.4% of total revenue for the
nine months ended September 30, 1998 to 1.7% of total revenue for the nine
months ended September 30, 1999.
Cost of services revenues increased from $1.9 million in the nine months
ended September 30, 1998 to $2.6 million in the nine months ended September 30,
1999. This increase was a result of an increase in the number of employees
engaged in installation, training and customer maintenance services. Cost of
services revenues as a percentage of total revenues decreased from 20.7% for the
nine months ended September 30, 1998 to 17.4% for the nine months ended
September 30, 1999. Cost of services revenues as a percentage of services
revenues decreased from 112% for the nine months ended September 30, 1998 to 64%
for the nine months ended September 30, 1999. This improvement in services
margin was a result of improved project management for installation services and
fewer employees engaged in customer maintenance services per customer. We expect
to continue to hire additional service personnel, however, and anticipate that
cost of services revenues will both increase in absolute dollars and as a
percentage of total revenues.
Hardware cost of revenues decreased from $2.0 million in the nine months
ended September 30, 1998 to $46,000 in the nine months ended September 30, 1999.
This decrease was due to our discontinuance of hardware sales in the first
quarter of 1999. Hardware cost of revenues decreased from 22.2% of total
revenues for the nine months ended September 30, 1998 to 0.3% of total revenues
for the nine months ended September 30, 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 75% from $4.2
million in the nine months ended September 30, 1998 to $7.4 million in the nine
months ended September 30, 1999, principally due to an increase in sales
personnel and marketing program expenses. As a percentage of total revenues,
sales and marketing expenses increased from 47.1% for the nine months ended
September 30, 1998 to 49.6% for the nine months ended September 30, 1999. We
expect that the absolute dollar amount of sales and marketing expenses will
continue to increase due to the planned growth of our sales force, including the
establishment of additional sales offices both domestically and internationally
in Europe and Asia. We also expect additional increases in advertising and
marketing programs and other promotional activities and anticipate that sales
and marketing expenses will vary as a percentage of total revenues from period
to period.
26
<PAGE> 31
Research and Development. Research and development expenses increased 74%
from $2.4 million in the nine months ended September 30, 1998 to $4.1 million in
the nine months ended September 30, 1999, primarily due to an increase in the
number of employees and consultants engaged in research and development
activities. As a percentage of total revenues, research and development expenses
increased from 26.5% for the nine months ended September 30, 1998 to 27.7% for
the nine months ended September 30, 1999. We expect research and development
costs to increase in amount as we continue to commit substantial resources to
enhancing existing product functionality and to developing new products.
General and Administrative. General and administrative expenses increased
75% from $1.5 million in the nine months ended September 30, 1998 to $2.6
million in the nine months ended September 30, 1999, primarily due to increased
salary and related expenses in our executive, finance and administrative
functions. As a percentage of total revenues, general and administrative
expenses increased from 16.2% for the nine months ended September 30, 1998 to
17.1% for the nine months ended September 30, 1999. We expect general and
administrative costs to increase in absolute amount as we continue to add
infrastructure to support a larger organization, continue to invest in our
international expansion and incur costs incident to being a publicly-held
company.
During the nine months ended September 30, 1998, we incurred a $900,000
charge to terminate a distributor agreement. We incurred other personnel costs
of $665,000 during the nine months ended September 30, 1999, which related to
severance payments for terminated executives as well as a bonus and relocation
costs in connection with recruiting a new executive.
Acquired In-Process Research and Development. During the nine months ended
September 30, 1999, we acquired certain in-process research and development, or
IPR&D, in exchange for our common stock valued at $3.5 million. The IPR&D
relates to the development of technology not possessed by us. At the date of the
transaction, the results of the IPR&D had not progressed to a stage where they
met technological feasibility as defined by SFAS No. 86, Accounting for the Cost
of Computer Software to Be Sold, Leased or Otherwise Marketed. As this was our
first attempt to develop the desired technology, there existed a significant
amount of uncertainty as to our ability to complete the development within a
timeframe acceptable to the market. Additionally, the amount of development
required to enable the acquired IPR&D to be compatible with our primary product
was significant, which increased the uncertainty surrounding its successful
development. We estimate it would have cost us more than $3.5 million to develop
the IPR&D internally and estimate we will incur an additional $3.3 million to
complete our development efforts. The IPR&D does not have an alternative future
use to us that has reached technological feasibility.
Interest Income (Expense), Net
Net interest expense increased from $26,000 during the nine months ended
September 30, 1998 to $320,000 during the nine months ended September 30, 1999
due to an increase in borrowings under our credit facilities.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues
Total revenues increased 240% from $1.8 million in 1996 to $6.2 million in
1997 and increased 112% to $13.1 million in 1998, primarily due to an increase
in license revenues. License revenues increased 394% from $764,000 in 1996 to
$3.8 million in 1997 and increased 125% to $8.5 million in 1998. The increase in
license revenues was the result of a number of factors, including a growing
market awareness of our products, an expanded sales force and add-on sales
associated with our existing customer base. As a percentage of total revenues,
license revenues increased from 42.0% in 1996 to 61.0% in 1997 and to 64.8% in
1998.
27
<PAGE> 32
Services revenues increased 168% from $425,000 in 1996 to $1.1 million in
1997 and increased 115% to $2.4 million in 1998. Installation and training
revenues grew due to an increase in license revenues, and maintenance revenues
grew due to an increase in customers. As a percentage of total revenues, service
revenues decreased from 23.3% in 1996 to 18.4% in 1997 and increased slightly to
18.7% in 1998.
Hardware revenues increased 101% from $632,000 in 1996 to $1.3 million in
1997 and increased 71% to $2.2 million in 1998. The increase in hardware
revenues was a result of the increased number of customer sites licensing our
software over the same period. As a percentage of total revenues, hardware
revenues decreased from 34.7% in 1996 to 20.6% in 1997 and decreased to 16.5% in
1998.
Cost of Revenues
Total cost of revenues increased 87% from $1.6 million in 1996 to $2.9
million in 1997 and increased 81% to $5.3 million in 1998. These increases in
total cost of revenues are related to the increase in total revenues over the
same periods. Total cost of revenues as a percentage of total revenues decreased
from 86.3% in 1996 to 47.6% in 1997 and decreased to 40.5% in 1998, primarily
due to the fact that higher margin license revenues grew at a faster rate than
lower margin hardware revenues.
Cost of license revenues increased from $30,000 in 1996 to $164,000 in 1997
and increased to $310,000 in 1998. These increases were due to increased
royalties for third party software caused by an increase in license revenues.
Cost of license revenues as a percentage of total revenues increased from 1.6%
in 1996 to 2.7% in 1997 and decreased to 2.4% in 1998.
Cost of services revenues increased 94% from $622,000 in 1996 to $1.2
million in 1997 and increased 110% to $2.5 million in 1998. These increases were
a result of increases in the number of employees engaged in installation,
training and customer maintenance services. Cost of services revenues as a
percentage of total revenues decreased from 34.2% in 1996 to 19.4% in 1997 and
decreased to 19.2% in 1998. Cost of services revenue as a percentage of services
revenues was 146% in 1996, 106% in 1997 and 103% in 1998. This improvement in
services margin was mainly due to improved project management for installation
services and fewer employees engaged in maintenance services per customer.
Hardware cost of revenues increased from $920,000 in 1996 to $1.6 million
in 1997 and increased 58% to $2.5 million in 1998. These increases in hardware
cost of revenues relate to the increases in hardware revenues in the same
periods. Hardware cost of revenues as a percentage of total revenues decreased
from 50.5% of total revenues in 1996 to 25.5% in 1997 and decreased to 18.9% in
1998. Cost of hardware revenues as a percentage of hardware revenues was 146% in
1996, 124% in 1997 and 114% in 1998. This improvement in hardware margin was a
result of increased pricing for hardware. We discontinued sales of hardware
during the first quarter of 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 593% from
$291,000 in 1996 to $2.0 million in 1997, and then increased 205% to $6.1
million in 1998. The increase in sales and marketing expenses is principally
related to an increase in sales personnel and marketing program expenses. As a
percentage of total revenues, sales and marketing expenses were 16.0% in 1996,
32.6% in 1997, and 46.8% in 1998. These percentage increases were primarily due
to an increase in sales personnel.
Research and Development. Research and development expenses increased 66%
from $1.1 million in 1996 to $1.8 million in 1997, and then increased 94% to
$3.5 million in 1998. The increase in absolute dollars was primarily due to an
increase in the number of employees and consultants engaged in research and
development activities. As a percentage of total revenues, research and
28
<PAGE> 33
development expenses were 60.1% in 1996, 29.4% in 1997, and 26.9% in 1998. These
percentage decreases were due to our revenue growing faster than our research
and development expenses.
General and Administrative. General and administrative expenses increased
59% from $1.1 million in 1996 to $1.7 million in 1997, and then increased 27% to
$2.1 million in 1998. The increase in absolute dollars was primarily
attributable to increased salary and related expenses in the executive, finance
and administrative functions to manage our growth. As a percentage of total
revenues, general and administrative expenses were 58.1% in 1996, 27.2% in 1997,
and 16.3% in 1998. These percentage decreases were due to our revenues growing
faster than our general and administrative expenses. During 1998, we incurred a
$900,000 charge to terminate a distributor agreement.
Interest Income (Expense), Net
Net interest income increased from $4,000 in 1996 to $62,000 in 1997, and
decreased to $31,000 in interest expense in 1998 due to long-term debt we
entered into during the latter portion of 1998.
Provision for Income Taxes
No provision for federal, state or foreign income taxes has been recorded
as we incurred net operating losses for all periods presented. We have recorded
a full valuation allowance against the deferred tax asset generated as a result
of these net operating loss carryforwards, as the future realization of the tax
benefit is not currently considered more likely than not.
As of September 30, 1999, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.7 million. These federal and
state loss carryforwards may be available to reduce future taxable income and
expire at various dates into the year 2019. Under the provisions of the Internal
Revenue Code, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to
offset taxable income.
29
<PAGE> 34
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited quarterly statements of
operations data for each of our last eight quarters in the period ended
September 30, 1999, as well as the percentage of our total revenues represented
by each item. The information has been derived from our unaudited consolidated
financial statements, which have been prepared on substantially the same basis
as the audited consolidated financial statements contained in this prospectus.
Our unaudited consolidated financial statements contain all adjustments,
consisting only of normal recurring adjustments, that we consider to be
necessary to present fairly this information when read in conjunction with the
consolidated financial statements and notes thereto 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
-----------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.............. $ 1,007 $ 1,595 $2,086 $ 1,914 $2,912 $ 3,024 $3,417 $ 4,370
Services............. 346 448 466 743 787 1,091 1,294 1,694
Hardware............. 351 614 522 614 421 46 -- --
------- ------- ------ ------- ------ ------- ------ -------
Total
revenues.... 1,704 2,657 3,074 3,271 4,120 4,161 4,711 6,064
Cost of revenues:
License.............. 54 37 101 80 92 102 83 73
Services............. 416 596 592 675 663 730 818 1,048
Hardware............. 416 733 581 681 487 46 -- --
------- ------- ------ ------- ------ ------- ------ -------
Total cost of
revenues.... 886 1,366 1,274 1,436 1,242 878 901 1,121
------- ------- ------ ------- ------ ------- ------ -------
Gross
profit...... 818 1,291 1,800 1,835 2,878 3,283 3,810 4,943
Operating expenses:
Sales and
marketing.......... 900 1,211 1,403 1,622 1,911 2,139 2,502 2,768
Research and
development........ 578 646 833 906 1,144 1,124 1,334 1,682
General and
administrative..... 613 508 438 512 683 785 768 1,003
Charge for
termination of
distribution
agreement.......... -- 900 -- -- -- -- -- --
Acquired in-process
research and
development........ -- -- -- -- -- -- -- 3,506
Other personnel
costs.............. -- -- -- -- -- 350 -- 315
------- ------- ------ ------- ------ ------- ------ -------
Operating
loss........ (1,273) (1,974) (874) (1,205) (860) (1,115) (794) (4,331)
Interest income
(expense), net....... 8 (8) (7) (11) (5) (19) (72) (229)
------- ------- ------ ------- ------ ------- ------ -------
Loss before
provision
for income
taxes....... (1,265) (1,982) (881) (1,216) (865) (1,134) (866) (4,560)
Provision for income
taxes................ -- -- -- -- -- -- -- --
------- ------- ------ ------- ------ ------- ------ -------
Net loss...... $(1,265) $(1,982) $ (881) $(1,216) $ (865) $(1,134) $ (866) $(4,560)
======= ======= ====== ======= ====== ======= ====== =======
</TABLE>
30
<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.............. 59.1% 60.0% 67.8% 58.5% 70.7% 72.7% 72.5% 72.1%
Services............. 20.3 16.9 15.2 22.7 19.1 26.2 27.5 27.9
Hardware............. 20.6 23.1 17.0 18.8 10.2 1.1 0 0
----- ----- ----- ----- ----- ----- ----- -----
Total
revenues.... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License.............. 3.2 1.4 3.3 2.4 2.2 2.5 1.8 1.2
Services............. 24.4 22.4 19.3 20.6 16.1 17.5 17.4 17.3
Hardware............. 24.4 27.6 18.9 20.8 11.8 1.1 0 0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues.... 52.0 51.4 41.5 43.8 30.1 21.1 19.2 18.5
----- ----- ----- ----- ----- ----- ----- -----
Gross
profit...... 48.0 48.6 58.5 56.2 69.9 78.9 80.8 81.5
Operating expenses:
Sales and
marketing.......... 52.8 45.6 45.6 49.6 46.4 51.4 53.1 45.7
Research and
development........ 33.9 24.3 27.2 27.7 27.8 27.0 28.3 27.7
General and
administrative..... 36.0 19.1 14.2 15.7 16.6 18.9 16.3 16.5
Charge for
termination of
distribution
agreement.......... -- 33.9 -- -- -- -- -- --
Acquired in-process
research and
development........ -- -- -- -- -- -- -- 57.8
Other personnel
costs.............. -- -- -- -- -- 8.4 -- 5.2
----- ----- ----- ----- ----- ----- ----- -----
Operating
loss........ (74.7) (74.3) (28.5) (36.8) (20.9) (26.8) (16.9) (71.4)
Interest income
(expense), net....... 0.5 (0.3) (0.2) (0.3) (0.1) (0.5) (1.5) (3.8)
----- ----- ----- ----- ----- ----- ----- -----
Loss before provision
for income taxes... (74.2) (74.6) (28.7) (37.1) (21.0) (27.3) (18.4) (75.2)
Provision for income
taxes................ -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net loss...... (74.2)% (74.6)% (28.7)% (37.1)% (21.0)% (27.3)% (18.4)% (75.2)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
License revenues as a percentage of total revenues experienced an upward
trend during 1998 and leveled off in the first three quarters of 1999. Services
revenues as a percentage of total revenues varied from quarter to quarter in
1998 and leveled-off in 1999 due to our discontinuance of hardware sales and
increased services revenues. We expect the relative amount of license revenues
as compared to services revenues, as experienced during the first three quarters
of 1999, to decrease which will increase our cost of revenues and decrease our
gross margin. We discontinued the sale of hardware during the first quarter of
1999.
Our quarterly revenues increased throughout 1998 and the first three
quarters of 1999 primarily as a result of growing market awareness of our
products, an expanded sales force and add-on sales from our existing customers.
Cost of revenues as a percentage of revenues has trended down due to our
discontinuance of hardware sales and improvements in installation project
management. Operating expenses increased in each quarter primarily as a result
of the increase in the number of employees engaged in sales and marketing and
research and development activities, as well as the growth experienced in the
executive, finance and administrative functions.
We believe that our quarterly operating results may experience seasonal
fluctuations in the future. For instance, quarterly results may fluctuate based
on client calendar year budgeting cycles, slow summer purchasing patterns in
Europe and our compensation policies that tend to compensate sales personnel,
typically in the latter half of the year, for achieving annual quotas.
31
<PAGE> 36
As a result of the foregoing and other factors, we believe that
quarter-to-quarter comparisons of results are not necessarily meaningful, and
such comparisons should not be relied upon as indications of future performance.
Fluctuations in operating results may also result in volatility in the price of
the shares of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through private sales of
convertible preferred stock totaling $20.4 million and, to a lesser extent, from
debt financing. As of September 30, 1999, we had $52,000 in cash and negative
working capital of $2.2 million.
The principal use of cash to date has been to fund our losses from
operations and to purchase furniture and equipment. Also, during 1997, 1998 and
for the nine months ended September 30, 1999, we purchased treasury shares
totaling $3.7 million, $1.9 million and $5.4 million, respectively.
During 1997, we entered into a financing agreement (the "Agreement") with a
commercial bank and obtained a $1.0 million working capital line of credit and a
$1.0 million committed equipment line (the "Credit Facilities"). The working
capital line of credit permitted us to borrow the lesser of $1.0 million or 70%
of eligible accounts receivable through the maturity date of July 1, 1998. At
December 31, 1997 there was $1.0 million outstanding under the working capital
line of credit. The committed equipment line allowed us to obtain advances for
all property and equipment purchases made during the period from May 1, 1997
through December 31, 1997. The aggregate amount of advances outstanding under
the equipment line was $890,000 as of December 31, 1997, which was converted to
a term note as of such date.
During 1998, the Agreement was amended (the "Amended Agreement") and the
working capital line of credit was increased to the lesser of $2.5 million or a
variable percentage of eligible accounts receivable, through December 10, 1999.
There was no balance outstanding under the working capital line of credit as of
December 31, 1998. In addition, we obtained a new $1.0 million committed
equipment line of credit under the Amended Agreement for the period from
December 11, 1998 through June 10, 1999. As of December 31, 1998, the aggregate
advances made under the equipment line of credit were $1.0 million and the
balance outstanding on the term note was $593,000. In connection with the
Amended Agreement, we issued the commercial bank a warrant to purchase 10,000
shares of our common stock (the "Bank Warrant").
In April 1999, the working capital line of credit was increased to the
lesser of $4.0 million or the lesser of 75% of net eligible accounts receivable
through August 1999 (the "Finance Loan"). In connection with the Finance Loan,
the Bank Warrants were cancelled and we issued warrants to the commercial bank
to purchase 20,000 shares of our Series B convertible preferred stock for $4.65
per share.
In June 1999, we refinanced all of our then existing borrowings with
another commercial lender (the "Lender"). Under the terms of the new loan and
security agreement ("Loan Agreement"), we obtained a $2.0 million secured term
loan (the "Term Loan"), a $1.0 million secured equipment loan (the "Equipment
Loan") and a $4.0 million working capital line of credit (the "Revolving Loan").
- The Term Loan bears interest at prime plus 2.0% and matures with a
balloon payment on December 31, 2000. The proceeds were used to pay down
the outstanding Credit Facilities. The balance outstanding under the Term
Loan was $2.0 million as of September 30, 1999.
- The Equipment Loan bears interest at prime plus 2% and has monthly
principal and interest installments through maturity on June 31, 2001.
The proceeds were used to pay for purchases of property and equipment.
The balance outstanding under the Equipment Loan was $875,000 as of
September 30, 1999.
32
<PAGE> 37
- The Revolving Loan permits us to borrow the lesser of $4.0 million or 80%
of eligible accounts receivable through the maturity date of December 31,
2000 and bears interest at prime plus 2%. The Revolving Loan is used to
fund certain working capital requirements of ours and we are required to
remit our accounts receivable collections to the Lender whenever there is
a balance outstanding under the Revolving Loan. The balance outstanding
under the Revolving Loan was $402,000 as of September 30, 1999.
In connection with the Loan Agreement, we issued to the Lender a warrant to
purchase 65,000 shares of our common stock for $4.65 per share.
We expect to have capital expenditures of approximately $500,000 and $2.0
million in the fourth quarter of 1999 and the year 2000, respectively. We also
anticipate that our capital expenditures will increase over the next several
years as we expand our facilities and acquire equipment to support expansion of
our sales and marketing and research and development activities.
We believe that the net proceeds from this offering, together with our
current cash and borrowing capacity will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 12
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt securities
or increase the available borrowings under our line of credit. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us.
YEAR 2000 READINESS
Some computers, software and associated equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if, for example, 00 is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the Year
2000 problem.
State of Readiness of Our Products. Our review of the Year 2000 readiness
of our products is performed as a part of our normal quality assurance program.
This program requires testing of computer processes with the hardware system
clock set to dates in the year 2000 and includes testing of dates in the year
2000 as inputs. As of the date of this prospectus, we have identified no
material Year 2000 compliance issues with our products as currently licensed.
However, our products operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We
have not performed extensive tests on all hardware, software, switches and other
devices that may operate in conjunction with our products, or provide data to or
receive data from our products. We also have not tested custom interfaces
written for our products. Some customers using our products may have Year 2000
problems.
State of Readiness of our Internal Information Technology 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 generally relied upon our own
testing and the public representations of our suppliers of products and services
of their Year 2000 readiness. We believe that we have identified substantially
all major computers, software applications and related equipment used with our
internal operations that must be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. We have begun modifying,
upgrading and replacing these systems and expect to complete this process before
the end of the fourth quarter of 1999.
Systems Other Than Information Technology Systems. Our internal operations
and businesses are also dependent upon computer-controlled systems of third
parties such as suppliers, customers and service providers. The operation of our
office and facilities equipment, such as fax machines,
33
<PAGE> 38
photocopiers, telephone switches, security systems, elevators, other common
devices and utilities, may be affected by the Year 2000 problem. We are
currently assessing the potential effect of, and costs of remediating, the Year
2000 problem on this equipment. We believe that, absent a critical failure
beyond our control, such as prolonged loss of electrical or telephone service,
Year 2000 problems experienced by third parties will not have a material impact
upon us.
Cost Assessment. We do not separately track expenditures to achieve Year
2000 readiness. Those expenditures are absorbed within our development
organization. To date, our costs related to Year 2000 readiness have not been
material relative to our overall development expenditures. Furthermore, based on
our experience to date, and our assessment as of the date of this prospectus, we
do not anticipate that costs associated with remediating non-compliant products
or internal systems will be material.
Risks. Any failure of our products to achieve Year 2000 readiness could
result in a decrease of sales of our products, an increase in allocation of
resources to address Year 2000 problems of our customers without additional
revenue commensurate with the dedication of resources, or an increase in
litigation costs relating to losses suffered by our customers due to these Year
2000 problems. Failures of our internal systems could prevent us from processing
orders, issuing invoices, and developing products, and could require us to
devote significant resources to correcting these problems. 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 operation, and
financial condition.
Contingency Plans. We are currently developing contingency plans to be
implemented as part of our efforts to identify and correct Year 2000 problems
affecting our internal systems. We expect to complete our contingency plans by
the end of the fourth quarter of 1999. Depending on the systems affected, these
plans could include:
- accelerated replacement of affected equipment or software;
- the use of backup equipment and software;
- increased work hours for our employees or use of contract personnel to
correct on an accelerated schedule any Year 2000 problems which arise or
to provide manual workarounds for information systems; and
- other similar approaches.
If we are required to implement any of these contingency plans, these plans
could have a material adverse effect on our business, financial condition and
operating results.
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, will adopt it upon its effective date and have
not currently reached a conclusion concerning its impact, if any, on us.
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
34
<PAGE> 39
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
undeliverable elements is recognized as revenue related to the deliverable
elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999.
We do not anticipate any material impact from the provisions of the new
pronouncement on our results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number or
factors including those set forth in the risk factors section of this
prospectus.
Foreign Currency Exchange Rate Risk
To date, approximately 95% of our recognized revenues have been denominated
in U.S. dollars and primarily from customers in the United States, and our
exposure to foreign currency exchange rate changes has been immaterial. We
expect, however, that future license and professional services revenues may also
be derived from international markets and may be denominated in the currency of
the applicable market. As a result, our operating results may become subject to
fluctuations based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales dominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.
Interest Rate Risk
As of September 30, 1999, we had cash and cash equivalents of $52,000 which
consist of cash and highly liquid short-term investments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure.
As of September 30, 1999, we had total short-term and long-term debt
outstanding of $902,000 and $2.2 million, respectively, which contain interest
rates that are tied to the prime rate. Therefore, we are subject to exposure to
interest rate risk for these borrowings based on fluctuations in the prime rate.
Based upon the outstanding indebtedness under these arrangements, an increase in
the prime rate of 0.5% would cause a corresponding increase in our annual
interest expense of approximately $16,000.
35
<PAGE> 40
BUSINESS
OVERVIEW
We are a leading provider of recording and analysis software that enables
companies to enhance their customer interactions across multiple communications
media. Our software is designed to enable companies to optimize their customer
relationship management, or CRM. As a result, we believe our customers are able
to generate additional revenue opportunities, improve profitability, enhance
customer retention and achieve greater customer intimacy.
Our WITNESS software is designed to enable customer contact centers within
a company to record and evaluate complete customer interactions through multiple
media, such as telephone and Web chat. Our software records customer service
representative, or CSR, voice interactions with a customer as well as the CSR's
corresponding computer desktop activities, such as data entry, screen navigation
and data retrieval. By capturing both voice and computer desktop activity and
synchronizing them during replay, a company can observe and analyze complete
customer interactions as they actually occurred. Supporting the need for
Web-based customer interactions driven by the growth of the Internet and
eCommerce, WITNESS enables companies to also capture, evaluate and analyze Web
chat sessions. In addition, our software allows companies to selectively record
and analyze customer interactions based on business criteria which they define,
such as key customers, important marketing campaigns, specific products and
selected CSRs.
We currently provide our software to an extensive base of large companies
with multiple contact centers, including American Express, Bank of America, Bell
Atlantic Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS,
Federal Express, Federated Department Stores, General Motors/Saturn, GTE, MCI
WorldCom, Merck-Medco, Sabre, Southern Company, VISA, Wells Fargo and Xerox. As
of November 1, 1999, we had licensed our software to over 100 customers at over
300 sites.
INDUSTRY BACKGROUND
Developing and maintaining long-term customer relationships is critical to
the success of businesses operating in a competitive global marketplace. The
rapid growth of the Internet and eCommerce has increased the importance
companies place on their customer relationships. Because the Internet enables
consumers to easily evaluate products and prices from a wide range of
geographically dispersed vendors and quickly change vendors at relatively low
cost, it is becoming more difficult for businesses to develop long-term
relationships with their customers. As the use of the Internet expands as a
business platform, the need for personal contact is essential to enabling a
higher quality customer experience. The integration and optimization of customer
contacts across all communications media is therefore becoming a strategic and
tactical business requirement.
In response to these trends, companies are adopting CRM initiatives seeking
to increase the longevity and profitability of their customer relationships. To
effect CRM initiatives, companies have developed software applications to
automate and evaluate key sales, marketing and customer service processes and
improve the effectiveness of their customer interactions. According to META
Group, an information technology research and advisory services firm, industry
leading enterprises are responding to the steadily increasing competitive
pressures and are focusing on CRM as their most valuable post-year 2000
technology investment. Moreover, according to a recent press release, AMR
Research, Inc. predicts that the market for CRM-related technology will grow at
a compound annual rate of 49% over the next five years, exceeding $16.8 billion
by 2003. Historically, the focus of CRM applications has been on improving the
companies internal sales, marketing and customer service processes.
Competitive pressures resulting from the emergence of the Internet and
eCommerce have required companies to shift the focus of their CRM initiatives
from improving their internal operations to meeting the needs of their
customers. Companies are developing a new set of business principles that place
a greater value on improving customer satisfaction and enhancing
36
<PAGE> 41
employee skills to foster customer relationships and increase customer intimacy.
We believe that companies with a better understanding of the characteristics and
preferences of their customers will be able to more effectively customize
product and service offerings that result in increased customer retention. In
addition, these companies will be able to better identify opportunities to sell
complementary or higher-end products and to more accurately forecast customer
demand.
To understand and improve customer relationships, a company must first
improve its specific business processes that involve a high degree of direct
customer interaction. Today, a majority of a company's direct customer
interactions occur through call centers. These call centers are generally
staffed by telephone operators, often referred to as call center agents, who
process a steady flow of outbound or inbound telephone calls relating to the
company's products and services. Call centers generally consist of supervisor
and agent workstations linked to a central telephone switch and a common
computer system. PELORUS Group estimates that at the end of 1998, there were
approximately 70,000 installed call center systems with 3.3 million call center
agent positions in the United States. It further estimates that by the end of
2003, the number of installed call center systems will increase to more than
117,000, with the number of agents reaching approximately 5.3 million. As a
result of this widespread market adoption, companies have increased their focus
on developing and improving the efficiency of their call center operations.
Historically, call centers have had the ability to handle only limited
telephone and other voice interactions. These call centers have generally
focused on either conducting outbound calls, for functions such as collections
and product sales, or on managing inbound calls, for purposes such as product
support, order processing or customer service. The growth of the Internet and
the increased focus of businesses on optimizing relationships with their
customers have contributed to the evolution of traditional single-function,
telephone-based call centers into multi-functional, multi-channel customer
interaction centers, or contact centers. The emergence of multi-channel customer
contact centers has generally increased the volume and complexity of tasks that
call center agents are required to perform. As a result, traditional
single-function call center agents must now assume more valuable, multi-function
customer service responsibilities. Companies are now attempting to apply the
best practices from the call center industry to the rapid, electronic,
high-volume customer interactions associated with the Internet.
These customer service representatives, or CSRs, are now required to
effectively handle multiple tasks that involve interaction across a growing
number of customer touch points, including telephone, Web chat and e-mail. For
example, certain Web-based consumers may have the option to select a "call me
now" button which initiates a Web chat or direct telephone interaction with a
CSR. While Web-based customer interactions are expected to continue to grow
rapidly, Jupiter Communications estimates that 90% of all online customers still
prefer human interaction. In addition, companies have discovered that the
success of their marketing initiatives depends on their ability to rapidly make
adjustments to these campaigns as they progress. We believe these adjustments
are best effected at the direct point of customer contact, which we believe is
increasingly occurring through the contact center. The increasing importance of
developing long-term customer relationships, the growing complexity of the CSR's
job and the opportunity to manage marketing initiatives through the customer
contact center have combined to dramatically increase the need for companies to
provide an effective means to record, evaluate and analyze their customer
interactions.
A number of applications have emerged to attempt to address the need to
better manage these interactions. However, we believe that most currently
available solutions do not adequately address the importance of optimizing
customer interactions through recording at the point of contact, evaluation of
the customer contact and analysis of CSR performance. For example, current
solutions require companies to record every call center telephone call and store
these calls on large-scale proprietary hardware systems. These solutions do not
allow a company to selectively record,
37
<PAGE> 42
retrieve, evaluate and analyze specific customer interactions based on criteria
selected by the company. Consequently, companies who employ these existing
solutions have only a limited ability to actively evaluate and improve their
customer interactions which in turn limits their ability to attract and retain
customers. As a result, we believe that there is a significant opportunity in
the marketplace for a comprehensive, integrated solution which optimizes a
company's customer interactions.
OUR SOLUTION
Our recording and analysis software enables companies to enhance their
customer interactions across multiple communications media, such as telephone
and Web chat. As a result, we believe our customers are able to generate
additional revenue opportunities, improve profitability and enhance customer
retention. We believe our software and services provide the following key
business benefits:
- Increases revenue opportunities. Our software enables companies to
analyze customer interactions, incorporating data from their existing
databases and systems. As a result, companies are able to customize their
sales and marketing efforts to individual customer preferences or
tendencies, improve the selling techniques of their CSRs and sell
additional complementary or higher-end products and services to their
existing customers. Consequently, we believe companies utilizing our
software can generate additional revenue opportunities.
- Improves profitability. Because our solution improves the overall
quality of companies' interactions with their customers, costs associated
with customer turnover are reduced. By providing CSRs with better
training, companies can improve the efficiency of CSRs by reducing their
average "talk time," which results in decreased total telephone charges
and a reduced total number of CSRs needed to handle the same volume of
customer interactions. Because our software enables the evaluation of
individual CSR performance, companies can customize incentives to reward
CSRs. We believe these customized incentives, together with effective
feedback and training, leads to increased CSR job satisfaction, retention
of high quality CSRs and reduced costs related to CSR turnover. According
to the 1999 Purdue University Call Center Benchmark Report, inbound call
center turnover averages 26% and the average cost to acquire a CSR is
$6,398. This data, combined with the estimates from PELORUS Group,
translate into an aggregate CSR turnover cost of approximately $5.5
billion.
- Enhances customer retention. Using our software, companies can develop
more intimate knowledge of their customers, which should improve the
overall quality of products and services being delivered to customers. We
believe that the growth in Internet-related commerce and services will
increase the importance customers place on high-quality and consistent
customer service. Jupiter Communications estimates that the average cost
to acquire a single customer by Amazon.com, eBay and Preview Travel has
risen approximately 45% from the second quarter of 1998 to the second
quarter of 1999. It is imperative that companies retain these costly new
customers to capitalize on their investment. As a result, we believe that
companies who deliver excellent service to their customers will develop
longer-term, more profitable customer relationships.
We believe that we are able to provide these key business benefits through
the innovative features of our software solution, which include the following:
- Enables synchronized replay of voice and computer desktop data. Our
software records a CSR's voice interaction with a customer as well as the
CSR's corresponding computer desktop activities, such as data entry,
screen navigation and data retrieval. By capturing both voice and
computer desktop activity and synchronizing them during replay, companies
can observe and analyze complete customer interactions as they actually
occurred. This enables
38
<PAGE> 43
companies not to only evaluate the behavior of their CSRs, but also to
determine whether the necessary technology resources for customer support
are readily available to the CSR and whether the CSR is making effective
and efficient use of available technology resources.
- Records based on company-selected criteria. Companies using our software
can record customer interactions based on selected criteria, which we
refer to as business-driven recording. This enables companies to define
specific business criteria to trigger recording and analysis of
information, such as key customers, important marketing campaigns,
specific products and selected CSRs. Further, companies can define
critical business events to trigger the capture of the interaction, such
as customer problems which have reached a certain severity level.
Companies can then use this information to quickly evaluate the
performance of targeted business initiatives and to adjust those
initiatives for higher market impact.
- Provides CSR performance analysis and feedback. Our Evaluation Reporter
software facilitates the review, evaluation and scoring of CSRs,
providing an immediate performance summary. Using our Performance
Analyzer product, a user can combine important data derived from
Evaluation Reporter with data derived from many other business
applications, such as CRM and enterprise resource planning software and
integrated telephony applications. For instance, a company can evaluate
quality scores obtained from Evaluation Reporter with sales achievement
data received from a sales tracking system to ensure CSRs are not
compromising the quality of their customer interactions to sell new
products. The resulting information, which is presented in easy-to-use
formats, such as reports, graphs and tables, allows companies to provide
more meaningful feedback to CSRs on their performance and better analyze
the overall operation of the contact center.
- Integrates with third party software and hardware. Our software is
designed to integrate with a variety of third party software, such as CRM
and enterprise resource planning applications. In addition, our software
is designed to integrate or be compatible with a company's existing
telephony and computer network hardware and software such as telephone
switches, automated telephone dialers and computer-telephony integration
systems. This allows companies to capitalize on their existing
infrastructure and gain the benefits of our software with minimal
additional investment.
- Provides an open architecture that scales to support small to large
installations. Our software is developed to operate on the Windows NT
platform and is compatible with standard voice cards and databases. By
utilizing off-the-shelf hardware and software, our customers are able to
implement and support our products at a relatively low cost. Because our
software is scaleable, it can support the needs of a small single site as
well as large multi-site installations. For example, our software is
currently being used at a customer installation with approximately 7,000
CSRs. In addition, our software can be expanded to accommodate an
increasing number of CSRs with minimal hardware and software investment.
- Enables rapid deployment. Because of our software's features, our
extensive third party integration, our open architecture and our
implementation process, our software can typically be used in production
at a customer's initial site within 30 to 45 days. Since the detailed
project planning occurs during installation at the first site, our
software can be used in production at additional sites in five to seven
days. Most of our target market consists of large corporations with many
customer contact centers, and we have significant experience with
customers purchasing our software for multiple sites. As a result, our
rapid deployment is important in that it allows those customers to
quickly implement and begin realizing the benefits of our software.
39
<PAGE> 44
STRATEGY
Our objective is to be the leading provider of software that enables
companies to optimize their customer interactions across multiple communications
media, including telephone, Web chat, eCommerce, Internet self-service and
e-mail. Key elements of our strategy include the following:
- Extend the breadth and depth of our product offerings. We intend to
continue to invest in research and development to enhance our current
software and build new software to address the growing needs of companies
that seek to better manage their customer relationships across multiple
communications media. We also intend to extend our Web-based
capabilities, such as the recording and analyzing of integrated
eCommerce, Internet self-service, e-mail and voice interactions.
Additionally, we plan to expand the number of third party applications
with which our software can integrate.
- Increase sales to existing and new customers. A majority of our existing
customers are large companies that have multiple contact centers. While
we have been successful in penetrating these customers and installing our
software at more than one contact center, we have not yet installed our
software at a majority of their contact centers. We intend to capitalize
on the success of our initial installations, use our direct sales force
and emphasize the scalability and rapid deployment of our software to
increase the number of installations at existing customer sites which
have not yet installed our software. We also plan to continue pursuing
new customer accounts with multiple contact centers through our existing
sales force and our network of strategic relationships.
- Expand our network of application software and Internet infrastructure
business alliances. We intend to expand our network of business
alliances with complementary application software and Internet
infrastructure providers to increase the number of products with which
our software is compatible. We believe the demand for our software will
increase as it becomes compatible with an increasing number of CRM,
enterprise resource planning and Internet infrastructure applications. In
addition, expanding this network of business alliances will enable us to
generate new sales leads as our business alliances recommend our product
to their customers. Currently we have business alliances with the
following application and Internet infrastructure providers: Siebel
Systems, Clarify, Cisco/Geotel, Genesys, eShare and Davox.
- Expand our international presence. We currently maintain a small direct
sales force in the United Kingdom. In the future, we plan to expand our
direct and indirect sales channels in Europe, the Asia Pacific region and
Latin America, with particular attention to areas that are actively
adopting CRM solutions.
PRODUCTS
Our software initiates recording of customer interactions based on criteria
selected by companies and facilitates retrieval and analysis of the recorded
information. It records a CSR's voice interaction with a customer as well as the
CSR's corresponding computer desktop activities, such as data entry, screen
navigation and data retrieval. The voice and data are captured and stored on a
computer disk for synchronized evaluation and analysis. By capturing both voice
and desktop activity and synchronizing them during replay, a company can observe
and analyze complete customer interactions as they actually occurred. The
captured interactions can then be selectively retrieved, combined with
information from a company's other business systems, such as CRM and enterprise
resource planning software, analyzed and presented in a number of summary or
detailed formats. Our software thus enables companies to evaluate the
effectiveness of its CSRs, improve contact center performance and profile their
customers' characteristics and preferences to create customized product and
service offerings.
40
<PAGE> 45
In addition, our software is also designed to integrate or be compatible
with a company's existing telephony and computer network hardware and software.
It can be used with a variety of software platforms and operating systems,
including Windows 3.1, Windows 95, Windows NT, OS/2, Sun Solaris, 3270, AS/400
and UNIX.
The following diagram provides a graphical depiction of the Witness Systems
solution:
[This graphic is titled "The Witness Systems Solution" across the top.
Underneath the title bar is a three level graphic. The top level is four
three-dimensional cubes. Inside the first cube text states: "Voice and Data
Recording". Inside the second cube text states: "Web Chat Recording" Inside the
third cube text states: "Evaluation Reporter." Inside the fourth cube text
states" Performance Analyzer." To the left of the four cubes, text states:
WITNESS Application Components. The second level is 2 three-dimensional
rectangles. Inside the first rectangle, text states: "WITNESS Core Technology."
Inside the second rectangle, text states: "Witness Integration Software." To the
left of both rectangles text states: "Witness Technology Platform." The third
level is one three-dimensional rectangle. Inside the rectangle text states:
"Technology Integration Modules." To the left of the rectangle is text stating:
"Enabling Technology Infrastructure".]
Three major products comprise our software solution:
WITNESS. Our core product, WITNESS, records a CSR's voice interaction with
a customer and the CSR's corresponding computer desktop activities, such as data
entry, screen navigation and data retrieval. The captured voice and desktop
activity can then be synchronized during replay, allowing companies to observe
and analyze complete customer interactions as they actually occurred. This
enables companies to evaluate the performance of CSRs, determine whether the
necessary technology resources for customer support are available to the CSRs
and ascertain whether the CSRs are making effective and efficient use of these
resources. Supervisors can use this information to train CSRs, improve company
systems and resources which are designed to support CSRs and enhance the quality
of the services being delivered to customers.
An integral feature of WITNESS is business-driven recording, which allows a
company to record specific customer interactions based on criteria that it
selects. Using WITNESS, a company can define business rules that trigger
recording of selective customer interactions that are particularly critical to
its operating performance. For example, a company may use WITNESS to record
customer interactions based on a number of criteria, including:
- Key customers. Our software can selectively record all calls from
specific classes or groups of customers having common traits or
characteristics. Examples include customers with certain sales or asset
levels or customers having a particular importance to the company.
- Important marketing campaigns. All calls associated with particular
marketing campaigns can be recorded so that the effectiveness of the
campaign can be evaluated while the initiative is in process.
Consequently, adjustments can be made proactively to optimize performance
of the campaign.
- Specific products. Interactions that relate to specific products can be
identified and recorded to allow businesses to evaluate product design,
installation and service issues. Examples
41
<PAGE> 46
include selected calls related to new products, key revenue-producing
products and particularly profitable products.
- Selected CSRs. Calls that are handled by specific CSRs can be sampled so
that supervisors can more effectively monitor and train CSRs. Examples
include newly hired CSRs and CSRs that are not achieving desired
performance levels.
By recording only critical customer interactions based on business rules,
companies have fewer interactions to store and therefore significantly lower
storage requirements. Further, our data capture technique allows companies to
utilize minimal network bandwidth by sending across the network only the changed
areas of a CSR's computer desktop screen. The result is a lower total cost of
ownership. To date, we have derived substantially all of our revenues from our
core WITNESS product.
Evaluation Reporter. Our Evaluation Reporter application facilitates the
review, evaluation and scoring of CSRs, providing an immediate summary of a
CSR's performance. Using Evaluation Reporter, CSR supervisors can build custom
evaluation forms which are designed to collect information about aspects of a
CSR's performance that are most important to them. Supervisors and others can
input information regarding a CSR's performance into the form, which is then
collected in a database. The collected information can be retrieved, presented
in a summary format, analyzed and ultimately used to measure and improve a CSR's
performance.
Evaluation Reporter can reveal problem areas, issues, trends and
opportunities. Supervisors and others with access to Evaluation Reporter can
review CSRs' performance and determine opportunities to increase their skill
levels through training. Supervisors can compare CSRs' performance to current
goals and provide more realistic future goals.
The following diagram presents a sample screen taken from Evaluation
Reporter:
[A screen of the Evaluation Reporter software. The tool bar is located on
the top portion of the page. The remainder of the page contains data entry pull
down menus and multilayered tab menus]
Performance Analyzer. Performance Analyzer provides a more comprehensive
analysis of customer interaction and CSR performance by bridging the disparate
information systems of a company. Using Performance Analyzer, a company can
combine data derived from Evaluation Reporter with data derived from information
obtained from a company's other business systems, such as CRM and enterprise
resource planning software and integrated telephony applications. Combining
multiple sources of data from within the company into a common analysis and
reporting system allows for a more thorough evaluation of CSR and overall
contact center performance. Recognizing the importance of multi-channel contact
centers, we have designed Performance Analyzer to integrate with business
systems that collect data from a broad range of communications media.
Performance Analyzer measures the performance of a company's contact center
based on criteria selected and weighted by the company. This performance index
allows a company to prioritize its key business drivers. For instance, a company
can evaluate quality scores obtained from Evaluation Reporter with sales
achievement data received from a sales tracking system to ensure CSRs are not
compromising the quality of their customer interactions to sell new products.
Performance Analyzer features the flexibility to produce a wide array of
summary and detailed analyses in easy-to-use formats, such as reports, graphs
and tables. Reporting features include Web-publishing capabilities, which allow
contact center managers to create reports in an HTML format, view them online or
print them for distribution. Additionally, CSRs are able to view their scores by
simply accessing the corporate Intranet.
42
<PAGE> 47
The following diagram presents a sample screen taken from Performance
Analyzer:
[A screen of the Evaluation Reporter software. The tool bar is located on
the top portion of the page. The remainder of the page contains data entry pull
down menus and multilayered tab menus]
PROFESSIONAL SERVICES
Our professional services group plays an integral role in installing our
software and training and supporting our customers. Specifically, we provide the
expertise, professional consulting staff and technology tools to install our
software and provide ongoing support to our customers. Our experienced
installation professionals work with the customer to build a solid technical
infrastructure that supports our software applications.
An initial installation engagement typically lasts 30 to 45 days and
involves the planning, configuration, testing and installation of our software.
We believe these installation projects allow our consultants and systems
engineers to gain industry-specific knowledge that can be used in future
projects and products.
In addition to installing our software and supporting our customers, our
professional services team works closely with our internal research and
development organization to help enhance our software solutions. Experience
gained by our professional services group through ongoing installation of our
software is regularly conveyed to our development staff. Our research and
development organization then capitalizes on this experience to design
enhancements to our software. Our services staff also maintains a technical
support hotline.
CUSTOMERS
Our target customers include companies in a number of industries having at
least one contact center. As of November 1, 1999, we had licensed our software
to over 100 customers at over 300 sites. To date, customer installations have
ranged from as small as one contact center having 25 CSRs, to customers with 14
contact centers having an aggregate of approximately 7,000 CSRs. The following
table is a representative list of customers who have licensed our software:
<TABLE>
<CAPTION>
FINANCIAL SERVICES TECHNOLOGY & TELECOM OTHER
------------------ -------------------- -----
<S> <C> <C>
American Express Alltel Communications 7C
Bank of America Bell Atlantic Mobile ADP
BB&T Bellsouth Federal Express
Capital One CCH INCORPORATED General Motors/Saturn
Chase Manhattan Bank CheckFree Georgia Pacific
Fleet Bank EDS International Paper
Discover Financial Services, GTE Maytag
formerly Novus MCI WorldCom Merck-Medco
Liberty Health McLeod USA Norcross Teleservices
PNC Bank TCI PC ServiceSource
VISA Xerox Pepsi
Wells Fargo Promus Hotels
Sabre
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
RETAIL UTILITIES
------ ---------
<S> <C> <C>
BMG Direct First Energy
CompUSA Niagra Mohawk
Federated Department Stores Northeast Utilities
Fingerhut Southern California Edison
Victoria's Secret Southern Company
Wisconsin Power and Light
</TABLE>
For the years ended December 31, 1997 and 1998 and for the nine months
ended September 30, 1999, we did not have a customer representing more than 10%
of our total revenues and the loss of whom would have a material impact on our
business.
SELECTED CUSTOMER EXAMPLES
GM/SATURN
Saturn is a wholly owned subsidiary corporation of General Motors. The
Saturn customer assistance center is where Saturn customers call upon a skilled
team of customer support consultants and customer assistant managers from both
Saturn and Centrobe, an EDS company and a leading provider of enterprise
customer management solutions. Recording and analysis software is an important
component of the company's assistance center. In calculating the number of Team
Leaders on staff along with their annual salaries, Saturn determined that
WITNESS has already decreased up to 50% of its workload, measured by call
monitoring time, through the automated recording process and the subsequent
evaluation processes.
PNC BANK
PNC Bank Corporation is a diversified financial services organization. To
service the financial needs of regional community banking customers, PNC Bank
operates a nearly 900 person customer contact center -- the National Financial
Services Center. Voted one of the top five call centers in financial services,
this contact center processes more than 2.8 million customer interactions for
PNC Bank each month. In response to the company's need to provide
industry-leading customer service, PNC Bank leverages our recording application
to record a random sample of each financial services consultant's voice and data
interactions with customers every month. This information is used to
44
<PAGE> 49
properly coach consultant's on customer service skills, trend customer needs and
requests, and ensure quality service in future customer interactions.
COMPUSA
CompUSA Inc. is a leading computer retailer in the United States. The
company deployed WITNESS in its call center services facility, which is
responsible for all technical support to CompUSA's individual and business
customers, customized help desk services for third party customers, and
technical support outsourcing for computer manufacturers and software
publishers. The 120,000-square-foot facility opened in July 1998 and has the
capacity for over 1,000 agents. CompUSA expects WITNESS' business-driven
recording capabilities to improve agent interaction with customers and internal
systems by simultaneously monitoring agents' conversations and on-screen
activities for improved coaching and training sessions that result in better
customer service.
7C LTD
7C Ltd is a leading independent outsourced CRM specialist in the United
Kingdom. The company implemented the WITNESS solution as part of 7C's recently
announced L10 million, three-year expansion program to become a major player in
the European call center market and the leading provider of Internet-based
customer contact solutions. WITNESS helps the company not only see how well its
people are servicing customers but also, crucially, how well its technology is
performing. 7C can determine immediately, for example, if slow computer response
times or screen sequencing are making calls unnecessarily long and placing undue
demand on staff.
PC SERVICESOURCE
PC ServiceSource is a leading provider of complete and integrated service
logistics outsourcing solutions for both OEMs and service providers in the
personal computer industry. Approximately 150 sales services representatives
handle about 10,000 phone calls daily. Asking for the sale and "upselling" is a
skill that PC ServiceSource managers are enhancing through the use of the
WITNESS voice and data recording solution. Its new training program places a
greater emphasis on the sales opportunities presented to sales service
representatives when they are interacting with customers. PC ServiceSource has
seen dramatic improvements and plans to continue regular training initiatives
designed to assist sales service representatives in increasing their sales,
while improving their skills with the help of our software.
PROMUS HOTEL CORPORATION
Promus Hotel Corporation is the franchiser and operator of the Doubletree
Hotels Guest Suites and Resorts, Embassy Suites, Hampton Inn, Hampton Inn &
Suites, Homewood Suites, Club Hotels by Doubletree, Red Lion Hotels, Embassy
Vacation Resorts and Hampton Vacation Resorts brands. The WITNESS solution has
enabled them to address specific service delivery and training issues as they
take place. Strengthening its service proactively and developing reservation
sales representatives' skill sets has been greatly enhanced with WITNESS at
their Central Reservations Office.
SALES AND MARKETING
We sell our software primarily through a combination of a direct sales
force and resellers. We have 11 sales offices in the United States, one in
Canada and two in the United Kingdom. As of November 1, 1999, our sales and
marketing organization consisted of 53 employees worldwide.
To date, substantially all of our revenues have been generated through our
direct sales force which consists of 26 sales people in 13 locations. Our direct
sales force consists of sales agents and regional managers. In addition to
qualified leads generated internally, our direct sales force also pursues
qualified leads provided by companies with whom we have formal or informal
referral
45
<PAGE> 50
agreements. These agreements are not exclusive and may be terminated by either
party. Our direct sales force is responsible for the direct sales effort and
manages, negotiates and closes those sales.
To expand the coverage and support of our direct sales force, we also
develop strategic marketing alliances with leading companies in our industry.
These relationships may include joint marketing campaigns and selling
strategies. Separate from our direct sales force, our business development
personnel are responsible for the initiation, negotiation and completion of
these partnerships. We currently have these relationships with Siebel Systems,
Clarify, Cisco/Geotel, Genesys, eShare and Davox.
In addition to our direct sales force, we have agreements with MCI WorldCom
and Rockwell under which they resell our software. To support this indirect
sales channel, our business development personnel provide information and
training to these companies' sales personnel so that they are better able to
educate potential customers about the benefits of our software and services. Our
agreements with our resellers are not exclusive and may be terminated by either
party.
Our direct sales cycle typically begins with the qualification of a sales
lead or the request for a proposal from a prospective customer. The sales lead,
or request for a proposal, is followed by the qualification of the lead or
prospect, an assessment of the customer's requirements, a formal proposal,
presentations and product demonstrations, site visits to an existing customer
using our software and contract negotiation. The sales cycle can vary
substantially from customer to customer but typically lasts three to six months,
and is considered completed with the signing of the contract. Historically, most
of our customers have expanded their use of our solutions to expand the number
of CSRs at existing sites and to license additional contact centers, with a
minimal incremental sales effort on our part. This results from high levels of
customer satisfaction within our installed base. Since a majority of the
detailed project planning occurs during the installation at the first site, our
software can be used in production at additional sites in five to seven days.
We use a variety of marketing programs to build awareness of Witness
Systems, our brand name and our software, as well as to attract potential
customers. These programs include market research, product and strategy updates
with industry analysts, public relations activities, direct mail and
relationship marketing programs, seminars, trade shows, speaking engagements and
Web site marketing. Our marketing organization also produces marketing materials
to support our sales efforts, that include brochures, data sheets and other
technical descriptions, presentations and demonstrations.
The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenues. As our revenues grow, seasonal
fluctuations in our revenues may become more evident.
RESEARCH AND DEVELOPMENT
We believe our software development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications
incorporating that technology and maintaining the competitiveness of our
software. We devote a substantial portion of our resources to developing new
software and features, extending and improving our software technology and
researching new technological initiatives in our market. We believe that our
future success depends in part upon our ability to continue to enhance existing
software, respond to changing customer requirements and develop and introduce
new or enhanced software that incorporate new technological developments and
emerging industry standards.
Our research and development expenditures for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended September 30, 1999 were $1.1
million, $1.8 million, $3.5 million and $4.1 million, respectively. We intend to
continue to increase our investment in research and development in the future.
As of November 1, 1999, 50 of our employees were engaged in research and
development and software maintenance activities.
46
<PAGE> 51
COMPETITION
Our software and services compete in the emerging market for products that
record and analyze customer interactions. This market is intensely competitive
and experiences rapid changes in technology. We believe that we compete
effectively with our competitors. However, many of our current and potential
competitors may have longer operating histories, more established business
relationships, larger customer bases, a broader range of products and services,
greater name recognition and substantially greater financial, technical,
marketing, personnel, management, service, support and other resources than we
do. This could allow our current and potential competitors to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements, better take advantage of acquisitions and other opportunities,
devote greater resources to the marketing and sale of their products and
services, and adopt more aggressive pricing policies. In addition, many of our
competitors market their products through resellers and companies that integrate
their technology and products with those of the competitor. These resellers and
technology partners of our competitors often have strong business relationships
with our customers and potential customers. Our competitors may use these
business relationships to market and sell their products and compete for
customers with us. We cannot assure you that our competitors will not offer or
develop products and services that are superior to ours, or that achieve greater
market acceptance. Our competitors include:
- quality monitoring suppliers to the call and contact center industry,
which historically have been companies that develop voice-only recording
software;
- traditional call logging vendors that have historically focused on
providing products that record all calls made by or to the user,
including emergency services, such as 911, and verification and liability
users, such as trading floors and stock brokers;
- systems integrators and consulting firms which design and develop custom
systems and perform custom integration; and
- new, larger and more established entities that may acquire, invest in or
form joint ventures with providers of recording or performance enhancing
software solutions, such as vendors of CRM products, computer telephony
companies and computer hardware, software and networking companies.
In addition, we have developed, and intend to continue to develop,
relationships with companies that resell our software, companies that integrate
our software with their technology and products and companies that provide us
with customer referrals or leads. Some of these companies have similar, and
often more established, relationships with our competitors, and may recommend
the products and services of our competitors to customers instead of our
software and services. In addition, through their relationships with us, these
companies could learn about our software and the market for our software and
services and could develop and sell competing products and services.
The principal competitive factors in our market include:
- product performance, reliability and features;
- user scalability and open architecture;
- third party integration;
- quality and speed of product implementation;
- ease-of-use for customers;
- analytic capabilities of the product;
- how quickly new products and product enhancements can be brought to
market;
47
<PAGE> 52
- customer support; and
- pricing of products and services.
We expect that competition will increase as other established and emerging
companies enter our market and as new products, services and technologies are
introduced. Increased competition may result in price reductions, lower gross
margins and loss of market share. This could materially and adversely affect our
business, financial condition and results of operations.
PROPRIETARY RIGHTS
General. Our success depends to a significant degree on the legal
protection of our software and other proprietary technology rights. We rely on a
combination of patent, trade secret, copyright and trademark laws and
confidentiality and non-disclosure agreements with employees and third parties
to establish and protect our proprietary rights. These measures may not be
sufficient to protect our proprietary rights, and we cannot be certain that
third parties will not misappropriate our technology and use it for their own
benefit. Also, most of these protections do not preclude our competitors from
independently developing products with functionality or features substantially
equivalent or superior to our software. Any failure to protect our intellectual
property could have a material adverse effect on our business.
Licenses. Our licenses are designed to prohibit unauthorized use, copying
and disclosure of our software technology. When we license our software to
customers, we require license agreements containing confidentiality terms
customary in the industry in order to protect our proprietary rights in our
software. These agreements generally warrant that our software will materially
comply with our written documentation and is free of viruses and other illicit
code. We also warrant that we own the software we distribute, have not violated
the intellectual property rights of others and that our current software is Year
2000 compliant. We license our products in a format that does not permit the
users 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.
Patents. We have received a patent generally relating to our technology
that enables the recording of a CSR's computer desktop activities and the
synchronization of certain of these activities with the CSR's voice
interactions. Our patent also relates to our data capture technique that records
only particular changed regions of a CSR's computer screen. We are currently
evaluating whether to revise one aspect of the patent for our synchronization
techniques. If we are unsuccessful, we may not be able to enforce any aspect of
that patent against third parties who infringe it. We also have two patent
applications pending with the United States Patent and Trademark Office. There
is no guarantee that our pending applications will result in issued patents or,
if issued, will provide us with any competitive advantages.
Trademarks and service marks. We have United States trademark
registrations on the mark WITNESS, on our logo and on one additional mark, and
have pending United States trademark applications for two other marks. We also
claim common law protections on the marks Evaluation Reporter and Performance
Analyzer. Competitors of ours and others could adopt marks similar to ours, or
try to prevent us from using our marks, thereby impeding our ability to build
brand identity and possibly leading to customer confusion.
Copyrights. We have seven pending copyright registrations covering the
most recent release of our WITNESS software.
EMPLOYEES
As of November 1, 1999, we had 159 full-time employees. Of these employees,
50 were engaged in research and development and software maintenance, 53 were
engaged in sales and marketing, 27 were engaged in professional services and 29
were engaged in executive, finance, administration and operations.
48
<PAGE> 53
None of our employees are represented by a labor union or covered by a
collective bargaining agreement. We have not experienced any labor-related work
stoppages and consider our relations with our employees to be good.
FACILITIES
Our principal administrative, sales, marketing, support, and research and
development facility is located in Alpharetta, Georgia. This facility consists
of approximately 31,200 square feet and is leased through July 2002. In
addition, we lease a total of 10 sales offices in the United States, one in
Canada and two in the United Kingdom for our direct sales force. We believe our
facilities are adequate for our current requirements.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
49
<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, the positions held by them, and their
ages as of October 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David B. Gould............................. 40 President, Chief Executive Officer and
Director
Jon W. Ezrine.............................. 32 Chief Financial Officer
Russell E. Brown........................... 41 Vice President, Business Development
Jeffery S. Ford............................ 49 Vice President, Operations
Colin Gallick.............................. 46 Vice President, International Operations
Doug Gisby................................. 39 Chief Technology Officer and Vice
President, Engineering
Alain Livernoche........................... 40 Vice President, North American Sales
Nancy Y. Treaster.......................... 38 Vice President, Marketing
James W. Judson, Jr........................ 41 Chairman of the Board
Thomas J. Crotty........................... 41 Director
John Abraham............................... 44 Director
Joel Katz.................................. 36 Director
</TABLE>
David B. Gould has served as our President and Chief Executive Officer and
as one of our Directors since February 1999. From March 1996 to November 1998,
Mr. Gould was Chief Executive Officer and Chairman of the Board of InStream
Corporation, a healthcare electronic commerce company. In 1998, InStream filed
for liquidation under bankruptcy law. Prior to that, Mr. Gould served as
President of Digital Communications Associates, Inc.'s Remote Access Division,
now Attachmate Corporation, an enterprise information access and management
software vendor, from August 1994 to August 1995. From June 1986 to July 1994,
Mr. Gould was employed by Management Science America, a developer of enterprise
solutions, where he held various management and executive level positions in
marketing, development and support, last serving as Vice President of Financial
Systems. Mr. Gould holds a BS in Econometrics from the University of
Pennsylvania and an MBA from Emory University.
Jon W. Ezrine has served as our Chief Financial Officer since April 1997.
From June 1993 to March 1997, Mr. Ezrine served as Controller for SQL
Financials, now Clarus Corporation, a client/server application software vendor.
From April 1992 to June 1993, Mr. Ezrine served as Controller for ITL Interiors,
Inc., distributor of materials to real estate property management companies.
Prior to that, Mr. Ezrine was employed by Arthur Andersen & Co. as a Senior
Staff Accountant. Mr. Ezrine holds a BS in Finance from the University of
Virginia.
Russell E. Brown joined us as Vice President of Business Development in
August 1999. From August 1993 to August 1999, Mr. Brown served in various
management positions with PeopleSoft Inc., a leading provider of client/server
application software products, most recently serving as Vice President of the
Sales/Retail Industry Business Unit. Mr. Brown holds a BS in Industrial
Management from the Georgia Institute of Technology.
Jeff Ford joined us as Vice President of Operations in July 1998. Prior to
that, Mr. Ford worked as an independent consultant from January 1998 to June
1998. From July 1989 to December 1997, Mr. Ford served in various management
positions at Cyborg Systems, a leading software provider of
50
<PAGE> 55
human resources applications, most recently serving as Vice President of Global
Development. Mr. Ford holds a BA in Behavioral Management from the Georgia
Institute of Technology.
Colin Gallick joined us as Vice President of International Operations in
December 1998. From September 1996 to January 1998, Mr. Gallick served as Vice
President of FTP Software Inc., now NetManage, an international leader in the
design, development, marketing, sale, and support of connectivity software
products. From October 1991 to September 1996, Mr. Gallick served as Vice-
President and a director of Utopia Information Systems Inc., a supplier of help
desk applications and software. Mr. Gallick holds a degree in Marketing from
Bristol Polytechnic and an MS in Marketing from the University of Bath.
Doug Gisby joined us as Chief Technology Officer & Vice President of
Engineering in March 1999. Prior to that, Mr. Gisby worked as an independent
consultant from March 1998 to February 1999. From January 1997 to February 1998,
Mr. Gisby served as Director of Engineering for Genesys Telecommunications
Laboratories, a provider of enterprise-wide platform and application software.
From May 1992 to January 1997, Mr. Gisby served in various management positions
at Rockwell International Corporation, a world leader in electronic controls and
communications, most recently serving as Director of Advance Technology within
the Electronic Commerce Division. Prior to that, Mr. Gisby served as Software
Development Manager with Aspect Telecommunications, a leading provider of
customer relationship management solutions, from January 1989 to May 1992. Mr.
Gisby holds a BS Degree in Computer Science from the University of
Staffordshire.
Alain Livernoche has served as our Vice President of North American Sales
since June 1998. From January 1997 to June 1998, Mr. Livernoche served as Vice
President of Sales, Western Region for SQL Financials, now Clarus Corporation, a
client/server application software vendor. Prior to that, Mr. Livernoche served
in various management positions at Dun & Bradstreet Software, now GEAC, a
developer of enterprise solutions, most recently serving as Regional Vice
President. Mr. Livernoche holds a BS in Finance and Marketing from the
University of Montreal.
Nancy Treaster has served as our Vice President of Marketing since April
1997. Prior to that, Ms. Treaster spent thirteen years with Dun & Bradstreet
Software, now GEAC, a developer of enterprise solutions, serving in various
management positions, most recently serving as Director, SmartStream Product
Marketing/Management. Ms. Treaster holds a BS in Management Science from the
Georgia Institute of Technology.
James W. Judson, Jr., our co-founder, has served as the Chairman of the
Board of Directors since March 1997. From February 1998 to February 1999, Mr.
Judson served as our Vice President of Business Development and from September
1995 to February 1998 he served as our President. Mr. Judson holds a BA in
Politics from Wake Forest University.
Thomas J. Crotty has served as one of our directors since April 1997. Mr.
Crotty has served as General Partner of Battery Ventures, a venture capital
firm, since 1989. Mr. Crotty received a BA in Business from the University of
Notre Dame and a MBA in Finance from the Wharton School.
John Abraham has been a director of the Company since March 1997. Mr.
Abraham has served as President and Chief Executive Officer of Add-Vision, Inc.,
a technology company specializing in electronic display and illumination
systems, since February 1998. From September 1997 to January 1998, he was
Executive Vice President and Chief Operating Officer of Add-Vision, Inc. From
March 1996 to November 1996, Mr. Abraham was a general partner at Geocapital
Partners, a venture capital firm. Mr. Abraham was Executive Vice President of
Compuware Corporation, a computer software developer from January 1995 to June
1995. From January 1994 to December 1994, he was Senior Vice President of
Mergers & Acquisitions of Compuware Corporation. Mr. Abraham was educated at
Columbia University and the University of Illinois.
Joel Katz has served as one of our directors since July 1999. Mr. Katz
currently serves as Chief Financial Officer for Vignette Corporation, a global
provider of e-business software products and
51
<PAGE> 56
services. Prior to Vignette Corporation, Mr. Katz served as Chief Financial
Officer of Harbinger Corporation, a leading worldwide provider of
business-to-business eCommerce software, from 1990 to 1999. Mr. Katz received a
BBA in Accounting from the University of Georgia.
BOARD COMMITTEES
The audit committee consists of Mr. Katz, the chairman, and Messrs. Crotty
and Abraham. The audit committee recommends the selection of our independent
auditors and reviews the results and scope of the audit and other services
provided by them. In addition, the audit committee reviews and evaluates our
internal audit and control functions.
The compensation committee consists of Mr. Crotty, the chairman, and
Messrs. Katz and Abraham. The compensation committee reviews the compensation
and benefits of all our officers, reviews general policies relating to
compensation and benefits of our employees and makes recommendations concerning
these matters to the board of directors. The compensation committee also
administers our amended and restated stock incentive plan and employee stock
purchase plan.
The executive committee consists of Messrs. Gould and Crotty. 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 Delaware.
DIRECTORS COMPENSATION
Directors do not currently receive compensation for services performed in
their capacity as directors. We reimburse each director for reasonable expenses
they incur in attending meetings of our board of directors and its committees.
In addition, non-employee directors who are not employed by venture capital
firms are eligible to receive options to purchase our common stock under our
amended and restated stock incentive plan. The board of directors determines the
vesting schedule and exercise price for options granted to non-employee
directors.
TERMS OF DIRECTORS AND EXECUTIVE OFFICERS
Immediately after the completion of this offering, our board of directors
will be divided into three classes, each serving for staggered three-year terms.
At each annual meeting of stockholders, 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. Our bylaws provide that each class of directors will be elected
by a plurality of all votes cast at the meeting.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been elected and qualified or until
their earlier resignation or removal. There are no family relationships among
any of our directors or executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
52
<PAGE> 57
EXECUTIVE COMPENSATION
The following table sets forth the total compensation we paid during the
year ended December 31, 1998 to our Chief Executive Officer and our next four
most highly compensated executive officers whose salary and bonus for 1998
exceeded $100,000. These executive officers are referred to as the Named
Executive Officers elsewhere in this prospectus. There were no options granted
to the Named Executive Officers in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------- ----------- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Craig Richards............. 1998 $208,519 $25,000 -- $ 591
President and Chief
Executive Officer
James Judson............... 1998 134,000 15,000 -- 377
Vice President, Business
Development
Kirk Knous................. 1998 241,227 -- -- --
Vice President,
International Sales
Nancy Treaster............. 1998 120,000 15,000 -- 338
Vice President,
Marketing
Elizabeth Brown............ 1998 120,000 15,000 -- 338
Vice President,
Engineering
</TABLE>
- ------------------------------
(1) Reflects payments made by the Company for short-term disability
insurance premiums and related tax gross-ups.
In February 1999, Mr. Richards resigned as President and Chief Executive
Officer and Ms. Brown resigned as Vice President of Engineering. In August 1999,
Mr. Judson resigned as Vice President of Business Development and Mr. Knous
resigned as Vice President of International Sales. Mr. David B. Gould became our
President and Chief Executive Officer in February 1999.
53
<PAGE> 58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information regarding options exercised
during fiscal 1998 by the Named Executive Officers and the number and value of
securities underlying unexercised options on December 31, 1998. The value
columns represent the difference between the fair market value of the shares of
common stock underlying the options at December 31, 1998 as determined by our
board of directors, $2.99 per share, less the exercise price paid or payable
upon exercise of these options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END
ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Craig Richards........ -- $ -- -- -- $ -- $ --
President and Chief
Executive Officer
James Judson.......... -- -- -- -- -- --
Vice President,
Business Development
Kirk Knous............ -- -- -- -- -- --
Vice President,
International Sales
Nancy Treaster........ -- -- 27,787 51,603 77,248 143,456
Vice President,
Marketing
Elizabeth Brown....... -- -- 27,787 51,603 77,248 143,456
Vice President,
Engineering
</TABLE>
STOCK OPTION AND OTHER COMPENSATION PLAN
Amended and Restated Stock Incentive Plan
We have established a stock incentive plan, which has recently been amended
and restated. This plan is intended to promote our interests by providing
employees and key persons, such as non-employee directors and consultants, the
opportunity to purchase shares of common stock and to receive compensation based
upon appreciation in the value of those shares. We have reserved 3,486,000
shares of common stock for issuance under this plan. This plan provides for the
grant of four types of awards:
- incentive stock options that qualify for tax benefits;
- non-qualified stock options;
- restricted stock awards; and
- stock appreciation rights.
Our plan is administered by the compensation committee of our board of
directors. The compensation committee has the authority to determine to whom
awards are granted, the terms of such awards, including the type of awards to be
granted, the exercise price, the number of shares subject to awards and the
vesting and exercisability of the awards. The term of a stock option granted
under the plan generally may not exceed 10 years.
54
<PAGE> 59
Beginning on January 1, 2001, and on the first day of each fiscal year
thereafter, this plan authorizes our board of directors to automatically adjust
the number of shares of common stock available for issuance under this plan so
that the total number of shares reserved will equal the sum of:
- the aggregate number of shares previously issued under this plan;
- the aggregate number of shares subject to outstanding options granted
under this plan; and
- 5% of the number of shares outstanding on the last day of the preceding
fiscal year.
The maximum annual increase in the number of shares, however, shall not exceed
1,000,000 in any calendar year. In addition, the board of directors, at its
discretion, may also issue a lower number of shares under this plan.
As of September 30, 1999, options have been granted to purchase 1,371,775
shares of our common stock at a weighted average exercise price of $2.78 per
share. 227,148 shares of common stock have been issued upon exercise of options
granted under our plan.
Employee Stock Purchase Plan
In November 1999, our board of directors approved the Witness Systems
Employee Stock Purchase Plan, and our stockholders are expected to approve the
plan in December 1999 to become effective upon the completion of this offering.
The stock purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, allows employees to purchase our common stock through
payroll deductions for 85% of the fair market value of the common stock.
Participation in the stock purchase plan is voluntary. Employees may participate
in the stock purchase plan by authorizing payroll deductions of one to fifteen
percent of their base pay for each payroll period. At the end of each six-month
offering period, each participant in the stock purchase plan will receive an
amount of our common stock equal to the sum of that participant's payroll
deductions during the period multiplied by 85% of the lower of the fair market
value of our common stock at the beginning of the period, or the fair market
value of our common stock at the end of the period. No employee may participate
in the stock purchase plan if such employee owns or would own after the purchase
of options under this plan 5% or more of the voting power of all classes of our
stock.
There are currently 550,000 shares of common stock reserved for issuance
under the stock purchase plan. The number of shares of common stock available
for issuance under the stock purchase plan shall automatically increase on the
last trading day of the last month of each of fiscal years, beginning with the
fiscal year ending December 31, 2000 by a number of shares equal to 2% of the
total number of shares of common stock outstanding on the last trading day of
the month preceding the final month of each such fiscal year, but in no event
shall any such annual increase exceed 500,000 shares, as adjusted under the
terms of the plan. In addition, the board of directors, at its discretion, may
also issue a lower number of shares under this plan. We are permitted under the
stock purchase plan to purchase shares of common stock on the open market for
the purpose of reselling the shares to participants in the stock purchase plan.
No shares will be sold by us to participants in the stock purchase plan until
after the completion of this offering.
401(k) Plan
We maintain a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. An employee becomes eligible to
participate in the 401(k) plan in the first month of the month following their
date of hire. Eligible employees may contribute a maximum of 20% of his or her
pre-tax salary, commissions and bonuses through payroll deductions, up to the
statutorily prescribed annual limit of $10,000 in calendar year 1999 to the
401(k) plan. The percentage elected by more highly compensated participants may
be required to be lower. In addition, at the discretion of the board of
directors, we may make discretionary profit-sharing
55
<PAGE> 60
contributions into the 401(k) plan for all eligible employees. To date we have
made no contributions into the 401(k) plan.
EMPLOYMENT AGREEMENTS, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
Generally, we do not enter into employment agreements with our employees.
The employment relationships with each executive officer are "at will". However,
we typically require each employee to enter into an agreement prohibiting the
employee from disclosing or using any of our confidential or proprietary
information without our permission and providing that the employee agrees to
assign to us all inventions developed during the course of employment. In
addition, the employee agrees not to solicit any of our customers or employees
or to work for a competitor in the metropolitan Atlanta area for a period of
time after termination of his or her employment.
However, we entered into a one-year employment agreement (certain elements
of the employment agreement survive longer than one year) with David Gould, our
Chairman, President and Chief Executive Officer effective February 2, 1999,
which was amended 8/2/99. Upon the expiration of the current term in August
2000, the agreement automatically renews for additional one-year terms until
either party notifies the other of its intent to terminate the agreement. Under
the agreement, Mr. Gould is entitled to receive a base salary of $225,000 per
year and a discretionary bonus in the amount of up to $40,000 for the first year
of employment. In addition to his base salary, Mr. Gould is entitled to receive
supplemental bonuses totaling $360,000 between March 31, 2000 and March 31,
2002, regardless of continued employment. Mr. Gould also received on February 2,
1999, a stock option grant of 167,220 shares of common stock, exercisable at a
price of $2.99 per share, pursuant to our stock incentive plan. The options vest
over a four-year period. Vesting accelerates upon a change of control. In the
event Mr. Gould's employment is terminated without cause, or within six months
of a change of control, which as defined in the agreement includes a sale of our
common stock in an underwritten public offering, or if he resigns for good
reason, he is entitled to a severance payment equal to twelve times his monthly
base salary. On August 2, 1999, Mr. Gould was also granted an option to acquire
62,350 shares of common stock exercisable at a price of $5.35 per share under
our stock incentive plan. These options vested immediately and Mr. Gould
exercised his options with payment made by a $333,000 Promissory Note with
similar terms and arrangements (as to Company reimbursement for interest
payments) as the March 31, 1999 notes prescribed in the next paragraph.
We have also entered into a restricted stock award agreement with Mr. Gould
effective March 31, 1999. Pursuant to this agreement, Mr. Gould purchased
488,757 shares of our common stock at a price of $2.99 per share and paid for
these shares with a promissory note to us in the principal amount of $1,461,383.
The note has a nine year term with acceleration upon a change of control and
interest accrues at a fixed rate of 6.41% per annum. Pursuant to Mr. Gould's
employment agreement, we are obligated to reimburse him for all interest
payments under the note. Mr. Gould's note is a recourse obligation as to 25% of
the principal and 100% of the interest. 167,000 of the purchased shares vested
immediately upon employment and the balance vest over a period ending on
February 2, 2003. Upon termination of Mr. Gould's employment with us, any
unvested shares revert to us for the original purchase price.
Addendums to the stock option agreements with Mr. Ezrine, Mr. Brown, Mr.
Ford, Mr. Gallick, Mr. Gisby, Mr. Livernoche and Ms. Treaster, provide that
stock options awarded to the executive officer will automatically vest if the
executive officer's employment is terminated without good cause upon a change of
control of Witness Systems, as those terms are defined in the addendum, that
occurs prior to December 31, 2001. As of November 1, 1999, an aggregate of
586,080 stock options are subject to this change of control provision.
In February 1999, we entered into separation agreements with Craig Richards
in connection with his resignation as President and Chief Executive Officer and
with Elizabeth Brown in connection with her resignation as Vice President of
Engineering. Our agreement with Mr. Richards
56
<PAGE> 61
entitled him to receive a severance payment equal to twelve times his monthly
base salary. In addition, we waived our right to repurchase Mr. Richards' vested
shares with respect to 156,056 shares and forgave an outstanding balance under a
related promissory note for $108,486. Mr. Richards delivered to us unvested
options for 360,544 shares. Our agreement with Ms. Brown entitled her to receive
a severance payment in the amount of $43,865.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated certificate of incorporation and bylaws provide
that the liability of the directors for monetary damages shall be eliminated to
the fullest extent permissible under Delaware law and that we shall indemnify
our officers, employees and agents to the fullest extent permitted under the
Delaware law.
Our amended and restated certificate of incorporation also provides that
our directors will not be personally liable to Witness Systems or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for:
- any breach of the director's duty of loyalty to Witness Systems or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- transactions from which the director derived an improper personal
benefit.
Any amendment, modification or repeal of these provisions will not
eliminate or reduce the effect of these provisions for any act or failure to
act, or any cause of action, suit or claim that would arise before the
amendment, modification or repeal. If Delaware law is amended to provide for
further limitations on the personal liability of directors of corporations for
breach of duty of care or other duty as a director, then the personal liability
of the directors will be so further limited to the greatest extent permitted by
Delaware law. This limitation of liability does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
We intend to enter into agreements to indemnify our executive officers and
directors in addition to indemnification provided for in our amended and
restated certificate of incorporation. These agreements, among other things, may
require us to indemnify these individuals against liabilities that arise by
reason of their status or services as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceedings against them for which they
could be indemnified.
Currently, we have purchased a directors and officers liability insurance
policy in the amount of $1 million per loss, with a maximum aggregate liability
of $1 million.
57
<PAGE> 62
RELATED PARTY TRANSACTIONS
SALES OF PREFERRED STOCK
Series A Preferred Stock
In March 1997, we issued and sold 3,184,000 shares of series A preferred
stock at a price of $2.145 per share to Battery Investment Partners IV, LLC,
Battery Ventures IV, L.P. and John Abraham, one of our directors, resulting in
net proceeds of $6.6 million. Thomas Crotty, one of our directors, is associated
with Battery Investment Partners IV, LLC and Battery Ventures IV, L.P.
Immediately before the consummation of this offering, each share of the series A
preferred stock will automatically convert into one share of our common stock.
Series B Preferred Stock
In September 1998, we issued and sold 1,181,954 shares of series B
preferred stock at a price of $4.65 per share to Battery Investment Partners IV,
LLC, Battery Ventures IV, L.P. and John Abraham, one of our directors, resulting
in net proceeds of $5.5 million. Thomas Crotty, one of our directors, is
associated with Battery Investment Partners IV, LLC and Battery Ventures IV,
L.P. Immediately before the consummation of this offering, each share of the
series B preferred stock will automatically convert into one share of our common
stock.
Series C Preferred Stock
In August 1999, we issued and sold 1,325,028 shares of series C preferred
stock at a price of $6.30 per share, resulting in net proceeds of $8.3 million.
The investors include the following persons who, along with their affiliates,
hold 5% or more of our capital stock:
<TABLE>
<CAPTION>
NAME OF INVESTOR NUMBER OF SHARES PURCHASE PRICE
- ---------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Noro-Moseley Partners IV, L.P............................. 317,460 $2,000
Noro-Moseley Partners IV-B, L.P........................... 317,122 1,998
Hambrecht & Quist California.............................. 25,797 163
Hambrecht & Quist Employee Venture Fund, L.P. II.......... 25,797 163
Access Technology Partners, L.P........................... 412,749 2,600
Access Technology Partners Brokers Fund, L.P.............. 7,739 49
H&Q Witness Systems Investors, L.P........................ 43,854 276
</TABLE>
Immediately before the consummation of this offering, each share of the
series C preferred stock will automatically convert into one share of our common
stock.
REGISTRATION RIGHTS
Certain of our directors and 5% stockholders and entitled to specified
rights with respect to the registration of their shares under the Securities
Act. These rights are described more fully under the section titled Description
of Capital Stock that is contained elsewhere in this prospectus.
COMMON STOCK PURCHASES AND SALES
On January 15, 1997, we entered into stock repurchase agreements with four
of our officers to repurchase 1,786,025 shares of our common stock for notes
payable totaling $3.7 million. The notes were repaid in March 1997 concurrent
with the sale of series A preferred stock.
On December 16, 1997, we sold restricted 516,600 shares of our common stock
to our former chief executive officer for $108,000 in return for a promissory
note. In February 1999, the officer resigned from Witness Systems and the amount
of the note related to the 156,056 vested shares plus
58
<PAGE> 63
all accrued interest was forgiven. The remainder of the note was cancelled in
connection with our repurchase at $0.21 per share of the 360,544 unvested
shares.
In March 1999, we issued 488,757 shares of restricted common stock to Mr.
Gould in return for a note receivable of $1.5 million. In August 1999, Mr. Gould
was granted and exercised options to acquire 62,350 shares of our common stock
in exchange for a note receivable of $334,000. The notes effectively bear no
interest and mature on March 30, 2008. Such maturity date is accelerated if we
consummate a merger, consolidation or reorganization, sell substantially all of
our assets, or complete an initial public offering.
On August 2, 1999, we sold 136,000 shares of restricted common stock which
consisted of 17,000 shares to each of the following officers: Mr. Gould, Mr.
Ezrine, Mr. Brown, Mr. Gisby, Mr. Ford, Mr. Gallick, Mr. Livernoche, and Ms.
Treaster. Each officer paid $90,950 for the shares by providing a full recourse
promissory note to us. The principal balance of each promissory note is due in
full on July 31, 2003, with interest of 7% payable in arrears annually. In
addition, on August 2, 1999, we sold 13,553 shares of restricted common stock to
Mr. Abraham for $72,402 in return for a full recourse promissory note. The
principal balance of the promissory note is due in full on July 31, 2003, with
interest of 7.00% payable in arrears annually.
We entered into stock repurchase agreements with the following persons to
repurchase a total of 1,700,000 shares for $7.3 million in cash.
<TABLE>
<CAPTION>
NAME NO. OF SHARES DOLLAR AMOUNT DATE
---- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mr. Judson..................................... 632,219 $3,382 August 2, 1999
Elizabeth Judson (Mr. Judson's spouse)......... 57,781 309 August 2, 1999
Mr. Abraham.................................... 10,000 54 August 2, 1999
Mr. Knous...................................... 300,000 1,605 August 2, 1999
Mr. Beckett.................................... 700,000 1,900 Sept. 10, 1998
</TABLE>
INDEMNIFICATION AGREEMENTS
We intend to enter into agreements to indemnify our executive officers and
directors in addition to indemnification provided for in our amended and
restated certificate of incorporation. These agreements, among other things, may
require us to indemnify these individuals against liabilities that arise by
reason of their status or services as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceedings against them for which they
could be indemnified.
POLICY ON FUTURE TRANSACTIONS
Our board of directors has adopted a resolution whereby all future
transactions with related parties, including any loans from us to our officers,
directors and principal stockholders or their family members, 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 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.
59
<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table presents information about the beneficial ownership of
our common stock as of November 1, 1999 by:
- each person or entity who is known by us to be the beneficial owner of
more than 5% of our outstanding common stock;
- each of our directors;
- each executive officer; and
- all of our directors and executive officers as a group.
For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding prior to the offering includes
3,812,433 common shares outstanding as of November 1, 1999; and 5,690,982 shares
issuable upon the automatic conversion of 3,184,000 shares of series A preferred
stock, 1,181,954 shares of Series B preferred stock and 1,325,028 shares of
series C preferred stock concurrently with this offering, but excludes
shares of common stock issuable upon the automatic conversion of
shares of series A preferred stock issued as a dividend on
, 1999 to the holders of our outstanding series A preferred stock. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to the securities. The number of shares beneficially owned by a person
includes shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of November 1, 1999. The
shares issuable under these options are treated as if outstanding for computing
the percentage ownership of the person holding these options but are not treated
as if outstanding for the purposes of computing the percentage ownership of any
other person.
Except as noted below, the business address of the named beneficial owner
is c/o Witness Systems, Inc., 1105 Sanctuary Parkway, Suite 210, Alpharetta,
Georgia 30004.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Battery Investment Partners IV, LLC (1).................... 4,340,493 45.7%
Battery Ventures IV, L.P................................... 4,275,386 44.9
20 William Street
Wellesley, MA 02181
James W. Judson, Jr. (2)................................... 951,750 10.0
MKFJ-IV, L.L.C. (3)........................................ 634,582 6.7
9 North Parkway Square 4200 Northside Parkway
Atlanta, GA 30327
David B. Gould (4)......................................... 601,551 6.3
W. Thomas Snyder........................................... 567,150 6.0
Kirk A. Knous.............................................. 550,725 5.8
Hambrecht & Quist California (5)........................... 515,936 5.4
One Bush Street
San Francisco, CA 94104
John Abraham (6)........................................... 52,437 *
Nancy Treaster (7)......................................... 63,840 *
Alain Livernoche (8)....................................... 61,485 *
Jon W. Ezrine (9).......................................... 55,206 *
Jeffery Ford (10).......................................... 47,135 *
Joel G. Katz............................................... -- *
Thomas C. Crotty (11)...................................... 4,340,493 45.7
All directors and executive officers as a group (9 persons)
(12)..................................................... 5,208,724 54.2
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.
(1) Consists of 4,275,386 shares held by Battery Ventures IV, L.P. and 65,107
shares held by Battery Investment Partners IV, LLC. Battery Investment
Partners IV, LLC is the managing partner of Battery Ventures IV, L.P.
60
<PAGE> 65
(2) Includes 126,169 shares held by Elizabeth A. Judson, Mr. Judson's spouse,
and 450,000 shares held by the Judson 1998 Trust. Mr. Judson disclaims
beneficial ownership of shares owned by Mrs. Judson and held by the Judson
1998 Trust.
(3) Includes 317,460 shares held by Noro-Mosley Partners IV, L.P. and 317,122
shares held by Noro-Mosley Partners IV-B, L.P. MKFJ-IV, L.L.C. is the
general partner of Noro-Mosley Partners IV, L.P. and Noro-Mosley Partners
IV-B, L.P. MKFJ-IV, L.L.C. disclaims beneficial ownership of the shares
owned by of Noro-Mosley Partners IV, L.P. and Noro-Mosley Partners IV-B,
L.P.
(4) Includes 33,444 shares subject to options which are exercisable within 60
days of November 1, 1999.
(5) Includes 25,797 shares held by the Hambrecht & Quist Employee Venture Fund,
L.P. II, 7,739 shares held by the Access Technology Partners Brokers Fund,
L.P., 43,854 shares held by H&Q Witness Systems Investors, L.P. and 412,749
shares held by Access Technology Partners, L.P. Hambrecht & Quist
California is the parent company of Hambrecht & Quist, LLC. The limited
partnership interests of Hambrecht & Quist Employee Venture Fund, L.P. II
and Access Technology Partners Brokers Fund, L.P. are held by employees of
Hambrecht & Quist California or Hambrecht & Quist LLC, and the general
partner of both of these funds is H&Q Venture Management LLC, a subsidiary
of Hambrecht & Quist California. Employees of Hambrecht & Quist LLC and
Hambrecht & Quist California also own a 98.1% limited partnership interest
in H&Q Witness Systems Investors, L.P. and a subsidiary of Hambrecht &
Quist California is one of its general partners. Access Technology
Partners, L.P. is a fund of outside investors that is managed by a
subsidiary of Hambrecht & Quist California.
(6) Includes 13,423 shares subject to options which are exercisable within 60
days of November 1, 1999.
(7) Includes 7,939 shares subject to options which are exercisable within 60
days of November 1, 1999.
(8) Includes 27,485 shares subject to options which are exercisable within 60
days of November 1, 1999.
(9) Includes 11,013 shares subject to options which are exercisable within 60
days of November 1, 1999.
(10) Includes 13,135 shares subject to options which are exercisable within 60
days of November 1, 1999.
(11) Includes 4,275,386 shares held by Battery Ventures IV, L.P. and 65,107
shares held by Battery Investment Partners IV, LLC. Mr. Crotty is the
managing member of Battery Investment Partners IV, LLC, the managing
partner of Battery Ventures IV, L.P. and therefore may be considered to
share beneficial ownership of the shares held by Battery Ventures IV, L.P
and by Battery Investment Partners IV, LLC. Mr. Crotty disclaims beneficial
ownership of these shares
(12) Includes 106,439 shares subject to options which are exercisable within 60
days of November 1, 1999.
61
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.01 par value per share and 16,731,954 shares of preferred stock, $.01 par
value per share. As of November 1, 1999, there were 9,503,415 shares of common
stock outstanding, assuming the conversion of all outstanding preferred stock
into common stock upon the completion of this offering, but excluding any shares
issued pursuant to dividend rights held by certain preferred stockholders. The
following description of our capital stock is a summary and is qualified in its
entirety by the provisions of our amended and restated certificate 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
As of November 1, 1999, there were 3,812,433 shares of common stock
outstanding which are held of record by approximately 88 stockholders. Upon
conversion of all outstanding shares of convertible preferred stock, which will
automatically occur upon closing of this offering according to the terms of our
amended and restated certificate of incorporation, there will be an aggregate of
shares of common stock outstanding.
The holders of common stock are entitled to one vote per share for the
election of directors and on all other matters to be submitted to a vote of our
stockholders. Subject to the rights of any holders of preferred stock which may
be issued in the future, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors and
paid out of funds legally available for that purpose. In the event of our
dissolution, liquidation or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of all liabilities, subject
to the prior distribution rights of preferred stock, if any, then outstanding.
The holders of common stock have no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock. The outstanding shares of 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
Under our amended and restated certificate of incorporation, our board of
directors is authorized, without further stockholder approval, to issue from
time to time up to an aggregate of 10,000,000 shares of preferred stock in one
or more series. The board also has the right to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of any
preferred stock issued, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of preferred stock with greater
rights, privileges and preferences than those applicable to the common stock may
adversely affect the voting power, market price and other rights and privileges
of the common stock, and may have the effect of delaying, deferring or
preventing a change of control of our company.
REGISTRATION RIGHTS
Pursuant to an Amended and Restated Registration Rights Agreement dated as
of September 30, 1999, as amended, stockholders holding an aggregate of
8,574,124 shares of capital stock, which includes approximately 5,771,635 shares
of series A, B and C preferred stock and shares of preferred stock resulting
from the payment of preferred stock dividends, 2,717,489 shares of common stock
held by certain of our stockholders, 65,000 shares of common stock to be issued
upon the exercise of warrant to Greyrock Capital and 20,000 shares of Series B
preferred stock to
62
<PAGE> 67
be issued upon the exercise of a warrant to Silicon Valley Bank, are entitled to
specified rights with respect to the registration of these shares under the
Securities Act.
Beginning 180 days following the date of this prospectus, a majority of the
holders of series A and B preferred stock and a majority of holders of the
series C preferred stock may request us, on up to two occasions, to register
their shares of common stock, outstanding after conversion of the preferred
stock, for public resale. We are obligated to register the common stock of the
Series A and Series B preferred stockholders only if at least 20% of the total
shares of Series A and B preferred stock request registration, or a lesser
percentage if the aggregate public offering price would exceed $5,000,000.
Further, holders of registrable securities may require on two separate occasions
within any twelve month period that we register their shares for public resale
on Form S-3 if the value of the securities to be registered is at least
$500,000. Under certain conditions, we may defer such registration for up to 90
days.
In the event we elect to register any of our shares of common stock for
purposes of effecting any public offering, the holders of the registrable
securities described above are entitled to include their shares of common stock
in the registration. We may reduce the number of shares requesting registration
in view of adverse market conditions. We plan to obtain waivers of these
registration rights with respect to this offering. All registration rights will
terminate five years following consummation of this offering.
WARRANTS
As of September 30, 1999 there were outstanding warrants to purchase 65,000
shares of common stock and 20,000 shares of series B preferred stock at an
exercise price of $4.65 per share.
ANTI-TAKEOVER EFFECTS OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
Anti-takeover provisions
As noted above, our board of directors, without stockholder approval, has
the authority under our amended and restated certificate of incorporation to
issue preferred stock with rights superior to the rights of holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change of control of Witness Systems or
make removal of management more difficult.
Under Delaware law, all stockholder actions must be effected at a duly
called annual or special meeting or by written consent. Our bylaws provide that,
except as otherwise required by law, special meetings of our stockholders can
only be called by the board of directors, the chairman of the board or the chief
executive officer, and stockholder action may not be effected by written
consent. Our amended and restated certificate of incorporation also provides
that the board is divided into three classes, with each director assigned to a
class with a term of three years. In addition, our bylaws establish an advance
notice procedure for stockholder proposals to be brought before an annual
meeting of stockholders, including proposed nominations of persons for election
to the board.
These provisions of our bylaws are intended to enhance the likelihood of
continuity and stability in the composition of our board of directors and in the
policies formulated by the board of directors and to discourage certain types of
transactions which may involve an actual or threatened change of control. Such
provisions are designed to reduce vulnerability to an unsolicited acquisition
proposal and, accordingly, could discourage potential acquisition proposals and
could delay or prevent a change in control. These provisions may also have the
effect of preventing changes in our management.
63
<PAGE> 68
Effect of Delaware Antitakeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prevents publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for three years following the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of the statute, a "business
combination" includes a merger, consolidation or sale of more than 10% of assets
involving our company, and an "interested stockholder" is any entity or person
beneficially owning 15% or more of the outstanding voting stock of our company
and any entity or person affiliated with or controlling or controlled by such
entity or person.
LISTING
The shares of common stock have been proposed to be listed for quotation on
the Nasdaq Stock Market under the symbol WITS.
TRANSFER AGENT AND REGISTRATION
The transfer agent for our common stock is SunTrust Bank, Atlanta, Georgia.
64
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After this offering, shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares
of common stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 under the Securities Act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 under the Securities Act,
which rules are summarized below.
The following table indicates approximately when the shares
of our common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES
FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At effective date...........................................
180 days after the effective date...........................
Thereafter upon expiration of one year holding periods......
</TABLE>
Most of the restricted shares that will become available for sale in the
public market starting 180 days after the effective date will be subject to
volume and other resale restrictions under Rule 144 because the holders are our
affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including any affiliate of ours, is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
65
<PAGE> 70
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us under a stock option plan or
other written agreement can resell those shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
Except for holders of shares of our common stock, all of our
executive officers, directors, stockholders and optionees who will hold an
aggregate of shares of our common stock after this offering are
subject to lock-up agreements under which they have agreed not to transfer or
dispose of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus, subject to some
exceptions. Transfers or dispositions can be made sooner with the prior written
consent of Hambrecht & Quist.
STOCK OPTIONS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of common stock reserved
for issuance under our stock option plan. Each year as the number of shares
reserved for issuance under our Witness Systems Employee Stock Purchase Plan
increases, we will file an amendment to the registration statement covering the
additional shares. As of November 1, 1999, options to purchase 1,370,830 shares
of common stock were issued and outstanding. When the lock-up agreements
described above expire, shares of common stock will be subject to
vested options, based on options outstanding as of November 1, 1999. This
registration statement is expected to be filed and become effective as soon as
practicable after the completion of this offering. Accordingly, shares
registered under that registration statement will, subject to vesting provisions
and Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after the 180 day lock-up agreements expire.
66
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , the underwriters named below, through their
representatives, Hambrecht & Quist LLC, U.S. Bancorp Piper Jaffray Inc. and
SoundView Technology Group, Inc., have severally agreed to purchase from us the
respective numbers of shares of common stock set forth opposite their names
below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Hambrecht & Quist LLC.......................................
U.S. Bancorp Piper Jaffray Inc..............................
SoundView Technology Group, Inc.............................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are obligated to purchase all shares of common stock
offered by us (other than those shares covered by the over-allotment option
described below) if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT EXERCISE OVER-ALLOTMENT EXERCISE
----------------------- -----------------------
<S> <C> <C>
Per Share........................... $ $
Total............................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
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 certain dealers at that price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the underwriters. The representatives have
informed us that the underwriters do not intend to confirm discretionary sales
of more than 5% of the shares of common stock offered in this offering.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to
additional shares of common stock at the initial public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. We will be obligated, pursuant to the option, to sell shares to
the underwriters to the extent the option is exercised. The underwriters may
exercise this option solely to cover over-allotments, if any, made in connection
with the sale of shares of common stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and 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.
67
<PAGE> 72
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and to contribute to payments the
underwriters may be required to make in respect of these liabilities.
Substantially all of our stockholders, including executive officers and
directors and optionees who will own in the aggregate shares of
common stock after the offering, have agreed not to, without the prior written
consent of Hambrecht & Quist LLC, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of common stock or any securities convertible into or exchangeable
or exercisable for shares of common stock for a period of 180 days from the date
of this Prospectus. We have agreed that we will not, without the prior written
consent of Hambrecht & Quist LLC, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of common stock or any securities convertible into or exchangeable
or exercisable for shares of common stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof and may grant additional options under
our stock option plans. Without the prior written consent of Hambrecht & Quist
LLC, any of these additional options shall not be exercisable during the 180 day
period.
At our request, the underwriters have reserved up to shares
of common stock offered hereby for sale at the initial public offering price to
our directors, officers, employees, business associates and related persons. The
number of shares of common stock available for sale to the general public will
be reduced by the number of reserved shares such persons purchase. 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 by this prospectus.
Persons who purchase reserved shares will be required to agree that they will
not, without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 180 days from the date of this Prospectus.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among us and the representatives of the underwriters. Among the
factors considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenues and earnings, market
valuations of other companies engaged in activities similar to ours, estimates
of our business potential and our prospects, the present state of our business
operations, our management and other factors deemed relevant.
We have applied for quotation of the common stock on the Nasdaq National
Market under the symbol WITS.
In our August 1999 private placement of Series C convertible preferred
stock, Hambrecht & Quist California, the parent company of Hambrecht & Quist
LLC, purchased 25,797 shares of Series C convertible preferred stock for
$162,521.10. In addition, the Hambrecht & Quist Employee Venture Fund, L.P. II
and the Access Technology Partners Brokers Fund, L.P. purchased an aggregate of
33,536 shares of Series C convertible preferred stock for $211,276.80. All of
the limited partnership interests of these two funds are held by employees of
Hambrecht & Quist California or Hambrecht & Quist LLC, and the general partner
of both of these funds is H&Q Venture Management LLC, a subsidiary of Hambrecht
& Quist California. Employees of Hambrecht & Quist LLC and Hambrecht & Quist
California also own a 98.1% limited partnership interest in H&Q Witness Systems
Investors, L.P., a partnership that purchased 43,854 shares of Series C
convertible preferred stock for $276,280.20 in the private placement, and a
subsidiary of Hambrecht & Quist California is one of its general partners.
Further, Access Technology Partners, L.P., a fund of outside investors that is
managed by a subsidiary of Hambrecht & Quist California, purchased 412,749
shares of Series Convertible preferred stock in the private placement. The
purchases
68
<PAGE> 73
described above were made on the same terms as those made by other investors in
the private placement, including the purchase price of $6.30 per share.
Persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. This
stabilizing, if commenced, may be discontinued at any time.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.
Each underwriter has also agreed that it has:
- not offered or sold and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell any shares of
common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
- complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
- only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of
the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
is a person to whom the document may otherwise lawfully be issued or
passed on.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Morris, Manning & Martin, L.L.P., Atlanta, Georgia. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements of Witness Systems 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.
69
<PAGE> 74
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 is only a part of the registration
statement and does not contain all of the information included in the
registration statement. Further information with respect to Witness Systems and
the common stock offered hereby can be found in the Registration Statement and
the exhibits and schedules thereto. 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 documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement and the exhibits and schedules thereto may be inspected without charge
at the public reference facilities maintained by the Commission in Room 1024,
450 Fifth Street, N. W., Washington, D.C. 20549, and at the following regional
offices of the Commission: Seven World Trade Center, Room 1400, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N. W., Washington, D.C.
20549, Room 1024, at prescribed rates. The Public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, Witness Systems is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains an
internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. Information concerning Witness Systems is also available
for inspection at the offices of the Nasdaq Stock Market, Reports Section, 1735
K Street, N.W., Washington, D.C. 20006.
Witness Systems intends to furnish to its stockholders 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.
70
<PAGE> 75
WITNESS SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997, 1998
and September 30, 1999................................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine
Months Ended September 30, 1999........................ F-4
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1996, 1997 and 1998 and for
the Nine Months Ended September 30, 1999............... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine
Months Ended September 30, 1999........................ F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Witness Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Witness
Systems, Inc. and subsidiary as of December 31, 1997 and 1998 and September 30,
1999, and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1998 and for the nine-month period ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Witness
Systems, Inc. and subsidiary at December 31, 1997 and 1998 and September 30,
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 and for the nine-month
period ended September 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
November 18, 1999
F-2
<PAGE> 77
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
CONVERTIBLE
PREFERRED
STOCK AND
STOCKHOLDERS'
DEFICIT AT
DECEMBER 31, SEPTEMBER 30,
------------------ SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 1(D))
------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,092 $ 912 $ 52
Accounts receivable, net of allowance for doubtful
accounts of $100 in 1997, $300 in 1998 and $438 in
1999.................................................... 276 2,464 6,268
Inventory................................................. 587 -- --
Prepaid and other current assets.......................... 13 58 700
------- -------- --------
Total current assets.................................... 2,968 3,434 7,020
Property and equipment, net................................. 954 1,535 1,738
Other assets................................................ 44 57 161
------- -------- --------
$ 3,966 $ 5,026 $ 8,919
======= ======== ========
LIABILITIES, CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt......................... $ 1,890 $ 491 $ 902
Accounts payable.......................................... 461 697 620
Accrued expenses.......................................... 632 2,114 4,932
Deferred revenue.......................................... 2,491 3,463 2,814
------- -------- --------
Total current liabilities............................... 5,474 6,765 9,268
Long-term debt, net of current portion...................... -- 1,102 2,210
------- -------- --------
Total liabilities....................................... 5,474 7,867 11,478
------- -------- --------
Convertible preferred stock, $.01 par value; redeemable;
authorized 6,731,954 shares; stated at redemption value,
net of unaccreted discount:
Series A, 4,000,000 shares designated, 3,184,000 shares
issued and outstanding; estimated redemption amount of
$25,472 at September 30, 1999........................... 6,733 7,233 8,319 --
Series B, 1,181,954 and 1,231,954 shares designated at
December 31, 1998 and September 30, 1999, respectively;
1,181,954 shares issued and outstanding at December 31,
1998 and September 30, 1999; redemption amount of
$5,496.................................................. -- 5,477 5,479 --
Series C, 1,500,000 shares designated, 1,325,028 shares
issued and outstanding at September 30, 1999; estimated
redemption amount of $10,600 at September 30, 1999...... -- -- 8,315 --
------- -------- -------- --------
Total convertible preferred stock....................... 6,733 12,710 22,113 --
------- -------- -------- --------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value; no shares authorized,
issued or outstanding, actual; 10,000,000 shares
authorized pro forma, no shares issued or outstanding,
pro forma............................................... -- -- -- --
Common stock, $.01 par value; authorized 13,800,000 shares
at December 31, 1997 and 1998 and 15,000,000 shares at
September 30, 1999; 4,487,991, 4,559,022, and 5,723,424
shares issued at December 31, 1997 and 1998 and
September 30, 1999, respectively; 4,487,991, 3,859,022,
and 3,812,433 shares outstanding at December 31, 1997
and 1998 and September 30, 1999, respectively;
11,495,059 shares issued and 9,584,068 shares
outstanding pro forma (unaudited)....................... 45 46 57 115
Additional paid-in capital................................ 654 187 5,122 27,177
Accumulated deficit....................................... (8,832) (13,776) (20,336) (20,336)
Notes receivable for stock................................ (108) (108) (2,594) (2,594)
Treasury stock, 700,000 and 1,910,991 common shares at
December 31, 1998 and September 30, 1999, respectively,
at cost................................................. -- (1,900) (6,921) (6,921)
------- -------- -------- --------
Total stockholders' deficit............................. (8,241) (15,551) (24,672) (2,559)
------- -------- -------- --------
$ 3,966 $ 5,026 $ 8,919
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 78
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License................................. $ 764 $ 3,775 $ 8,507 $ 5,595 $10,811
Services................................ 425 1,138 2,444 1,657 4,079
Hardware................................ 632 1,271 2,171 1,750 46
------- ------- ------- ------- -------
Total revenues....................... 1,821 6,184 13,122 9,002 14,936
------- ------- ------- ------- -------
Cost of revenues:
License................................. 30 164 310 218 258
Services................................ 622 1,204 2,526 1,863 2,596
Hardware................................ 920 1,574 2,482 1,995 46
------- ------- ------- ------- -------
Total cost of revenues............... 1,572 2,942 5,318 4,076 2,900
------- ------- ------- ------- -------
Gross profit......................... 249 3,242 7,804 4,926 12,036
Operating expenses:
Sales and marketing..................... 291 2,016 6,147 4,236 7,409
Research and development................ 1,095 1,817 3,529 2,385 4,140
General and administrative.............. 1,058 1,684 2,141 1,458 2,556
Charge for termination of distribution
agreement............................ -- -- 900 900 --
Acquired in-process research and
development.......................... -- -- -- -- 3,506
Other personnel costs................... -- -- -- -- 665
------- ------- ------- ------- -------
Operating loss....................... (2,195) (2,275) (4,913) (4,053) (6,240)
Interest income........................... 4 82 56 42 31
Interest expense.......................... -- (20) (87) (68) (351)
------- ------- ------- ------- -------
Loss before provision for income
taxes.............................. (2,191) (2,213) (4,944) (4,079) (6,560)
Provision for income taxes................ -- -- -- -- --
------- ------- ------- ------- -------
Net loss............................. (2,191) (2,213) (4,944) (4,079) (6,560)
Preferred stock dividends and accretion... -- (84) (502) (77) (1,090)
------- ------- ------- ------- -------
Net loss applicable to common
stockholders....................... $(2,191) $(2,297) $(5,446) $(4,156) $(7,650)
======= ======= ======= ======= =======
Net loss per share:
Basic and diluted....................... $ (0.38) $ (0.57) $ (1.41) $ (1.03) $ (2.13)
======= ======= ======= ======= =======
Basic and diluted weighted-average
common shares outstanding............ 5,726 4,021 3,869 4,025 3,596
======= ======= ======= ======= =======
Unaudited pro forma net loss per share
(note 1(l)):
Basic and diluted....................... $ (0.66) $ (0.77)
======= =======
Basic and diluted weighted-average
common shares outstanding............ 7,444 8,495
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 79
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- TREASURY STOCK
NUMBER ------------------
OF ADDITIONAL NOTES NUMBER
SHARES PAID-IN ACCUMULATED RECEIVABLE OF AMOUNT
ISSUED AMOUNT CAPITAL DEFICIT FOR STOCK SHARES (AT COST) TOTAL
------ ------ ---------- ----------- ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995........................... 5,726 $ 58 $ 628 $ (755) $ -- -- $ -- $ (69)
Net loss....................... -- -- -- (2,191) -- -- -- (2,191)
------ ---- ------- -------- ------- ------ ------- --------
Balances at December 31,
1996......................... 5,726 58 628 (2,946) -- -- -- (2,260)
Purchase and retirement of
treasury stock............... (1,786) (18) -- (3,673) -- -- -- (3,691)
Accretion on Series A
convertible preferred
stock........................ -- -- (30) -- -- -- -- (30)
Dividends accrued on Series A
convertible preferred
stock........................ -- -- (54) -- -- -- -- (54)
Exercise of stock options...... 31 -- 7 -- -- -- -- 7
Sale of restricted common stock
for notes.................... 517 5 103 -- (108) -- -- --
Net loss....................... -- -- -- (2,213) -- -- -- (2,213)
------ ---- ------- -------- ------- ------ ------- --------
Balances at December 31,
1997......................... 4,488 45 654 (8,832) (108) -- -- (8,241)
Common stock granted for
services..................... 22 -- 25 -- -- -- -- 25
Purchase of treasury stock..... -- -- -- -- -- 700 (1,900) (1,900)
Accretion on Series A and
Series B convertible
preferred stock.............. -- -- (434) -- -- -- -- (434)
Dividends accrued on Series A
convertible preferred
stock........................ -- -- (68) -- -- -- -- (68)
Exercise of stock options...... 49 1 10 -- -- -- -- 11
Net loss....................... -- -- -- (4,944) -- -- -- (4,944)
------ ---- ------- -------- ------- ------ ------- --------
Balances at December 31,
1998......................... 4,559 46 187 (13,776) (108) 700 (1,900) (15,551)
Accretion on Series A, Series
B, and Series C convertible
preferred stock.............. -- -- (1,039) -- -- -- -- (1,039)
Dividends accrued on Series A
convertible preferred
stock........................ -- -- (51) -- -- -- -- (51)
Exercise of stock options...... 208 2 422 -- (333) -- -- 91
Fair value of common stock
warrants issued.............. -- -- 275 -- -- -- -- 275
Repurchase of common stock..... -- -- -- -- -- 1,000 (5,350) (5,350)
Issuance of common stock for
notes........................ 489 5 1,851 -- (2,261) (150) 405 --
Fair value of shares issued for
acquired in-process research
and development.............. 467 4 3,477 -- -- -- -- 3,481
Forgiveness of note receivable
for stock.................... -- -- -- -- 108 361 (76) 32
Net loss....................... -- -- -- (6,560) -- -- -- (6,560)
------ ---- ------- -------- ------- ------ ------- --------
Balances at September 30,
1999......................... 5,723 57 5,122 (20,336) (2,594) 1,911 (6,921) (24,672)
Pro forma unaudited:
Conversion of Series A, B,
and C preferred stock,
including dividends on
Series A preferred stock... 5,772 58 22,055 -- -- -- -- 22,113
------ ---- ------- -------- ------- ------ ------- --------
Pro forma balances at
September 30, 1999
(unaudited)................ 11,495 $115 $27,177 $(20,336) $(2,594) 1,911 $(6,921) $ (2,559)
====== ==== ======= ======== ======= ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 80
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(2,191) $(2,213) $(4,944) $(4,079) $(6,560)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment........................................ 75 258 743 500 934
Stock issued for in-process research and
development...................................... -- -- -- -- 3,481
Other non-cash expenses............................ -- -- 225 25 281
Changes in operating assets and liabilities:
Accounts receivable.............................. (528) 528 (2,388) (1,211) (3,942)
Prepaid expenses and other assets................ 37 (53) (58) (67) (746)
Inventory........................................ (210) (295) 587 473 --
Accounts payable................................. 126 288 236 359 (77)
Accrued expenses................................. 504 (112) 1,482 1,284 2,818
Deferred revenue................................. 2,353 (160) 972 1,043 (649)
------- ------- ------- ------- -------
Net cash flows provided by (used in) operating
activities.................................. 166 (1,759) (3,145) (1,673) (4,460)
------- ------- ------- ------- -------
Cash flows from investing activities -- purchase of
property and equipment............................... (181) (1,073) (1,324) (937) (1,137)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net borrowings on (repayments of) working capital
line of credit..................................... -- 1,000 (1,000) (1,000) 402
Proceeds from long-term debt......................... -- 890 1,000 -- 3,000
Repayments on long-term debt......................... -- -- (297) (223) (1,718)
Purchase of treasury shares.......................... -- (3,691) (1,900) (1,900) (5,350)
Proceeds from exercise of stock options.............. -- 7 11 -- 91
Proceeds from sale of Series A convertible preferred
stock, net......................................... -- 6,649 -- -- --
Proceeds from sale of Series B convertible preferred
stock, net......................................... -- -- 5,475 5,475 --
Proceeds from sale of Series C convertible preferred
stock, net......................................... -- -- -- -- 8,312
------- ------- ------- ------- -------
Net cash flows provided by financing
activities.................................. -- 4,855 3,289 2,352 4,737
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................. (15) 2,023 (1,180) (258) (860)
Cash and cash equivalents at beginning of period....... 84 69 2,092 2,092 912
------- ------- ------- ------- -------
Cash and cash equivalents at end of period............. $ 69 $ 2,092 $ 912 $ 1,834 $ 52
======= ======= ======= ======= =======
Supplemental disclosure of cash paid for interest...... $ -- $ 20 $ 87 $ 65 $ 209
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 81
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
Witness Systems, Inc. develops, markets and licenses recording and analysis
software designed to enable customer contact centers to record and evaluate
customer interactions through one or more media, such as telephony and Web chat.
It is headquartered in Alpharetta, Georgia with other offices in the United
States and the United Kingdom.
The Company was originally incorporated as a Georgia corporation ("Witness
Georgia") on May 26, 1988. Witness Systems Delaware, Inc., a Delaware
corporation ("Witness Delaware"), was incorporated on March 13, 1997 to effect a
merger with Witness Georgia. Effective March 14, 1997, the Board of Directors
approved an Agreement and Plan of Merger to merge Witness Georgia with Witness
Delaware. The surviving entity, Witness Systems Delaware, Inc. filed for a
corporate name change to Witness Systems, Inc. on March 18, 1997. These
financial statements reflect the financial position and results of operations
for both entities (the "Company") for all periods presented.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiary, Witness Systems UK Limited. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(C) UNAUDITED INTERIM INFORMATION
The accompanying interim financial statements for the nine months ended
September 30, 1998 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, such financial statements reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flows.
(D) UNAUDITED PRO FORMA CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
The Board of Directors has authorized the Company to file a registration
statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering. If the offering is
consummated as presently anticipated, all shares of the Series A, Series B, and
Series C convertible preferred stock will automatically convert into an equal
number of shares of common stock. In addition, the Series A stockholders would
be entitled to payment of accrued dividends either in cash or in additional
shares of Series A convertible preferred stock. The unaudited pro forma
convertible preferred stock and stockholders' deficit reflects the subsequent
conversion of Series A, Series B and Series C convertible preferred stock,
assuming conversion of accrued dividends on the Series A convertible preferred
stock, into common stock as if such conversions had occurred as of September 30,
1999.
(E) REVENUE RECOGNITION AND DEFERRED REVENUE
Software and computer hardware sales are recorded in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-4,
Deferral of the Effective Date of a Provision of SOP 97-2. Revenue from license
fees and from sales of software products is recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred, the fee is fixed
or determinable and collectibility is probable.
F-7
<PAGE> 82
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
Services include software installation, training and maintenance. Revenues
from software installation and training are recognized upon performance of the
related services. Revenues derived from maintenance are recognized ratably over
the terms of the related contract, usually one year.
In December 1998, the Accounting Standards Committee of the American
Institute of Certified Public Accountants issued SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions. SOP 98-9 is effective for
fiscal years beginning after March 15, 1999 and the Company does not expect a
material change to its accounting for revenues as a result of adopting the
provisions of SOP 98-9.
Accounts receivable include amounts due from customers for which revenue
has been recognized. Deferred revenue consists of amounts received from
customers for which revenue has not been recognized.
(F) CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(G) INVENTORY
Inventory consists mainly of computer hardware purchased for customers and
is stated at the lower of cost or market. Cost is determined using the specific
identification method. As of December 31, 1998, the Company no longer maintains
inventory for resale.
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization on property and equipment is
calculated using the straight-line method over the shorter of the estimated
useful lives of the assets or the lease term. The estimated useful lives of the
assets are as follows:
<TABLE>
<S> <C>
Equipment and purchased software............................ 2 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... 3 years
</TABLE>
(I) RESEARCH AND DEVELOPMENT AND SOFTWARE 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.
(J) INCOME TAXES
The Company was taxed as an S Corporation pursuant to the Internal Revenue
Code during 1996. As such, the Company did not record any provisions for federal
or state income taxes since all earnings were passed through to, and the related
income tax liabilities were the responsibility of, the stockholders of the
Company.
On January 1, 1997, the Company terminated its election to operate as an S
Corporation and became taxable as a C Corporation. Since the Company reported
operating losses with no
F-8
<PAGE> 83
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
recognizable benefit in 1996, the pro forma provision for income taxes that
would have been provided had the Company operated as a C Corporation during 1996
would also be $0.
From January 1, 1997 forward, income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(K) STOCK COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense is
recorded on the date of grant only if the current estimated fair value of the
underlying stock exceeds the exercise price. The Company has also provided pro
forma disclosures as if the fair value-based method of accounting prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock Based Compensation, had been used to account for its fixed plan stock
options (note 6(a)).
(L) COMPUTATION OF HISTORICAL AND UNAUDITED PRO FORMA NET LOSS PER SHARE
The Company has presented historical net loss per share pursuant to SFAS
No. 128, Earnings Per Share, and the Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 98. Pursuant to SFAS No. 128, unvested stock is
excluded from basic earnings per share and included in diluted earnings per
share if dilutive. Pursuant to SAB No. 98, common stock and convertible
preferred stock issued for nominal consideration, prior to the effective date of
the initial public offering, are required to be included in the calculation of
basic and diluted net 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.
The unaudited pro forma net loss per share for the year ended December 31,
1998 and the nine months ended September 30, 1999 is calculated using the
historical weighted-average common shares outstanding and reflecting: (1) the
subsequent conversion of Series A, Series B and Series C convertible preferred
stock, assuming conversion of accrued dividends on the Series A convertible
preferred stock, into shares of the Company's common stock, as if such
conversions had occurred on January 1, 1998, or at the date of issuance, if
later; and (2) the vesting of certain restricted common shares held by an
officer of the Company which become fully vested upon the occurrence of an
initial public offering of the Company, as if such vesting became effective on
the date such shares were issued. The calculation excludes preferred stock
dividends and accretion of $502,000 and $1,090,000 for the year ended December
31, 1998 and the nine months ended September 30, 1999, respectively.
Potentially dilutive securities for both historical and unaudited pro forma
net loss per share include stock options, stock warrants and convertible
preferred stock (notes 5 and 6).
F-9
<PAGE> 84
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
(M) SEGMENT REPORTING
Effective 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 customer interaction recording and analysis market.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt is estimated by discounting
the future cash flows of each instrument at rates estimated to be currently
available to the Company for similar instruments. The carrying value of the
Company's remaining financial instruments approximate fair value due to the
short-term nature of such instruments.
(O) REFERENCE TO PERIODS PRESENTED
References within the notes to consolidated financial statements to 1996,
1997, 1998, and 1999 relate to the years ended December 31, 1996, 1997, and 1998
and to the nine months ended September 30, 1999, respectively.
(P) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(Q) RECLASSIFICATIONS
Certain amounts in the accompanying 1996, 1997 and 1998 financial
statements have been reclassified to conform to the presentation adopted in the
1999 financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Purchased software.......................................... $ 120 $ 453 $ 755
Equipment................................................... 824 1,642 2,345
Furniture and fixtures...................................... 310 451 577
Leasehold improvements...................................... -- 32 38
------ ------ ------
1,254 2,578 3,715
Less accumulated depreciation............................... 300 1,043 1,977
------ ------ ------
$ 954 $1,535 $1,738
====== ====== ======
</TABLE>
F-10
<PAGE> 85
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Term loan, interest payable in monthly installments at prime
plus 2% (10.25% at September 30, 1999), principal payable at
earlier of December 31, 2000 or upon an initial public
offering of the Company's equity securities, net of
unamortized discount of $165,500 at September 30, 1999...... $ -- $ -- $1,835
Equipment loan, payable in monthly principal installments of
$41,667, plus interest at prime plus 2% (10.25% at
September 30, 1999) through maturity, June 30, 2001....... -- -- 875
Revolving loan, interest payable in monthly installments at
prime plus 2% (10.25% at September 30, 1999), principal
payable on December 31, 2000.............................. -- -- 402
Working capital line of credit, interest payable monthly at
the prime rate............................................ 1,000 -- --
Term note payable in 36 monthly installments of $24,719 plus
interest at prime plus 1 1/4% (9% at December 31, 1998),
through January 31, 2001.................................. 890 593 --
Outstanding advances convertible to term note payable in 36
monthly installments of $27,798 plus interest at prime
plus 1 1/4% (9% at December 31, 1998), commencing June 30,
1999, through May 31, 2002................................ -- 1,000 --
------ ------ ------
Total long-term debt...................................... 1,890 1,593 3,112
Less current portion (the 1997 balance was classified as
current due to previous covenant violations).............. 1,890 491 902
------ ------ ------
Long-term debt, excluding current portion................. $ -- $1,102 $2,210
====== ====== ======
</TABLE>
During 1997, the Company entered into a loan and security agreement (the
"Agreement") with a commercial bank that made borrowings available to the
Company under working capital and equipment lines of credit. The working capital
line of credit permitted the Company to borrow the lesser of $1.0 million or 70%
of eligible accounts receivable, as defined in the Agreement, through July 1,
1998. The equipment line of credit permitted the Company to obtain advances of
up to $1.0 million for all property and equipment purchases during the period
from May 1, 1997 through December 31, 1997. The aggregate amount of advances
outstanding under the equipment line was $0.9 million as of December 31, 1997,
which was converted to a term note as of such date.
In December 1998, the Agreement was amended (the "Amended Agreement") and
permitted the Company to borrow the lesser of $2.5 million or a variable
percentage of eligible accounts receivable through December 10, 1999 under the
working capital line of credit and provided the Company a $1.0 million committed
equipment line of credit for the period from December 11, 1998 through June 10,
1999. In connection with the Amended Agreement, the Company issued the
commercial bank a warrant to purchase 10,000 shares of the Company's common
stock for $4.65 per share (the "Bank Warrant") (see note 5(e)). The fair value
of the warrant was nominal in
F-11
<PAGE> 86
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCING ARRANGEMENTS -- (CONTINUED)
December 1998. There was no balance outstanding under the working capital line
of credit as of December 31, 1998.
In April 1999, the Company entered into an additional finance loan (the
"Finance Loan") with the commercial bank which replaced the working capital line
of credit and permitted the Company to borrow the lesser of $4.0 million or 75%
of net eligible accounts receivable through the earlier of August 7, 1999 or the
closing of a financing transaction in which the Company received at least $4.0
million. Borrowings under the Finance Loan accrued interest at the prime rate
plus 2.5%. In connection with the Finance Loan, the Company cancelled the Bank
Warrant and issued the commercial bank warrants to purchase 20,000 shares of the
Company's Series B convertible preferred stock for $4.65 per share (see note
5(e)). The fair value of the warrant was estimated at $0.1 million in April 1999
and was recorded as debt discount and amortized over the term of the Finance
Loan.
In June 1999, the Company refinanced all of its then existing borrowings
with another commercial lender (the "Lender"). Under the terms of the new loan
and security agreement (the "Loan Agreement"), the Company obtained a $2.0
million secured term loan (the "Term Loan"), a $1.0 million secured equipment
loan (the "Equipment Loan") and a $4.0 million working capital line of credit
(the "Revolving Loan"). The Revolving Loan permits the Company to borrow the
lesser of $4.0 million or 80% of eligible accounts receivable through the
maturity date of December 31, 2000. The Company remits its accounts receivable
collections for application against any advances, interest and fees on the
Revolving Loan. In connection with the Loan Agreement, the Company issued the
Lender a warrant to purchase 65,000 shares of the Company's common stock for
$4.65 per share (see note 5(e)). The fair value of the warrant was estimated at
$0.2 million in June 1999 and has been recorded as debt discount and is being
amortized over the term of the loans. The Loan Agreement is secured by
substantially all of the Company's assets, including intellectual property.
The Loan Agreement contains various negative covenants, including, but not
limited to, the prohibition of cash dividend payments to stockholders. At
September 30, 1999, the Company was in compliance with all such requirements.
The aggregate maturities of long-term debt, exclusive of the unamortized
discount, for each of the two years subsequent to September 30, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- -------------------------
<S> <C>
2000........................................................ $ 902
2001........................................................ 2,375
------
Total long-term debt...................................... $3,277
======
</TABLE>
4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In September 1999, the Company obtained certain in-process research and
development efforts ("IPR&D") for 467,289 shares of the Company's common stock
valued at $7.45 per share. As a result, the Company has recorded a charge of
$3.5 million in the accompanying consolidated statement of operations. The IPR&D
relates to the development of technology not possessed by the Company. At the
date of the transaction, the results of the IPR&D had not progressed to a stage
where they met technological feasibility as defined by SFAS No. 86, Accounting
for the Cost of Computer Software to Be Sold, Leased or Otherwise Marketed. As
this was the Company's first
F-12
<PAGE> 87
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT -- (CONTINUED)
attempt to develop the desired technology, there existed a significant amount of
uncertainty as to the Company's ability to complete the development within a
timeframe acceptable to the market. Additionally, the amount of development
required to enable the acquired IPR&D to be compatible with the Company's
primary product was significant, which increased the uncertainty surrounding its
successful development. Management of the Company estimated it would have cost
the Company more than $3.5 million to develop the IPR&D internally and estimates
it will incur an additional $3.3 million to complete its development efforts.
The IPR&D does not have an alternative future use to the Company that has
reached technological feasibility.
5. STOCKHOLDERS' DEFICIT
During 1997, the Company approved a stock conversion whereby stockholders
of Witness Georgia received 4,975 shares of Witness Delaware for each share of
Witness Georgia stock. All share amounts have been retroactively adjusted for
periods prior to the change in capital structure.
(A) STOCKHOLDERS' AGREEMENT
All holders of the Company's preferred stock and certain holders of the
Company's common stock are parties to the Company's Stockholders' Agreement, as
amended in August 1999 to include the holders of Series C convertible preferred
stock. This agreement provides for a right of first refusal to the Company and
then to the preferred stockholders or their qualified transferees, as defined in
the agreement, to purchase any selling stockholders' shares at a price equal to
that determined by a third party. The agreement terminates upon the earlier of
(a) August 2, 2019, (b) completion of a qualified initial public offering, or
(c) the sale of the Company, as defined.
(B) STOCK REPURCHASES
During 1997, the Company entered into Stock Repurchase Agreements with four
officers of the Company, under which the Company repurchased 1,786,025 shares of
the Company's common stock for notes payable totaling $3.7 million. The notes
were repaid in 1997 concurrent with the sale of Series A convertible preferred
stock. All of the treasury stock was retired during 1997.
During 1998, the Company entered into a Stock Repurchase Agreement with a
stockholder of the Company, under which the Company repurchased 700,000 shares
of the Company's common stock for $1.9 million. These shares are included in
treasury stock as of December 31, 1998 and September 30, 1999.
In February 1999, the Company repurchased 360,544 shares of the Company's
common stock in connection with a forgiveness of a related note receivable (note
5(d)).
In July 1999, the Company entered into Stock Repurchase Agreements with
three directors of the Company, under which the Company repurchased 1,000,000
shares of the Company's common stock for $5.4 million. Such consideration was
paid concurrent with the sale of the Series C convertible preferred stock (note
5(c)). These shares are included in treasury stock as of September 30, 1999.
(C) SALES OF CONVERTIBLE PREFERRED STOCK
During 1997, the Company executed a Series A convertible preferred stock
("Series A") purchase agreement to sell 3,184,000 shares of Series A for $2.145
per share, resulting in net
F-13
<PAGE> 88
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' DEFICIT -- (CONTINUED)
proceeds to the Company of $6.6 million. The Company records accretion on Series
A equal to the difference between the net proceeds received and the redemption
amount based on the greater of $2.145 per share or the then fair value
(estimated as $25.5 million as of September 30, 1999) using the interest method
from the original issuance date through the final redemption date commencing
September 24, 2003. Additionally, the Company is increasing the value of the
Series A by the contractual amount of cumulative preferred dividends due each
year to the Series A stockholders. The holders of Series A shares are entitled
to participation rights and cumulative preferred dividends (payable at
redemption or upon an initial public offering of the Company's common stock) at
$.02145 per share per annum to be paid in Series A shares or cash.
During 1998, the Company executed a Series B convertible preferred stock
("Series B") purchase agreement to sell 1,181,954 shares of Series B for $4.65
per share, resulting in net proceeds to the Company of $5.5 million. The Company
is recording accretion on Series B equal to the difference between the net
proceeds received and the redemption amount of $5.5 million using the interest
method from the original issuance date through the final redemption date
commencing September 24, 2003.
In August 1999, the Company executed a Series C convertible preferred stock
("Series C") purchase agreement to sell 1,325,028 shares of Series C for $6.30
per share, resulting in net proceeds to the Company of $8.3 million. The Company
records accretion on Series C equal to the difference between the net proceeds
received and the redemption amount based on the greater of $6.30 per share or
the then fair value (estimated as $10.6 million as of September 30, 1999) using
the interest method from the original issuance date through the final redemption
date commencing September 24, 2003.
The holders of the convertible preferred stock are entitled to, among other
substantial rights: (1) voting rights equivalent to the voting rights they would
hold as if their holdings were converted to common stock; (2) the right to name
two members of the Company's Board of Directors; (3) distribution and
liquidation preferences; (4) the option to convert to common stock at any time;
(5) automatic conversion upon the effective date of a qualified initial public
offering; (6) certain anti-dilution provisions; (7) certain covenants requiring
convertible preferred stockholder authorization of transactions; and (8) a
mandatory redemption provision whereby the majority of holders of convertible
preferred stock may give redemption notice at any time after September 24, 2003
and cause the Company to redeem 50% of their shares within 60 days of receipt of
the redemption notice and to redeem the remainder on the first anniversary of
the first redemption date, with the redemption price for: Series A defined as
the greater of the then fair market value or the original cost plus all accrued
but unpaid dividends; for Series B, defined as the original cost plus all
declared but unpaid dividends; and for Series C, defined as the greater of the
then fair market value or the original cost plus all accrued but unpaid
dividends. Additionally, the holders of convertible preferred stock are party to
a Registration Rights Agreement which provides them with certain rights,
including but not limited to, demand and incidental registration rights.
(D) NOTES RECEIVABLE FROM STOCK SALES
During 1997, the Company sold restricted common stock to an officer of the
Company for $0.1 million in return for a note receivable, all of which remained
outstanding as of December 31, 1997 and 1998. In February 1999, the officer
resigned from the Company and the amount of the note related to vested shares
plus all accrued interest was forgiven. The remainder of the note was canceled
in connection with the Company's repurchase of the unvested shares at $0.21 per
share (note 5(b)).
F-14
<PAGE> 89
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' DEFICIT -- (CONTINUED)
In March 1999, the Company issued 488,757 shares of restricted common stock
to an officer of the Company in return for a note receivable of $1.5 million. In
August 1999, an officer of the Company was granted and exercised options to
acquire 62,350 shares of the Company's common stock in exchange for a note
receivable of $0.3 million. The notes effectively bear no interest and mature on
March 30, 2008. Such maturity date is accelerated if the Company (1) consummates
a merger, consolidation or reorganization, (2) sells substantially all of its
assets, or (3) completes an initial public offering.
In August 1999, the Company issued 149,553 shares of common stock (from
treasury shares) to certain officers and directors of the Company in return for
individual notes receivable aggregating $0.8 million. The notes accrue interest
at 7% and mature on July 31, 2003. Such maturity date is accelerated if the
Company (1) consummates a merger, consolidation or reorganization, (2) sells
substantially all of its assets, (3) completes an initial public offering, (4)
terminates the employee for cause, or (5) receives the employee's resignation.
(E) WARRANTS
In connection with the Amended Agreement (note 3), the Company granted a
warrant to a commercial bank to purchase 10,000 shares of common stock of the
Company for $4.65 per share. The warrant vested immediately with an initial
expiration date of December 10, 2003. The warrant agreement provided the holder
with a put right at fair market value in case of sale, merger, or consolidation
of the Company, as defined in the warrant agreement. In connection with the
Finance Loan, the warrant to purchase the 10,000 common shares was cancelled and
the Company granted a warrant to purchase 20,000 shares of the Company's Series
B for $4.65 per share. The warrant vested immediately, expires April 22, 2004
and remained outstanding and exercisable as of September 30, 1999. The warrant
agreement provides the holder with a put right at fair market value in case of
sale, merger, or consolidation of the Company, as defined in the warrant
agreement.
In connection with the Loan Agreement (note 3), the Company granted a
warrant to purchase 65,000 shares of common stock of the Company for $4.65 per
share. The warrant vested immediately, expires June 24, 2004 and remained
outstanding and exercisable as of September 30, 1999. The warrant agreement
provides the holder with certain rights, including but not limited to, a put
right at fair market value in case of sale, merger, or consolidation of the
Company, as defined in the warrant agreement.
6. EMPLOYEE BENEFIT PLANS
(A) STOCK INCENTIVE PLAN
In 1997, the Company adopted the Witness Systems, Inc. Stock Incentive Plan
(the "Plan") pursuant to which the Company's Board of Directors may grant up to
2,620,800 shares of common stock in the form of stock options, restricted stock
awards, or stock appreciation rights to employees and key persons affiliated
with the Company, as defined in the Plan document. The Plan remains in effect
until the earlier of the tenth anniversary of its effective date or the date on
which all reserved shares have been issued or are no longer available for use
under the Plan. Through September 30, 1999, the Company has issued 666,338
shares of restricted common stock. As of September 30, 1999, 294,579 shares
remain available for grant under the Plan. In November 1999, the Company amended
the Plan, authorized an additional 865,200 shares subject to grant, and adopted
a provision to increase the number of shares authorized each year.
F-15
<PAGE> 90
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Options granted under the Plan and approved by the Board of Directors may
be incentive stock options ("ISO"), which qualify for certain tax benefits, or
nonqualified stock options. Only employees are eligible to receive ISOs, which
must be granted at a price not less than the estimated fair value of the stock
on the grant date, or not less than 110% of the estimated fair value if granted
to a participant who is a greater than 10% stockholder of the Company.
Nonqualified stock options may be granted to employees and key persons at a
price which may be greater than, equal to, or less than the estimated fair value
of the stock on the grant date. Option vesting terms are established by the
Board of Directors at the time of grant, and typically range from three to four
years. The expiration date of options granted under the Plan is determined at
the time of grant and may not exceed ten years from the date of the grant for a
non-10% owner of the Company, or five years from the date of the grant in the
case of an ISO granted to a participant who is a greater than 10% owner of the
Company.
At September 30, 1999, 167,220 options were outstanding with an officer
which provide for accelerated vesting in the event that the Company completes an
initial public offering. At September 30, 1999, the Company also had 692,901
options outstanding with certain officers of the Company which provide for
accelerated vesting if the Company undergoes a change in control, as defined,
and if there is a significant reduction in each individual's respective
responsibilities within the Company, as defined.
The following summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at January 1, 1997.................................. -- $ --
Granted..................................................... 597,077 0.21
Exercised................................................... (31,191) 0.21
Cancelled................................................... (83,149) 0.21
--------- -----
Balance at December 31, 1997................................ 482,737 0.21
Granted..................................................... 511,030 2.12
Exercised................................................... (49,506) 0.21
Cancelled................................................... (83,042) 0.25
--------- -----
Balance at December 31, 1998................................ 861,219 1.34
Granted..................................................... 863,900 3.90
Exercised................................................... (208,356) 2.02
Cancelled................................................... (145,933) 1.70
--------- -----
Balance at September 30, 1999............................... 1,370,830 $2.78
========= =====
</TABLE>
F-16
<PAGE> 91
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED- WEIGHTED- -------------------------
AVERAGE AVERAGE WEIGHTED-
RANGE OF NUMBER REMAINING EXERCISE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE PRICE OF SHARES EXERCISE PRICE
- --------------- ----------- ---------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.21-$2.56 473,380 8.42 years $1.15 114,092 $0.99
$2.57-$2.99 616,440 9.34 years 2.99 33,444 2.99
$3.00-$7.45 281,010 9.82 years 5.09 -- --
</TABLE>
The weighted-average remaining contractual life of options outstanding at
September 30, 1999 was 9.12 years.
The Company applies the provisions of APB No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
--------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -----------------
<S> <C> <C> <C>
Historical net loss..................................... $2,213 $4,944 $6,560
Pro forma net loss...................................... 2,214 5,005 6,965
Pro forma basic and diluted net loss per share.......... 0.57 1.42 2.24
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $0.0226, $0.7501, and $1.35, respectively, on the date
of grant using the Black-Scholes option-pricing model (excluding a volatility
assumption) with the following weighted-average assumptions: 1997 -- expected
dividend yield 0%, risk-free interest rate of 6%, and an expected life of 7.26
years; 1998 -- expected dividend yield 0%, risk-free interest rate of 6%, and an
expected life of 7.51 years; 1999 -- expected dividend yield 0%, risk-free
interest rate of 6%, and an expected life of 7.20 years.
(B) RETIREMENT PLAN
The Company maintains a tax-qualified defined contribution plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Employees are
eligible to participate the first of the month following their date of hire. The
401(k) Plan allows participants to contribute by salary reduction up to 20% of
eligible compensation, subject to Internal Revenue Service limitations. The
401(k) Plan also provides for discretionary employer matching contributions,
none of which were made during 1996, 1997, 1998, or 1999.
(C) EMPLOYEE STOCK PURCHASE PLAN
In November 1999, the Company established an employee stock purchase plan
pursuant to Section 423 of the Internal Revenue Code. The plan covers 550,000
shares of the Company's common stock and would become effective upon an initial
public offering of the Company's common stock.
F-17
<PAGE> 92
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ------ -------------
<S> <C> <C> <C>
Accrued wages, salaries, and employee benefits.............. $172 $ 353 $1,503
Sales taxes payable......................................... 300 552 1,468
Reserve for sales returns and allowances.................... -- 400 600
Other....................................................... 160 809 1,361
---- ------ ------
$632 $2,114 $4,932
==== ====== ======
</TABLE>
8. OTHER PERSONNEL COSTS
During 1999, the Company incurred $0.3 million of severance costs for
terminated executives and incurred $0.4 million for a bonus and relocation costs
in connection with recruiting a new executive.
9. INCOME TAXES
The Company did not record any income tax expense during the year ended
December 31, 1996 because it was operating as an S Corporation. Further, the pro
forma provision for income taxes for 1996 is $0 because the Company reported
operating losses with no recognizable benefit.
During 1997, 1998 and 1999, no income taxes were recorded because the
Company reported operating losses with no recognizable benefit. Income tax
expense (benefit) differed from the amounts computed by applying the statutory
U.S. federal income tax rate of 34% to loss before income taxes as a result of
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -----------------
<S> <C> <C> <C>
Computed "expected" tax benefit....................... $(752) $(1,681) $(2,230)
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income taxes..... (55) (191) (203)
Nondeductible items................................. 12 35 57
Generation of research and experimentation credit
carryforward..................................... (35) (150) (40)
Other, net.......................................... 228 (92) (25)
Increase in valuation allowance..................... 602 2,079 2,441
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
F-18
<PAGE> 93
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
The income tax effects of temporary differences that give rise to
significant portions of the Company's deferred income tax assets and liabilities
are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -----------------
<S> <C> <C> <C>
Deferred income tax assets:
Accruals not deducted for tax....................... $ 100 $ 553 $ 756
Property and equipment, principally due to
differences in depreciation...................... 8 114 207
Acquired in-process research and development........ -- -- 1,367
Net operating loss and research and experimentation
credit carryforwards............................. 720 2,164 2,867
----- ------- -------
Total gross deferred tax assets.................. 828 2,831 5,197
Less valuation allowance............................ (602) (2,681) (5,122)
----- ------- -------
Net deferred income tax assets................... 226 150 75
Deferred income tax liabilities -- adjustment to
accrual basis for income taxes...................... (226) (150) (75)
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
The net change in the valuation allowance for deferred income tax assets
for 1997, 1998 and 1999 was an increase of $0.6 million, $2.1 million, and $2.4
million, respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
At September 30, 1999, the Company has net operating loss and research and
experimentation credit carryforwards for federal income tax purposes of
approximately $6.7 million and $0.2 million, respectively, which expire in
varying amounts beginning in the year 2014.
Approximately $0.2 million of the net operating loss carryforwards that the
Company may use to offset taxable income in future years is limited as a result
of an ownership change, as defined under Internal Revenue Code Section 382,
which occurred effective with the Company's sale of preferred stock in March
1997. Further restrictions on the Company's utilization of net operating losses
may result upon an initial public offering of the Company's common stock.
F-19
<PAGE> 94
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases certain office space under noncancelable operating lease
agreements which expire at various times through 2002 and provide for minimum
annual rentals as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999........................................................ $ 951
2000........................................................ 750
2001........................................................ 712
2002........................................................ 376
------
$2,789
======
</TABLE>
Rental expense under all lease agreements for 1996, 1997, 1998 and 1999 was
$0.1 million, $0.3 million, $0.5 million, $0.5 million, respectively.
(B) TERMINATION OF DISTRIBUTION AGREEMENT
During 1998, the Company terminated an agreement with a distributor. The
Company agreed to pay $0.9 million in order to terminate the arrangement, all of
which was paid by December 31, 1998. The $0.9 million charge has been included
in the operating expense category of the Company's 1998 statement of operations.
11. BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are located in the United States.
Two customers accounted for 23% of the Company's revenue in 1996, two
customers accounted for 28% of the Company's revenue in 1997, two customers
accounted for 27% of the Company's revenue in 1998, and two customers accounted
for 16% of the Company's revenue in 1999. Total accounts receivable outstanding
from these major customers were approximately $0.6 million, $0.1 million, and
$1.3 million at December 31, 1997, 1998, and September 30, 1999, respectively.
The Company generally does not require collateral on accounts receivable as
the majority of its customers are large, well established companies. The Company
estimates an allowance for doubtful accounts and sales returns and allowances
based on the creditworthiness of its customers, general economic conditions, and
other factors. Consequently, an adverse change in those factors could affect the
Company's estimate of its bad debts.
F-20
<PAGE> 95
2. Inside back page portrays the following: In the center of the page is a
circle with the stylized Witness logo inside. Inside the logo and
underneath the logo text states: "WITNESS SYSTEMS INC". A line extends from
the top of the circle to the top of the page at the end of this line is a
circle in which text states: "1". A line extends from the left side of the
circle to the left side of the page. At the end of this line is a circle in
which text states: "2". A line extends from the bottom of the circle to the
bottom of the page. At the end of this line is a circle in which text
states: "3". In the top left hand portion of the page is a column of text
stating: "From quality monitoring to comprehensive multimedia
contact recording, from basic agent observation to synchronized
voice and data evaluation, from essential customer interaction recording to
mission-critical business-driven recording and analysis, Witness Systems
has the technological prowess to help drive businesses forward." In the
bottom left hand corner of the page is a paragraph of text stating:
"Organizations can also leverage WITNESS to optimize multimedia
interactions by recording Web chat/instant messages as in this example in
which WITNESS is monitoring a prospective online sale." Underneath the text
is a screen shot of a web-browser screen with an overlaying box of text.
The top right corner of the page has a paragraph of text which states:
"WITNESS helps companies optimize CRM by letting users establish "business
rules" to initiate recording of customer interactions from within CRM
applications. These rules trigger recordings based on the entry of
information in selected fields of the CRM solution." Below the text is a
screen shot of our WITNESS software. The bottom right corner of the page
has a paragraph of text which states: These CRM and multimedia recordings
can then be evaluated using Performance Analyzer which measures contact
center performance. This eliminates manual data collection and facilitates
the accurate assessment of performance against expectations for metrics
such as trouble ticket response time and average Web chat time, as in this
example." Below the text is a screen shot of our Performance Analyzer
software.
<PAGE> 96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
-------------------
, 2000
-------------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATIONS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 97
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $
National Association of Securities Dealers, Inc. fee........
Nasdaq Stock Market listing fee.............................
Accountants' fees and expenses..............................
Legal fees and expenses.....................................
Blue Sky fees and expenses..................................
Transfer Agent's fees and expenses..........................
Printing and engraving expenses.............................
Miscellaneous...............................................
--------
Total Expenses.................................... $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Certificate of Incorporation limits personal
liability for breach of the fiduciary duty of our directors to the fullest
extent provided by the Delaware General Corporation Law. Such provisions provide
that no director of Witness Systems shall have personal liability to us or to
our stockholders for monetary damages for breach of fiduciary duty of care or
other duty as a director. However, such provisions shall not eliminate or limit
the liability of a director
- for any breach of the director's duty of loyalty to us or to our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for voting or assenting to unlawful distributions; or
- for any transaction for which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under our bylaws, any
agreement, a vote of our stockholders or otherwise. Our certificate of
incorporation eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was our director or
officer or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
Section of the Underwriting Agreement filed as Exhibit 1.1
hereto also contains provisions pursuant to which certain officers, directors
and controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
II-1
<PAGE> 98
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Witness Systems has issued the securities set
forth below which were not registered under Section 5 of the Securities Act of
1933:
On December 16, 1997, we sold restricted common stock to Mr. Richards for
$108,000 in return for a promissory note. In February 1999, Mr. Richards
resigned from Witness Systems and the amount of the note related to the 156,056
vested shares plus accrued interest was forgiven. The remainder of the note was
cancelled in connection with our repurchase at $0.21 per share of the 360,544
unvested shares.
On March 18, 1997, we issued and sold 3,184,000 shares of series A
preferred stock at a price of $2.145 per share to Battery Investment Partners
IV, LLC, Battery Venture IV, L.P. and John Abraham resulting in net proceeds of
$6.6 million. Immediately before the consummation of this offering, each of the
series A preferred shares will be automatically converted into one share of
common stock.
On September 24, 1998, we issued and sold 1,181,954 shares of series B
preferred stock at a price of $4.65 per share to Battery Investment Partners IV,
LLC, Battery Venture IV, L.P. and John Abraham resulting in net proceeds of $5.5
million. Immediately before the consummation of this offering, each of the
series B preferred shares will be automatically converted into one share of
common stock.
On August 2, 1999, we issued and sold 1,325,028 shares of series C
preferred stock at a price of $6.30 per share to a group of venture capital
firms and an individual investor resulting in net proceeds of $8.3 million.
Immediately before the consummation of this offering, each of the series C
preferred shares will be automatically converted into one share of common stock.
On September 30, 1999, we purchased certain assets from Advanced Integrated
Recorders, Inc. and issued 467,289 shares of common stock to Advanced Integrated
Recorders, Inc. as consideration for the assets.
In March 1999, we issued 488,757 shares of restricted common stock to Mr.
Gould in return for a note receivable of $1.5 million.
On August 2, 1999, we sold 17,000 shares of restricted common stock to each
of the following officers (for a total of 136,000 shares): Mr. Gould, Mr.
Ezrine, Mr. Brown, Mr. Gisby, Mr. Ford, Mr. Gallick, Mr. Livernoche, and Ms.
Treaster. Each officer paid $90,950 for the shares by providing a promissory
note to the company. The principal balance of each promissory note is due in
full on July 31, 2003, with interest of 7% payable in arrears annually. In
addition, on August 2, 1999, we sold 13,553 shares of restricted common stock to
Mr. Abraham for $72,402 in return for a promissory note. The principal balance
of the promissory note is due in full on July 31, 2006, with interest of 6.41%
payable in arrears annually.
The issuance of securities in the transaction described above was deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
and Regulation D of the Securities Act.
II-2
<PAGE> 99
ITEM 16. EXHIBITS
<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 -- Office Lease Agreement between Regency Park West Associates,
L.P. and Witness Systems, Inc., dated April 15, 1997.
10.2* -- Landlord's Consent to Second Sublease, dated June 2, 1999
and Second Sublease Agreement between Regency Park West
Associates, L.P., as Landlord and Witness Systems, Inc., as
Second Sublessee, dated May 28, 1999.
10.3* -- Amended and Restated Stock Incentive Plan of the Registrant.
10.4* -- Form of Stock Option Grant Certificate.
10.5* -- Form of Amendment to Stock Option Grant Certificate between
Registrant and certain of the officers of the Registrant.
10.6* -- Employee Stock Purchase Plan of the Registrant.
10.7 -- Employment Agreement entered into between David B. Gould and
the Registrant, effective February 2, 1999.
10.8 -- Promissory Note, dated March 31, 1999, between the
Registrant and David Gould.
10.9 -- Restricted Stock Award Agreement, dated March 31, 1999,
between the Registrant and David Gould.
10.10 -- Form of Promissory Note and Subscription Agreement, dated
August 2, 1999, between the Registrant and certain of the
officers of the Registrant.
10.11 -- Promissory Note and Subscription Agreement, dated August 2,
1999, between the Registrant and John Abraham.
10.12 -- Form of Stock Repurchase Agreement between the Registrant
and certain shareholders of the Registrant.
10.13 -- Loan and Security Agreement, dated June 24, 1999 between
Greyrock Capital and the Registrant.
10.14* -- Loan and Security Agreement between Silicon Valley Bank and
the Registration, dated April 22, 1999.
10.15* -- Warrant to Purchase Stock, dated June 29, 1999 between
Greyrock Capital and the Registrant.
10.16* -- Warrant to Purchase Stock, dated April 22, 1999 between
Silicon Valley Bank and the Registrant.
10.17* -- Amended and Restated Registration Rights Agreement, dated as
of August 2, 1999, as amended, among the Registrant and
certain shareholders of the Registrant.
10.18* -- Subsidiary License and Distribution Agreement.
10.19* -- Form of Indemnification Agreement to be entered into between
Registrant and each of its executive officers and directors.
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.20* -- Amendment No. 1 to Employment Agreement entered into between
David B. Gould and the Registrant, dated as of August 2,
1999.
21.1 -- List of Subsidiaries.
23.1 -- Independent Auditors' Consent and Report on Financial
Statement Schedule 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).
</TABLE>
- ------------------------------
* To be filed by amendment
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such 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-4
<PAGE> 101
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 Alpharetta, State of
Georgia on the 22nd day of November, 1999.
WITNESS SYSTEMS, INC.
By: /s/ DAVID B. GOULD
------------------------------------
David B. Gould
Chairman of the Board, President and
Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David B. Gould and Jon W. Ezrine, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any subsequent registration
statements pursuant to Rule 462 of the Securities Act and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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>
/s/ DAVID B. GOULD Chairman of the Board, November 22, 1999
- --------------------------------------------------- President and Chief
David B. Gould Executive Officer (Principal
Executive Officer)
/s/ JON W. EZRINE Chief Financial Officer and November 22, 1999
- --------------------------------------------------- Secretary (Principal
Jon W. Ezrine Financial and Accounting
Officer)
/s/ JAMES W. JUDSON, JR. Director November 22, 1999
- ---------------------------------------------------
James W. Judson, Jr.
/s/ THOMAS J. CROTTY Director November 22, 1999
- ---------------------------------------------------
Thomas J. Crotty
/s/ JOHN ABRAHAM Director November 22, 1999
- ---------------------------------------------------
John Abraham
/s/ JOEL G. KATZ Director November 22, 1999
- ---------------------------------------------------
Joel G. Katz
</TABLE>
II-5
<PAGE> 102
WITNESS SYSTEMS, INC.
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
OF PERIOD EXPENSES EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ---------
(IN 000'S)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1996.... $ -- -- -- -- --
Year ended December 31, 1997.... $ -- 100 -- -- 100
Year ended December 31, 1998.... $100 200 -- -- 300
Nine months ended September 30,
1999......................... $300 138 438
</TABLE>
<PAGE> 103
EXHIBIT INDEX
<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 -- Office Lease Agreement between Regency Park West Associates,
L.P. and Witness Systems, Inc., dated April 15, 1997.
10.2* -- Landlord's Consent to Second Sublease, dated June 2, 1999
and Second Sublease Agreement between Regency Park West
Associates, L.P., as Landlord and Witness Systems, Inc., as
Second Sublessee, dated May 28, 1999.
10.3* -- Amended and Restated Stock Incentive Plan of the Registrant.
10.4* -- Form of Stock Option Grant Certificate.
10.5* -- Form of Amendment to Stock Option Grant Certificate between
Registrant and certain of the officers of the Registrant.
10.6* -- Employee Stock Purchase Plan of the Registrant.
10.7 -- Employment Agreement entered into between David B. Gould and
the Registrant, effective February 2, 1999.
10.8 -- Promissory Note, dated March 31, 1999, between the
Registrant and David Gould.
10.9 -- Restricted Stock Award Agreement, dated March 31, 1999,
between the Registrant and David Gould.
10.10 -- Form of Promissory Note and Subscription Agreement, dated
August 2, 1999, between the Registrant and certain of the
officers of the Registrant.
10.11 -- Promissory Note and Subscription Agreement, dated August 2,
1999, between the Registrant and John Abraham.
10.12 -- Form of Stock Repurchase Agreement between the Registrant
and certain shareholders of the Registrant.
10.13 -- Loan and Security Agreement, dated June 24, 1999 between
Greyrock Capital and the Registrant.
10.14* -- Loan and Security Agreement between Silicon Valley Bank and
the Registration, dated April 22, 1999.
10.15* -- Warrant to Purchase Stock, dated June 29, 1999 between
Greyrock Capital and the Registrant.
10.16* -- Warrant to Purchase Stock, dated April 22, 1999 between
Silicon Valley Bank and the Registrant.
10.17* -- Amended and Restated Registration Rights Agreement, dated as
of August 2, 1999, as amended, among the Registrant and
certain shareholders of the Registrant.
10.18* -- Subsidiary License and Distribution Agreement.
10.19* -- Form of Indemnification Agreement to be entered into between
Registrant and each of its executive officers and directors.
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.20* -- Amendment No. 1 to Employment Agreement entered into between
David B. Gould and the Registrant, dated as of August 2,
1999.
21.1 -- List of Subsidiaries.
23.1 -- Independent Auditors' Consent and Report on Financial
Statement Schedule 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).
</TABLE>
- ------------------------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 10.1
SUMMARY OF LEASE PROVISIONS
LEASE DATE: April 15, 1997
LANDLORD: REGENCY PARK WEST ASSOCIATES, L.P., a Georgia
limited partnership
TENANT: WITNESS SYSTEMS DELAWARE, INC., a Delaware
corporation
PREMISES: Net Usable: 20,376 square feet
Net Rentable: 22,312 square feet
Suite Number: 210
TERM: Sixty (60) months
COMMENCEMENT DATE: Commencement date shall be July 1, 1997 or
substantial completion.
BASE RENT: $38,116.33 per month or $20.50 per square foot.
SECURITY DEPOSIT: $38,116.33
ESCALATIONS: Commencing January 1, 1998, then on each
January 1 thereafter during the Lease Term, the
Monthly Rental specified in this Lease shall be
increased by taking that portion of the Monthly
Rental which is not a part of the Operating
Expenses of the Building (the portion of Monthly
Rental which is not part of Operating Expenses of
the Building is initially Fourteen and 65/100
Dollars ($14.65) per square foot of Net Rentable
Area per annum) and multiply said amount by fifty
percent (50%) of the percentage increase in the
Consumer Price Index. See paragraph 3b, page 2.
OPERATING EXPENSE INCREASES: The Monthly Rental provided herein is based, in
part, upon Landlord's estimate of Operating
Expenses of the Building. For the purpose of this
Lease, the initial Operating Expenses of the
Building are stipulated to be on an annual bases,
Five and 85/100 Dollars ($5.85) multiplied by the
number of square feet of Net Rentable Area in the
entire Building, which square footage is agreed to
be 180,741. Tenant shall pay as "additional rent"
Tenant's share of the projected increase, if any,
in the Operating Expenses for the then-current
year to the extent expenses for the then-current
year are projected to exceed Five and 85/100
Dollars ($5.85) per square foot of Net Rentable
Area in the Building per annum. One-twelfth (1/12)
of such projected increase in Operating Expenses
shall be payable by Tenant monthly in advance. See
paragraph 3f, pages 2 and 3.
OPTION TO EXTEND: Tenant has right to extend the Term of this Lease
for one (1) five (5) year term ("Extension
Period") by providing written notice on or before
the 270th day preceding the expiration date. If
Landlord and Tenant cannot agree upon the current
fair market rental rate, Extension Period shall be
ineffective.
RIGHT OF FIRST OFFER: Right of First Offer on any available space on the
2nd floor of the building. Right is subject to any
then existing rights of other tenants. Landlord to
notify Tenant of (i) specific space available and
(ii) lease terms. Tenant shall then have 5 days to
provide written notice of election to lease said
space.
<PAGE> 2
If Tenant elects to lease space, will be
incorporated into base lease at the then current
rental rate with $.24 per rentable square foot
tenant improvement allowance.
LANDLORD'S NOTICE ADDRESS: Ridr Knowlton
LaSalle Partners
1105 Sanctuary Parkway
Suite 150
Alpharetta, Georgia 30004
With copy to:
Jennifer Burrell
Property Manager
LaSalle Partners
1105 Sanctuary Parkway
Suite 150
Alpharetta, Georgia 30004
TENANT'S NOTICE ADDRESS: Witness Systems Delaware, Inc.
1105 Sanctuary Parkway,
Suite 210 Alpharetta, GA 30201
Attn: John Ezrine, CFO
2
<PAGE> 3
EXECUTION DRAFT April 14,1997
OFFICE LEASE AGREEMENT
SANCTUARY PARK
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. LEASED PREMISES 1
2. TERM AND POSSESSION 1
3. MONTHLY RENTAL 1
4. SECURITY DEPOSIT 3
5. OCCUPANCY AND USE 4
6. COMPLIANCE WITH LAWS 4
7. ALTERATIONS 4
8. REPAIR 4
9. LIENS 5
10. ASSIGNMENT AND SUBLETTING 5
11. INSURANCE AND INDEMNIFICATION 5
12. WAIVER OF SUBROGATION 6
13. SERVICES AND UTILITIES 6
14. ESTOPPEL CERTIFICATE 7
16. HOLDING OVER 7
16. SUBORDINATION 8
17. RE-ENTRY BY LANDLORD 8
18. INSOLVENCY OR BANKRUPTCY 8
19. DEFAULT AND REMEDIES 8
20. DAMAGE BY FIRE OR OTHER CASUALTY 10
21. CONDEMNATION 11
22. SALE BY LANDLORD 12
23. RIGHT OF LANDLORD TO PERFORM 12
24. SURRENDER OF PREMISES 12
25. WAIVER 12
26. PARKING 13
27. NOTICES 13
28. CERTAIN RIGHTS RESERVED TO LANDLORD 13
29. ABANDONMENT 14
30. SUCCESSORS 14
31. ATTORNEYS' FEES 14
32. CORPORATE AUTHORITY 14
33. MORTGAGEE APPROVALS 14
34. LANDLORD'S LIEN 14
35. QUIET ENJOYMENT 14
36. LIMITATION OF LANDLORD'S LIABILITY AND EXCULPATION OF PARTNERS 14
37. RIGHT TO RELOCATE 14
38. NO ESTATE IN TENANT 15
39. DISCLAIMER OF CREATION OF PARTNERSHIP OR JOINT VENTURE 15
40. LEASE EFFECTIVE DATE 15
41. RULES AND REGULATIONS 15
42. NO BROKERS 15
43. RECORDING 15
44. MISCELLANEOUS 15
45. SPECIAL STIPULATIONS 16
</TABLE>
<PAGE> 4
EXECUTION DRAFT April 14,1997
OFFICE LEASE AGREEMENT
THIS LEASE is made as of this 15th day of April, 1997, between REGENCY
PARK WEST ASSOCIATES, L.P., a Georgia limited partnership (hereinafter called
"Landlord"), and WITNESS SYSTEMS DELAWARE, INC., a Delaware corporation
(hereinafter called "Tenant").
W I T N E S S E T H:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
those premises (hereinafter called "Premises" or "Leased Premises") shown on
Exhibit "A" attached hereto and made a part hereof, being located on the second
(2nd) floor of a multi-story precast concrete and glass office building (the
"Building") constructed on a parcel of land (the "Property") described on
Exhibit "B" attached hereto and made a part hereof.
1. LEASED PREMISES
Net Usable Area of Leased Premises: 20,376 sq. ft.
Net Rentable Area of Leased Premises: 22,312 sq. ft.
Suite Number: 210.
2. TERM AND POSSESSION
(a) The term of this Lease (the "Term" or "Lease Term") shall be
for sixty (60) months (or until sooner terminated as herein provided), beginning
on the "Commencement Date" (as hereinafter defined), except that if the
Commencement Date is other than the first day of a calendar month, the Term
shall be extended for the remainder of the final calendar month thereof.
(b) The "Commencement Date" shall be (i) July 1, 1997, or (ii)
such later date upon which the improvements in the Leased Premises have been
substantially completed in accordance with the plans and specifications therefor
(other than minor punch list items and any work which cannot be completed on
such date provided such incompletion will not substantially interfere with
Tenant's use of the Leased Premises) and a temporary certificate of occupancy
has been issued by the City of Alpharetta, Georgia, and the building architect
has certified that the Leased Premises are substantially complete in accordance
with the plans and specifications; provided, however, the Commencement Date and
the payment of rent hereunder shall be accelerated by the number of days of any
delay resulting from Tenant's request(s) for materials, finishes or
installations, other than provided for in the plans agreed upon by the parties
as provided for in the Leased Premises Improvement Agreement (Exhibit "C"
hereto) which causes Landlord to be delayed in delivering the Leased Premises.
If possession of the Premises has not been delivered to Tenant within ninety
(90) days following July 1, 1997 due to delays attributable to Landlord, Tenant
at its option at any time thereafter, but prior to the delivery of possession,
may terminate this Lease by notice to Landlord; Tenant shall thereupon be
released from all obligations under this Lease; provided, however, said 90-day
period shall be extended by any period of delay or delays attributable to
Tenant.
(c) Landlord agrees to perform the "Improvement Work" in the
Premises as provided in the Leased Premises Improvement Agreement (Exhibit "C"
hereto) with diligence, subject to events and delays due to causes beyond its
reasonable control. The Leased Premises shall be deemed substantially completed
and possession delivered when Landlord has substantially completed the work to
be constructed or installed pursuant to the provisions of said Leased Premises
Improvement Agreement, subject only to the completion of items on Landlord's
punch list (and exclusive of the installation of all telephone and other
communications facilities and equipment and other finish work to be performed by
or for Tenant).
<PAGE> 5
(d) Upon request of Landlord, Tenant shall execute a memorandum
confirming that the Leased Premises have been completed in accordance with the
plans and specifications and are in good and satisfactory condition and that
Tenant accepts the Leased Premises. Once executed by Tenant, said memorandum
shall conclusively establish that the Leased Premises have been completed in
accordance with the plans and specifications and are in good and satisfactory
condition as of the date of said memorandum.
3. MONTHLY RENTAL
(a) Tenant shall pay to Landlord, commencing on the Commencement
Date and continuing throughout the Lease Term, monthly rental of Thirty-Eight
Thousand One Hundred Sixteen and 33/100 Dollars ($38,116.33), said Monthly
Rental being computed by (i) multiplying "Net Rentable Area" (as defined herein)
by Twenty and 50/100 Dollars ($20.50) per square foot, and then (iii) dividing
the resulting product thereof by 12. Said Monthly Rental shall be due and
payable in equal installments as of the first day of each month during every
year of the Term hereof in lawful money of the United States, without deduction
or offset whatsoever, to Landlord or to such other firm or person as Landlord
may from time to time designate in writing. Said Rental is subject to adjustment
as provided hereinbelow, provided that in no event shall Monthly Rental be at
any time less than the original base Monthly Rental stated hereinabove. If this
Lease commences on a day other than the first day of a calendar month, the
Monthly Rental for the fractional month shall be appropriately prorated. Tenant
shall pay to Landlord, concurrently with Tenant's execution and delivery of this
Lease, the first Monthly Rental payment due from Tenant to Landlord under this
Lease.
(b) Tenant recognizes that late payment of any rent or other sum
due hereunder from Tenant to Landlord will result in administrative expense to
Landlord, the extent of which additional expense is extremely difficult and
economically impracticable to ascertain. Tenant therefore agrees that if rent or
any other payment due hereunder from Tenant to Landlord remains unpaid ten (10)
days after said amount is due, the amount of such unpaid rent or other payment
shall be increased by a late charge to be paid Landlord by Tenant in an amount
equal to five percent (5%) of the amount of the delinquent rent or other
payment. The amount of the late charge to be paid to Landlord by Tenant for any
month shall be computed on the aggregate amount of delinquent rents and other
payments, including all accrued late charges, then outstanding. Tenant agrees
that such amount is a reasonable estimate of the loss and expense to be suffered
by Landlord as a result of such late payment by Tenant and may be charged by
Landlord to defray such loss and expense. The provisions of this Paragraph shall
not relieve Tenant of the obligation to pay rent or other payments on or before
the date on which they are due; nor do the terms of this Paragraph in any way
affect Landlord's remedies pursuant to Paragraph 19 of this Lease or otherwise
at law in the event said rent or other payment is unpaid after the date due.
(c) "Net Usable Area" is (i) in the case of a single tenancy
floor, all space measured from the inside surface of the outer wall of the
Building to the inside surface of the opposite outer wall, excluding only the
areas ("Service Areas") within the outside walls used for building stairs, fire
towers, elevator shafts, flues, vents, pipe shafts, vertical ducts, restrooms,
mechanical room, electrical/telephone room and custodial room (such Service
Areas being designated in black on Exhibit "A" hereto), but including any such
areas which are for the specific use of the Tenant such as (but not limited to)
special stairs or elevators, dedicated computer/telephone and communications
equipment rooms, and (ii) in the case of a multi-tenancy floor, all space
(excluding those Service Areas as defined in (i) hereinabove, if any, as
designated in black on Exhibit "A" hereto) within the inside surface of the
outer wall of the Building enclosing the tenant occupied portion of the floor
and measured to the midpoint of the walls separating areas leased by or held for
lease to other tenants or from areas devoted to corridors, elevator lobbies,
restrooms and other similar facilities for the use of all tenants on the
particular floor.
No deductions from Net Usable Area are made for columns necessary to
the Building. The Net Usable Area in the Leased Premises and in the Building
have been calculated on the basis of the foregoing definition and are hereby
stipulated above as to the Leased Premises, whether the same should be more or
less as a result of minor variations resulting from actual construction and
completion of the Leased Premises for occupancy so long as such work is done
substantially in accordance with the approved plans.
2
<PAGE> 6
(d) Commencing January 1, 1998, then on each January 1 thereafter
during the Lease Term, the Monthly Rental specified in this Lease shall be
increased by taking that portion of the Monthly Rental which is not a part of
the Operating Expenses of the Building (the portion of Monthly Rental which is
not part of the Operating Expenses of the Building is initially Fourteen and
65/100 Dollars ($14.65) per square foot of Net Rentable Area per annum) and
multiplying said amount by fifty percent (50%) of the percentage increase in the
Consumer Price Index which occurred over the yearly period between the month of
December in the calendar year preceding the calendar year as to which the
adjustment is being made and the previous month of December. The increase in
Monthly Rental as determined above for each given calendar year shall be
accumulated over the Lease Term, and the cumulative annual additions to Monthly
Rental shall be added to the initial Base Rent figure set out above to
determine, for each succeeding calendar year, the annual increase in Monthly
Rental. (See the further explanation and formula set out at Paragraph 8 of the
Special Stipulations, Exhibit "F.") If the Monthly Rental cannot be calculated
by the end of any calendar year because of the unavailability of the then
current Index, Tenant shall continue to pay the then existing Monthly Rental,
and Landlord shall prepare as soon as practicable (but in no event later than
April 1 of each successive calendar year) a statement reflecting the increase in
Monthly Rental for the calendar year in question. Within ten (10) days following
receipt of Landlord's statement, Tenant shall also pay any amounts due from
Tenant because of such adjustments for months in which Tenant would have paid a
greater Monthly Rental had such figure been calculated earlier. If Tenant's
payments have been in excess of the increased Monthly Rental due, Tenant shall
be provided a credit for such excess amount applied to the next installment of
Monthly Rental due by Tenant; provided that in no event shall Monthly Rental
ever be less than the initial Monthly Rental hereunder.
(e) "Consumer Price Index" shall be the Consumer Price Index for
All Urban Consumers - U.S. City Average for All Items (1982-84 = 100) of the
Bureau of Labor Statistics of the United States Department of Labor. If the
Consumer Price Index published by the Department of Labor, Bureau of Labor
Statistics, is changed so that it affects the calculations achieved hereunder,
the Consumer Price Index shall be converted in accordance with a conversion
factor published by the United States Department of Labor, Bureau of Labor
Statistics. If the Consumer Price Index is discontinued or revised during the
Term of this Lease, such other government index or computation with which it is
replaced or which it most closely resembles shall be used in order to obtain
substantially the same result as would have been obtained if the Consumer Price
Index had not been discontinued or revised. If the Consumer Price Index is
discontinued and no government index or computation then replaces or closely
resembles the same, Landlord and Tenant shall in good faith agree upon a
suitable substitute.
(f) "Operating Expenses of the Building" shall mean all expenses
of every kind, both fixed and variable and including, without limitation, any
and all federal, state and local taxes (except income taxes), fees and
assessments now or hereafter existing, as are incurred with respect to the
ownership, management, operation, or maintenance of the Building, all as
recorded on an accrual basis and in accordance with accepted principles of sound
management and accounting practices applicable to first-class office building
complexes. "Tenant's proportionate share of the Operating Expenses of the
Building" shall mean, for any period, the amount determined by multiplying the
Operating Expenses of the Building for such period by a fraction, the numerator
of which shall be the then current Net Rentable Area of the Leased Premises, and
the denominator of which shall be 180,741 square feet. Provided, however, in no
event shall operating expenses include: (A) the cost of any service, e.g.,
electricity, that Landlord separately sells to tenants and for which Landlord is
entitled to be reimbursed by such tenants; (B) leasing commissions, attorney
fees and other costs and expenses incurred in connection with negotiations or
disputes with tenants or other occupants of the Building or prospective tenants;
(C) the cost of any work or service performed for any specific tenant of the
Building (as distinguished from work or services performed generally for all
tenants); (D) management fees in excess of four percent (4%) of gross annual
collections for the Building; (E) any other interest or amortization of debt
except as specified in the Agreement; (F) compensation paid to clerks or
attendants in concessions or newsstands; (G) any cost or expense for which
Landlord is separately reimbursed or for which Landlord receives a credit from
any other party; (H) any costs, fines or penalties incurred due to violations by
Landlord of any governmental rule or authority or violation of any lease; (I)
any item of a capital nature including but not limited to capital improvements,
capital repairs, capital equipment and capital tools which, under generally
accepted accounting principles, are not regarded as operating or maintenance
expenses; or (J) costs incurred by Landlord to comply with the Americans With
Disabilities Act in the common areas of the Building. Landlord, upon the request
and reasonable notice of Tenant, shall make Landlord's books and records
3
<PAGE> 7
available to Tenant, during normal business hours and upon reasonable notice,
for review by Tenant for compliance with this Paragraph.
The Monthly Rental provided for herein is based, in part, upon
Landlord's estimate of Operating Expenses of the Building. For the purpose of
this Lease, the initial Operating Expenses of the Building are stipulated to be
on an annual basis, Five and 85/100 Dollars ($5.85) multiplied by the number of
square feet of Net Rentable Area in the entire Building, which square footage is
agreed to be 180,741.
Commencing January 1, 1998, and on or about each January 1 thereafter
(or as soon thereafter as practicable), Landlord shall provide Tenant with a
comparison of the Operating Expenses for the immediately preceding twelve (12)
month period (or, in the case of 1997, extrapolated expenses for said 12-month
period, based upon actual Operating Expenses for the months in 1997 during which
the Building was operational) and the projected Operating Expenses for the
then-current calendar year, and Tenant shall pay as "additional rent" Tenant's
share of the projected increase, if any, in the projected Operating Expenses for
the then-current year to the extent expenses for the then-current year are
projected to exceed Five and 85/100 Dollars ($5.85) per square foot of Net
Rentable Area in the Building per annum. One-twelfth (1/12) of such projected
increase in Operating Expenses shall be payable by Tenant monthly in advance. If
Landlord has not furnished Tenant with Landlord's projected Operating Expenses
for the then-current year by January 1, Tenant shall continue to pay any
additional rent on the basis of the prior year's projected Operating Expenses
until the month after the current year's projected Operating Expenses have been
provided by Landlord. Landlord shall, within one hundred twenty (120) days (or
as soon thereafter as practicable) after the close of each calendar year,
provide Tenant an unaudited statement of such year's actual Operating Expenses
compared to the initial Operating Expenses. If actual Operating Expenses are
greater than the projected Operating Expenses, Tenant shall pay Landlord, within
thirty (30) days of such statement's receipt, Tenant's Share of the difference
thereof. If such year's projected Operating Expenses are greater than actual
Operating Expenses, Landlord shall credit Tenant with Tenant's Share of the
difference between projected Operating Expenses and the greater of actual
Operating Expenses or Initial Operating Expenses. In no event shall the initial
Monthly Rental ever be reduced.
If this Lease commences or terminates at any time than the first day of
a calendar year, the amount of additional rent due from Tenant shall be
proportionately adjusted based on that portion of the calendar year that this
Lease was in effect.
4. SECURITY DEPOSIT
Tenant hereby deposits with Landlord on the date hereof the sum of
Thirty-Eight Thousand One Hundred Sixteen and 33/100 Dollars ($38,116.33), which
sum shall be held by Landlord, as security for the full, timely and faithful
performance of Tenant's covenants and obligations under this Lease. Landlord
shall pay interest to Tenant on said security deposit at the rate of five
percent (5%) per annum, which interest payments shall be made by Landlord no
more than once in any period of twelve consecutive months during the Term. It is
understood and agreed that such deposit is not an advance rental deposit or a
measure of Landlord's damages in case of Tenant's default. Upon the occurrence
of any default or event of default by Tenant, Landlord, may from time to time,
without prejudice to any other remedy provided herein or provided by law, use
such funds to the extent necessary to make good any arrears of rent or other
payments due Landlord hereunder, and any other damage, injury, expense or
liability caused by any event of Tenant's default; and Tenant shall pay to the
Landlord on demand the amount so applied in order to restore the security
deposit to its original amount. Although the security deposit shall be deemed
the property of Landlord, any remaining balance of such deposit shall be
returned by Landlord to Tenant or Tenant's last, permitted assignee at such time
after termination of this Lease when Landlord shall have determined that
Tenant's obligations under this Lease have been fulfilled, but in no event later
than 60 days after expiration. Landlord shall not be required to keep any
security deposit separate from its general funds. Upon the occurrence of any
event of default or default as described in this Lease said security deposit
shall become due and payable to Landlord. Subject to the other terms and
conditions contained in this Lease, if the Building is conveyed by Landlord,
said deposit may be turned over to Landlord's grantee and, if so, Tenant hereby
releases Landlord from any and all liability with respect to said deposit and
its application or return; provided, however, Landlord's grantee must agree to
assume all obligations of Landlord under the Lease.
4
<PAGE> 8
5. OCCUPANCY AND USE
(a) Tenant shall use and occupy the Premises for general office
purposes and for no other use or purpose without the prior written consent of
Landlord.
(b) Tenant shall not do or permit anything to be done in or about
the Premises which will in any way obstruct or interfere with the rights of
other tenants or occupants of the Building or injure or annoy them; nor shall
Tenant use or allow the Premises to be used for any improper, immoral, unlawful,
or objectionable purposes or for any business, use or purpose deemed to be
disreputable or inconsistent with the operation of a first class office
building; nor shall Tenant cause or maintain or permit any nuisance or breach of
the peace, in, on, or about the Premises. Tenant shall not commit or suffer the
commission of any waste in, on, or about the Premises.
6. COMPLIANCE WITH LAWS
Tenant shall be solely responsible for, and shall pay promptly and
before delinquent, all federal, state, city, county and other taxes, license
fees and assessments due or coming due during or after the Term of this Lease
against Tenant, Tenant's interest in this Lease or Tenant's personal property or
intangibles owned, placed in or generated in, upon or about the Premises by
Tenant. Tenant shall not use the Premises in a manner which will in any way
conflict with any law, statute, ordinance, or governmental rule or regulation
now in force or which may hereafter be enacted or promulgated. Tenant shall not
do or permit anything to be done on or about the Premises or bring or keep
anything therein which will in any way increase the rate of any insurance upon
the Building or any of its contents or cause a cancellation of said insurance or
otherwise affect said insurance in any manner. Tenant shall at its sole cost and
expense promptly comply with all laws, statutes, ordinances, recommendations,
rules, regulations and requirements of governmental, public or private
authorities and agencies, which are now in force or which may hereafter be in
force and with the requirements of any board of fire underwriters or other
similar body now or hereafter constituted as may apply in relation to or
affecting the condition, use, or occupancy of the Premises, including without
limitation the Occupational Safety and Health Act (29 U.S.C. Sections 651, et
seq., as amended) and the Americans With Disabilities Act (42 U.S.C. Sections
12101, et seq., as amended). Upon demand, Tenant shall pay to Landlord as
additional rent, to be added to any installment of rent thereafter becoming due,
any cost incurred by Landlord in curing any default or meeting any obligation of
Tenant under this Paragraph, and Landlord shall have the same remedies for a
default in payment of such sums as for a default in the payment of rent.
7. ALTERATIONS
Tenant shall not make or suffer to be made any material alterations,
additions, changes or improvements in, on, or to the Premises or any part
thereof without the prior written consent of Landlord; such consent not to be
unreasonably withheld or delayed; and any such alterations, additions, changes
or improvements in, on, or to said Premises, except for Tenant's movable
furniture and equipment, shall immediately become Landlord's property and, at
the end of the Term hereof, shall remain on the Premises without compensation to
Tenant. In the event Landlord consents to the making of any such alterations,
additions, changes or improvements by Tenant, the same shall be made by Tenant,
at Tenant's sole cost and expense, in accordance with all applicable laws,
statutes, ordinances, rules and regulations public and private, and all
requirements of Landlord's and Tenant's insurance policies, and in accordance
with plans and specifications approved by Landlord (such approval not to be
unreasonably withheld, delayed or conditioned). At Landlord's option, Tenant
shall pay to Landlord a fee equal to ten percent (10%) of the cost and expense
of any alterations, additions, changes or improvements in or to said Premises
after the Commencement Date; said fee shall (i) be due and payable prior to
performance of any such alterations, additions, changes or improvements, and
(ii) compensate Landlord for Landlord's coordination, supervision and overhead
resulting from said alterations, additions, changes or improvements. Any
contractor or person selected by Tenant to make the same, and all
subcontractors, must first be approved in writing by Landlord; or, at Landlord's
option, the alteration, addition or improvement shall be made by Landlord for
Tenant's account and Tenant shall reimburse Landlord for the cost thereof upon
demand, provided that the cost is less than or equal to and workmanship is equal
to or greater than contractor or person selected by Tenant. Upon the expiration
or sooner termination of the Term herein provided, Tenant shall upon demand by
Landlord (and provided Landlord conditioned its consent to such
5
<PAGE> 9
alterations upon same), at Tenant's sole cost and expense, forthwith and with
all due diligence remove any and all alterations, additions or improvements made
by or for the account of Tenant, designated by Landlord to be removed, and
Tenant shall forthwith and with all due diligence, at its sole cost and expense,
repair and restore the Premises to their original condition as improved with the
tenant improvements described in the plans and specifications.
8. REPAIR
By taking possession of the Premises, Tenant accepts the Premises as
being in the condition in which Landlord is obligated to deliver them and
otherwise in good order, condition, and repair, subject to any minor items
commonly considered punchlist items in the construction industry that remain to
be corrected or finished. Tenant shall, at all times during the Term hereof at
Tenant's sole cost and expense, keep the Premises and every part thereof in good
order, condition and repair, excepting ordinary wear and tear, damage thereto by
fire, earthquake, act of God or the elements. Landlord shall at all times during
the term hereof keep in good condition and repair, consistent with current
practices of class A office buildings in Atlanta, Georgia, the roof, foundations
and exterior walls of the Building and the heating and air-conditioning
equipment, utilities and pipes. Tenant shall upon the expiration or sooner
termination of the Term hereof, unless Landlord demands otherwise as in this
Paragraph provided, surrender to Landlord the Premises and all repairs, changes,
alterations, additions and improvements thereto in the same condition as when
received, or when first installed, ordinary wear and tear, damage by fire,
earthquake, act of God, or the elements excepted. It is hereby understood and
agreed that Landlord has no obligation to alter, remodel, improve, repair,
decorate, or paint the Premises or any part thereof except as specified in
Exhibit "C" attached hereto and made a part hereof, and that no representations
respecting the condition of the Premises or the Building have been made by
Landlord to Tenant, except as specifically herein set forth.
9. LIENS
Tenant shall keep the Premises free from any liens arising out of work
performed, material furnished, or obligations incurred by Tenant. In the event
that Tenant shall not, within thirty (30) days following the imposition of any
such lien, cause the same to be released of record by payment or posting of a
proper bond, Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause the same to be
released by such means as it shall deem proper, including payment of the claim
giving rise to such lien. All such sums paid by Landlord and all expenses
incurred by it in connection therewith shall be considered additional rent and
shall be payable to Landlord by Tenant on demand and with interest at the rate
per annum of four percent higher than the prime commercial lending rate from
time to time of Sun Trust Bank in Atlanta, Georgia; provided, however, that if
such rate exceeds the maximum rate permitted by law the maximum lawful rate
shall apply; the interest rate so determined is hereinafter called the "Agreed
Interest Rate." Landlord shall have the right at all times to post and keep
posted on the Premises any notices permitted or required by law, or which
Landlord shall deem proper, for the protection of Landlord, the Premises, the
Building, and any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give to Landlord at least five (5)
business days prior written notice of commencement of any construction on the
Premises.
10. ASSIGNMENT AND SUBLETTING
(a) Tenant shall not sell, assign, encumber or otherwise transfer
by operation of law or otherwise this Lease or any interest herein, sublet the
Premises or any portion thereof, or suffer any other person to occupy or use the
Premises or any portion thereof, without the prior written consent of Landlord
as provided for herein, nor shall Tenant permit any lien to be placed on
Tenant's interest by operation of law; provided that Landlord's consent to
assignment or subletting shall not unreasonably be withheld, delayed or
conditioned. Tenant shall (i) by written notice, advise Landlord of its desire
from and after a stated date (which shall not be less than fifteen (15) days or
more than ninety (90) days after the date of Tenant's notice) to assign this
Lease or to sublet the Premises or any portion thereof for any part of the Term
hereof; said notice by Tenant shall state the name and address of the proposed
assignee or subtenant, and Tenant shall deliver to Landlord a true and complete
copy of the proposed sublease with said notice; and (ii) supply Landlord with
such information, financial statements, verifications and related materials as
Landlord may request or desire to evaluate the written request to sublet or
assign. Within ten
6
<PAGE> 10
(10) business days after Landlord's receipt from Tenant of all the items
specified in the immediately preceding sentence, Landlord shall have the right,
exercisable in its reasonable discretion, to consent to the proposed subletting
or assignment, or to disapprove the proposed subletting or assignment. Tenant
shall, at Tenant's own cost and expense, discharge in full any outstanding
commission obligation on the part of the Landlord with respect to this Lease,
and any commissions which may be due and owing as a result of any proposed
assignment or subletting.
(b) Any subletting or assignment hereunder by Tenant shall not
result in Tenant's being released or discharged from any liability under this
Lease. As a condition to Landlord's prior written consent as provided for in
this Paragraph, the assignee or subtenant shall agree in writing to comply with
and be bound by all of the terms, covenants, conditions, provisions and
agreements of this Lease, and Tenant shall deliver to Landlord promptly after
execution, an executed copy of each sublease or assignment and an agreement of
said compliance by each subtenant or assignee.
(c) Tenant shall reimburse Landlord, within ten (10) days from
receipt of Landlord's invoice, all Landlord's reasonable administrative costs
and expenses, including legal fees, for reviewing and processing any requests
for Landlord's consent made by Tenant with respect to the subject matter of this
Paragraph; provided, however, such costs shall not exceed $1,000 per request.
(d) Landlord's consent to any sale, assignment, encumbrance,
subletting, occupation, lien or other transfer shall not release Tenant from any
of Tenant's obligations hereunder or be deemed to be a consent to any such
subsequent occurrence. Any sale, assignment, encumbrance, subletting,
occupation, lien or other transfer of this Lease which does not comply with the
provisions of this Paragraph shall be void.
11. INSURANCE AND INDEMNIFICATION
(a) Landlord shall not be liable to Tenant and Tenant hereby waives all
claims against Landlord for any injury or damage to any person or property in or
about the Leased Premises by or from any cause whatsoever, without limiting the
generality of the foregoing, whether caused by water leakage of any character
from the roof, walls, basement, or other portion of the Premises or the
Building, or caused by gas, fire or explosion of the Building or the Office Park
of which it is a part or any part thereof, except as caused by Landlord's
negligence or willful misconduct.
(b) Tenant shall hold Landlord harmless from and defend the Landlord
against any and all claims or liability for any injury or damage to any person
or property whatsoever: (i) occurring in, on, or about the Premises or any part
thereof; (ii) occurring in, on, or about any facilities (including, without
limitation, elevators, stairways, passageways or hallways), the use of which
Tenant may have in conjunction with other tenants of the Building, when such
injury or damage shall be caused in part or in whole by the act, neglect, fault
of, or omission of any duty with respect to the same by Tenant, its agents,
servants, employees, or invitees. Tenant further agrees to indemnify and save
harmless Landlord against and from any and all claims by or on behalf of any
work or thing whatsoever done by Tenant in or about or from transactions of
Tenant concerning the Premises, and will further indemnify and save Landlord
harmless against and from any and all claims arising from any breach or default
on the part of Tenant in the performance of any covenant or agreement on the
part of Tenant to be performed pursuant to the terms of this Lease, or arising
from any act or negligence of Tenant, or any of its agents, contractors,
servants, employees and licensees, and from and against all cost, counsel fees,
expenses and liabilities incurred in connection with any such claim or action or
proceeding brought thereon. Furthermore, in case any action or proceeding be
brought against Landlord by reason of any claims or liability for which Tenant
must indemnify Landlord hereunder, Tenant agrees to defend such action or
proceeding at Tenant's sole expense by counsel reasonably satisfactory to
Landlord. The provisions of this Lease with respect to any claims or liability
occurring prior to expiration or termination of this Lease shall survive any
such expiration or termination. Notwithstanding anything to the contrary herein,
Tenant's indemnification of Landlord under this Paragraph is expressly limited
to the insurance coverages required of Tenant pursuant to paragraph 11(c)
hereof, plus any deductible.
(c) Tenant agrees to purchase at its own expense and to keep in force
during the term of this Lease a policy or policies of workers' compensation and
comprehensive general liability insurance, including personal
7
<PAGE> 11
injury and property damage, with contractual liability endorsement, in the
amount of at least Five Million Dollars ($5,000,000.00) combined single limit
per occurrence for personal injuries or deaths of persons occurring in or about
the Premises. Said policies shall: (i) name Landlord as an additional insured
and insure Landlord's contingent liability under this Lease (except for the
workers' compensation policy, which shall instead include waiver of subrogation
endorsement in favor of Landlord); (ii) be issued by an insurance company which
is acceptable to Landlord and licensed to do business in the State of Georgia;
and (iii) provide that said insurance shall not be cancelled unless thirty (30)
days' prior written notice shall have been given to Landlord. Said policy or
policies or certificates thereof shall be delivered to Landlord by Tenant upon
commencement of the Term of this Lease and upon each renewal of said insurance.
12. WAIVER OF SUBROGATION
Each of Landlord and Tenant hereby release the other from any and all
liability or responsibility to the other or to anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of insurance covering
such property, even if such loss or damage shall have been caused by fault or
negligence of the other party, or by anyone for whom such party may be
responsible; provided, however, that this release shall be applicable and in
force and effect only to such extent that such releases shall be lawful at that
time and in any event only with respect to loss or damage occurring during such
time as the releasor's policies of insurance shall contain a clause or
endorsement to the effect that any such release shall not adversely affect or
impair said policies or prejudice the right of the releasor to coverage
thereunder, and then only to the extent of the insurance proceeds payable under
such policies. Landlord and Tenant each hereby covenant and agree to use
commercially reasonable efforts to cause their respective insurance carrier(s)
to include in their policy(ies) such a clause or endorsement. Nothing in this
paragraph 12 shall be deemed to relieve Landlord of its obligations respecting
the repair or restoration of Premises in the event of any casualty.
13. SERVICES AND UTILITIES
(a) Landlord shall maintain the Common Area (as herein defined)
and the public and common areas of the Building, including lobbies, stairs,
elevators, escalators, parking facilities, loading docks and areas, corridors
and restrooms, the windows in the Building, the mechanical, plumbing and
electrical equipment serving the Building, and the structure itself, in
reasonably good order and condition except for damage occasioned by the act of
Tenant, which damage shall be repaired by Landlord at Tenant's expense. In the
event Tenant requires or needs to have one or more separate systems of either
heating, ventilating, air-conditioning or other similar systems over and above
that provided by Landlord, the installation, care, expenses and maintenance of
each such system shall be borne by and paid for by Tenant.
(b) Provided Tenant shall not be in default hereunder, and subject
to the provisions elsewhere herein contained and to the Rules and Regulations of
the Building, Landlord agrees to furnish to the Premises during ordinary
business hours of generally recognized business days, to be determined by
Landlord (but exclusive, in any event, of Sundays and legal holidays),
electrical service equal to three and one-half (3.5) watts per rentable square
foot, heat and air-conditioning required in Landlord's reasonable judgment for
the comfortable use and occupation of the Premises, janitorial services during
the times and in the manner that such services are, in Landlord's judgment,
customarily furnished in comparable office buildings in the immediate market
area, and elevator service.
Landlord shall be under no obligation to provide additional or
after-hours heating or air-conditioning, but if Landlord elects to provide such
services at Tenant's request, Tenant shall pay to Landlord a reasonable charge
for such services as determined from time to time by Landlord. Tenant agrees to
keep and cause to be kept closed all window coverings, if any, when necessary
because of the sun's position, and Tenant also agrees at all times to cooperate
fully with Landlord and to abide by all rules, regulations and requirements
which Landlord may prescribe for the proper functioning and protection of
lighting, heating, ventilating, and air-conditioning systems and to comply with
all laws, ordinances and regulations respecting the conservation of energy. In
the event heat-generating machines, excess lighting or equipment used in the
Premises affect the temperature normally maintained by the air-conditioning
units in the Premises, Tenant shall pay to Landlord, upon demand by Landlord,
all costs incurred by Landlord in excess of the ordinary costs of maintaining
the normal temperature of the Premises.
8
<PAGE> 12
Landlord agrees to furnish to the Lease Premises electricity for general office
purposes and hot and cold water for lavatory and drinking purposes, subject to
the provisions of subparagraph 13(c) below. Landlord shall in no event be liable
for any interruption or failure of utility services on the Premises, but
Landlord will exercise commercially reasonable efforts to furnish uninterrupted
service; provided, however, if said utility interruptions continue for more than
five (5) continuous days Tenant shall be entitled to an abatement of rent for
each day of interruption.
(c) Tenant will not without the written consent of Landlord use
any apparatus or device in the Premises, including without limitation,
electronic data processing machines, punch card machines, and machines using
excess lighting or electrical current which will in any way increase the amount
of electricity or water usually furnished or supplied for use of the Premises as
general office space; nor will Tenant connect with electrical current, except
through existing electrical outlets in the Premises, or water pipes in the
Premises, any apparatus or device for the purpose of using electrical current or
water. If Tenant in Landlord's judgment shall require water or electrical
current or any other resource in excess of that usually furnished or supplied
for use of the Premises as general office space (it being understood that such
an excess may result from the number of fixtures, apparatus and devices in use,
the nature of such fixtures, apparatus and devices, the hours of use, or any
combination of such factors), Tenant shall first procure the consent of Landlord
which Landlord may refuse, to the use thereof, and Landlord may cause a special
meter to be installed in the Premises in order to measure the amount of water,
electrical current or other resource consumed for any such other use. The cost
of any such meters and of installation, maintenance, and repair thereof shall be
paid for by Tenant, and Tenant agrees to pay Landlord promptly upon demand by
Landlord for all such water, electrical current or other resource consumed, as
shown by said meters, at the rates charged by the local public utility
furnishing the same, plus any additional expense incurred in keeping account of
the water, electrical current or other resource so consumed. Landlord shall not
be in default hereunder or be liable for any damages directly or indirectly
resulting from, nor shall the rental herein reserved be abated by reason of (i)
the installation, use or interruption of use of any equipment in connection with
the furnishing of any of the foregoing utilities and service, (ii) failure to
furnish or delay in furnishing any such utilities or services when such failure
or delay is caused by acts of God or the elements, labor disturbances of any
character, any other accidents or other conditions beyond the reasonable control
of Landlord, or by the making of repairs or improvements to the Premises or to
the Building, or (iii) the limitation, curtailment, rationing or restriction on
use of water, electricity, gas or any other form of energy or any other service
or utility whatsoever serving the Premises or the Building. Furthermore,
Landlord shall be entitled to cooperate voluntarily in a reasonable manner with
the efforts of national, state or local governmental agencies or utilities
suppliers in reducing energy or other resources consumption.
(d) Any sums being payable under this Paragraph shall be
considered additional rent and shall be added to the next installment of rent
thereafter becoming due, and Landlord shall have the same remedies for a default
in payment of such sums as for a default in the payment of rent.
(e) Tenant shall not provide any regular janitorial services
without Landlord's written consent and then only through a janitorial contractor
or employees at all times satisfactory to and under supervision of Landlord. Any
such services provided by Tenant shall be at Tenant's sole expense, risk and
responsibility.
14. ESTOPPEL CERTIFICATE
Within ten (10) days following any written request which Landlord may
make from time to time, Tenant shall execute and deliver to Landlord in
recordable form an Estoppel Certificate substantially as attached hereto as
Exhibit "D" and made a part hereof, and being modified as necessary to indicate
thereon any exceptions thereto which may exist at that time. Failure of Tenant
to execute and deliver such certificate shall constitute an acceptance of the
Premises and acknowledgment by Tenant that the statements included in Exhibit
"D" are true and correct without exception. Landlord and Tenant intend that any
statement delivered pursuant to this Paragraph may be relied upon by Landlord or
by any mortgagee, beneficiary, purchaser or prospective purchaser of the
Building or any interest therein, or by anyone to whom Landlord may provide said
certificate.
9
<PAGE> 13
15. HOLDING OVER
Tenant will, at the termination of this Lease by lapse of time or
otherwise, yield up immediate possession to Landlord. If Tenant retains
possession of the Leased Premises or any part thereof after such termination,
then Landlord may, at its option, serve written notice upon Tenant that such
holding over constitutes: (i) creation of a month to month tenancy, upon the
terms and conditions set forth in this Lease; or (ii) creation of a tenancy at
sufferance, in any case upon the terms and conditions set forth in this Lease;
provided, however, that the Monthly Rental (or daily rental under (ii)) shall,
in addition to all other sums which are to be paid by Tenant hereunder, whether
or not as additional rent, be equal to one hundred fifty percent (150%) of the
rental being paid monthly to Landlord under this Lease immediately prior to such
termination (prorated in the case of (ii) on the basis of a 365 day year for
each day Tenant remains in possession). If no such notice is served then a
tenancy at sufferance shall be deemed to be created at the rent in the preceding
sentence. Tenant shall also pay to Landlord as additional rent due and payable,
all damages sustained by Landlord resulting from retention of possession by
Tenant, including the loss of any proposed subsequent tenant for any portion of
the Lease Premises. In any such events, Tenant shall vacate the Lease Premises
and deliver full possession to Landlord upon the giving to Tenant by Landlord of
ten (10) days' written notice and demand therefor. The provisions of this
Paragraph shall not constitute a waiver by Landlord of any right of re-entry as
herein set forth; nor shall receipt of any rent or any other act in apparent
affirmance of the tenancy operate as a waiver of the right to terminate this
Lease for a breach of any of the terms, covenants, or obligations herein on
Tenant's part to be performed by Tenant, or of any other right of Landlord.
16. SUBORDINATION
Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, this Lease shall be subject
and subordinate at all times to: (a) all ground leases or underlying leases
which may now exist-or hereafter be executed affecting the Building or the
Property upon which the Building is situated or both; and (b) the lien or
interest of any mortgage or deed to secure debt which may now exist or hereafter
be executed in any amount for which said Building, Property, ground leases or
underlying leases, or Landlord's interest or estate in any of said items is
specified as security. Notwithstanding the foregoing, Landlord shall have the
right to subordinate or cause to be subordinated to this Lease any such ground
leases or underlying leases or any such liens or interests of mortgages or deeds
to secure debt. In the event that any ground lease or underlying lease is
terminated for any reason or any mortgage or deed to secure debt is foreclosed
or a conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the tenant of the
successor in interest to Landlord at the option of such successor in interest,
provided such successor assumes all obligations of Landlord (i) under the Lease
to the extent said obligations accrue after the date title to the Building vests
in the successor, and (ii) with respect to the security deposit referred to in
Paragraph 4 of this Lease. Tenant agrees to execute such non-disturbance and
attornment agreements as the holder of any mortgage or deed to secure debt may
reasonably require. Tenant covenants and agrees to execute and deliver, upon
demand by Landlord and in the form requested by Landlord, any additional
documents evidencing the priority or subordination of this Lease with respect to
any tenant of the successor in interest to Landlord at the option of such
successor in interest. Tenant agrees to execute such non-disturbance and
attornment agreements as the holder of any mortgage or deed to secure debt and
Tenant shall agree to, each acting reasonably.
17. RE-ENTRY BY LANDLORD
Landlord reserves and shall at all times have the right to re-enter the
Premises to inspect the same, to supply janitor service and any other service
provided by Landlord to Tenant hereunder, to show said Premises to prospective
purchasers, mortgagees or tenants (as to tenants, only during the last 12 months
of the term), to post notices of nonresponsibility, and to alter, improve, or
repair the Premises and any portion of the Building of which the Premises are a
part or to which access is conveniently made through the Premises, without
abatement of rent, and may for that purpose erect, use, and maintain
scaffolding, pipes, conduits, and other necessary structures in and through the
Premises where reasonably required by the character of the work to be performed,
provided that entrance to the Premises shall not be blocked thereby, and further
provided that the business of Tenant shall not be interfered with unreasonably.
Tenant hereby waives any claim for damages for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises, and any other loss
10
<PAGE> 14
occasioned thereby. For each of the aforesaid purposes, Landlord shall at all
times have and retain a key with which to unlock all of the doors, in, upon, and
about the Premises, and Landlord shall have the right to use any and all means
which Landlord may deem necessary or proper to open said doors in an emergency,
in order to obtain entry to any portion of the Premises, and any entry to the
Premises, or portions thereof obtained by Landlord by any of said means, or
otherwise, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction, actual or constructive, of Tenant from the Premises or any portions
thereof; provided, however, Landlord shall repair any damage caused by such
entry. Landlord shall also have the right at any time, without the same
constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement and/or location of
entrances or passageways, doors and doorways, and corridors, elevators, stairs,
toilets, parking facilities, loading docks and areas, delivery and pick-up areas
or other public parts of the Building and to change the name, number or
designation by which the Building is commonly known.
18. INSOLVENCY OR BANKRUPTCY
The appointment of a receiver to take possession of all or
substantially all of the assets of Tenant, or an assignment by Tenant for the
benefit of creditors, or any action taken or suffered by Tenant under any
insolvency, bankruptcy, or reorganization act, shall at Landlord's option
constitute a breach of this Lease by Tenant. Upon the happening of any such
event or at any time thereafter, this Lease shall terminate after written notice
of termination from Landlord to Tenant. In no event shall this Lease be assigned
or assignable by operation of law or by voluntary or involuntary bankruptcy
proceedings or otherwise and in no event shall this Lease or any rights or
privileges hereunder be an asset of Tenant under any bankruptcy, insolvency, or
reorganization proceedings.
19. DEFAULT AND REMEDIES
(a) The following events shall be deemed to be events of default
by Tenant under this Lease:
(1) Tenant shall fail to pay when or before due any sum
of money, in whole or in part, becoming due to be paid to Landlord hereunder,
whether such sum be any installment of the rent herein reserved, any other
amount treated as additional rent hereunder, or any other payment or
reimbursement to Landlord required herein, whether or not treated as additional
rent hereunder, and such failure shall continue for a period of ten (10) days
from the date such payment was due; or
(2) Tenant shall fail to comply with any term, provision
or covenant of this Lease other than by failing to pay when or before due any
sum of money becoming due to be paid to Landlord hereunder, and shall not cure
such failure within twenty (20) days (except immediately and forthwith, if the
default involves a hazardous condition) after written notice thereof to Tenant;
or
(3) Tenant shall fail to vacate the Leased Premises
immediately and forthwith upon termination of this Lease, by lapse of time or
otherwise, or upon termination of Tenant's right to possession only; or
(4) If, in spite of the provisions hereof, the interest
of Tenant shall be levied upon under execution or be attached by process of law,
or Tenant shall fail to contest diligently the validity of any lien or claimed
lien upon the Leased Premises and give sufficient security to Landlord to insure
payment thereof, and such default shall continue for ten (10) days after written
notice thereof to Tenant.
(b) Upon the occurrence of any such events of default described in
subparagraph (a) above or elsewhere in this Lease, Landlord shall have the
option, at its election, to terminate this Lease or to terminate Tenant's right
to possession only, without terminating this Lease, and to pursue any one or
more of the following remedies without any further notice or demand whatsoever,
provided that, upon any termination of this Lease, or upon any termination of
Tenant's right to possession without termination of this Lease, Tenant shall in
either event surrender possession and vacate the Leased Premises immediately,
upon the expiration of five (5) days next following the giving by Landlord to
Tenant of written notice demanding same, and deliver possession thereof to
Landlord, and Tenant hereby grants to Landlord full and free license to enter
into and upon the Leased Premises in
11
<PAGE> 15
such event with or without process of law and to repossess Landlord of the
Leased Premises and to expel or remove Tenant and any others who may be
occupying or within the Leased Premises and to remove any and all property
therefrom, without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer, and without incurring any liability for any damage
resulting therefrom, Tenant hereby waiving any right to claim damage for such
re-entry and expulsion, and without relinquishing any right given to Landlord
hereunder or by operation of law:
(1) Upon termination of this Lease, Landlord shall be
entitled to recover as damages, all rent, including any amount treated as
additional rent hereunder, and other sums due and payable by Tenant on the date
of termination, plus the sum of: (i) an amount equal to the then present value
of the rent, including any amounts treated as additional rent hereunder, and
other sums provided herein to be paid by Tenant for the residue of the stated
Term hereof, less the fair rental value of the Leased Premises for such residue
(taking into account the time and expense necessary to obtain a replacement
tenant or tenants, including expenses hereinafter described in subparagraph
(b)(2) hereinbelow relating to recovery of the Leased Premises, preparation for
reletting and for reletting itself) and (ii) the cost of performing any other
covenants which otherwise would have been performed by Tenant; or
(2) Alternatively to the remedy provided in subparagraph
(b)(1) hereinabove, upon any termination of Tenant's right to possession only
without termination of this Lease, Landlord may, at Landlord's option, enter
into the Leased Premises, remove Tenant's signs and other evidences of tenancy,
and take and hold possession thereof as provided in subparagraph (b)(1) above,
without such entry and possession terminating the Lease or releasing Tenant, in
whole or in part, from any obligation, including Tenant's obligation to pay the
rent, including any amounts treated as additional rent hereunder, for the full
Term; and Landlord may then or thereafter sublet the Premises or any part
thereof, on such occasions and terms as may be determined in Landlord's sole
discretion and, in such event, if the consideration collected by Landlord upon
any such reletting plus any sums previously collected from Tenant are not
sufficient to pay the full amount of all rent, including any amounts treated as
additional rent hereunder and other sums reserved in this Lease for the
remaining Term hereof, together with the costs of repairs, alterations,
additions, redecorating, and Landlord's expenses of reletting and the collection
of the rent accruing therefrom (including attorneys' fees and broker's
commissions), Tenant shall pay to Landlord the amount of such deficiency upon
demand and Tenant agrees that Landlord may file suit to recover any sums failing
due under this subparagraph from time to time.
(3) In either of the events set forth in subparagraphs
(b)(1) and (b)(2) hereinabove, Landlord may, but need not, relet or sublet the
Premises or any part thereof, as the case may be, for such rent and upon such
terms as Landlord in its sole discretion shall determine (including the right to
relet the Leased Premises for a greater or lesser term than that remaining under
this Lease, the right to relet the Leased Premises as a part of a larger area,
and the right to change the character and use made of the Leased Premises) and
Landlord shall not be required to accept any tenant offered by Tenant or to
observe any instructions given by Tenant about such reletting. In any such case,
Landlord may make repairs, alterations and additions in or to the Leased
Premises, and redecorate the same to the extent Landlord deems necessary or
desirable, and Tenant shall, upon demand, pay the cost thereof, together with
Landlord's expenses for reletting including, without limitation, any broker's
commission incurred by Landlord.
(c) Should Landlord, acting reasonably and in good faith,
determine that Tenant is not acting within a commercially reasonable time to
maintain, repair or replace anything for which Tenant is responsible hereunder,
Landlord may, in Landlord's option, upon Tenant's continued failure to so
maintain, repair or replace after twenty (20) days notice from Landlord, enter
into and upon the Leased Premises, with or without process of law and correct
the same, without being deemed in any manner guilty of trespass, eviction or
forcible entry and detainer and without incurring any liability for any damage
resulting therefrom; and Tenant agrees to reimburse Landlord, on demand, as
additional rent, for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this Lease.
(d) Any and all property which may be removed from the Leased
Premises by Landlord pursuant to the authority of this Lease or of law, to which
Tenant is or may be entitled, may be handled, removed and stored, as the case
may be, by or at the direction of Landlord at the risk, cost and expense of
Tenant, and Landlord shall in no
12
<PAGE> 16
event be responsible for the value, preservation or safekeeping thereof. Tenant
shall pay to Landlord, upon demand, any and all expenses incurred in such
removal and all storage charges against such property so long as the same shall
be in Landlord's possession or under Landlord's control. Any such property of
Tenant not retaken by Tenant from storage within thirty (30) days after removal
from the Leased Premises shall, at Landlord's option, be deemed conveyed by
Tenant to Landlord under this Lease as by a bill of sale without further payment
or credit by Landlord to Tenant.
(e) In exercising any of the remedies set forth in this Lease with
respect to entry or re-entry of the Leased Premises, Landlord shall not be
civilly or otherwise liable to Tenant for any damage to Tenant's property unless
same is solely caused by the intentional or wanton willful and reckless conduct
of Landlord.
(f) Pursuit by Landlord of any of the foregoing remedies shall
not, except as set forth in the alternative in the case of those remedies
provided in subparagraphs (b)(1) and (b)(2) hereinabove, preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law or
available in equity (as such remedies being cumulative), nor shall pursuit of
any remedy herein provided constitute a forfeiture or waiver of any rent due to
Landlord hereunder or of any damages accruing to Landlord by reason of the
violation of any of the terms, provisions and covenants herein contained. Except
for a written termination notice signed by Landlord, no act or thing done by
Landlord or its agents during the Term hereby granted shall be deemed a
termination of this Lease or an acceptance of the surrender of the Leased
Premises, and no agreement to terminate this Lease or accept a surrender of said
Premises shall be valid unless in writing signed by Landlord. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants herein contained shall be deemed or construed to constitute a waiver
of any other violation or breach of any of the terms, provisions and covenants
herein contained. Landlord's acceptance of the payment of rental or other
payments hereunder after the occurrence of an event of default shall not be
construed as a waiver of such default, or as accord and satisfaction of any
liability of Tenant, unless Landlord expressly so notifies Tenant in writing.
Forbearance by Landlord in enforcing one or more of the remedies herein provided
upon any event of default shall not be deemed or construed to constitute a
waiver of such default or of Landlord's right to enforce any such remedies with
respect to such default or any subsequent default. If, on account of any breach
or default by Tenant in Tenant's obligations under the terms and conditions of
this Lease, it shall become necessary or appropriate for Landlord to employ or
consult with any attorney concerning or to enforce or defend any of Landlord's
rights or remedies hereunder, Tenant agrees to pay all reasonable attorneys'
fees so incurred, said attorneys' fees being deemed additional rent due
hereunder upon the next date the payment by Tenant of rent or any installment
thereof is due.
(g) Without limiting the foregoing:
(1) Service of process upon Tenant may be had by serving
any officer, director or employee of Tenant at or upon the Leased Premises and
Landlord or anyone acting therefor shall at all times have the right to enter,
seek out and locate any appropriate person for such purpose;
(2) Service of process upon Landlord may be had by
serving any registered agent or partner of Landlord, or any person acting
therefor, at Landlord's offices in the Building or elsewhere;
(3) Provided, however, neither Landlord nor Tenant hereby
waive the right to serve each other with process by any other lawful means;
(4) Landlord and Tenant expressly waive any right to
trial by jury; and
(5) To the extent permitted by existing or future law of
the State of Georgia, Tenant expressly waives any and all rights of redemption
granted by or under any existing or future laws if Tenant is evicted or
dispossessed for any cause, or if Landlord obtains possession of the Premises
due to Tenant's default hereunder or otherwise.
13
<PAGE> 17
20. DAMAGE BY FIRE OR OTHER CASUALTY
(a) If the Building, improvements, or Leased Premises are rendered
partially or wholly untenantable by fire or other casualty, and if such damage,
in Landlord's reasonable estimation, as set forth in the written notice
delivered to Tenant within forty-five (45) days of such fire or other casualty,
cannot be materially restored within one hundred-fifty (150) days of such
damage, then either Tenant or Landlord may, at its option, terminate this Lease
as of the date of such fire or casualty by written notice to the other within
sixty (60) days of such fire or other casualty. For purposes hereof, the
Building, improvements, or Leased Premises shall be deemed "materially restored"
if they are in such condition as would not prevent or materially interfere with
Tenant's use of the Leased Premises for the purpose for which the Premises were
being used at the time of such fire or casualty.
(b) If this Lease is not terminated pursuant to this Paragraph,
then Landlord shall proceed with all due diligence to repair and materially
restore the Building, improvements (including all of the Tenant improvements
done by Landlord for Tenant) or Leased Premises, as the case may be, and
thereafter to restore same as near to the condition in which same existed prior
to the casualty as is reasonably feasible under all the circumstances (except
that Landlord may elect not to rebuild if such damage occurs during the last
year of the Term of this Lease exclusive of any option which is unexercised at
the date of such damage).
(c) If this Lease shall be terminated pursuant to this Paragraph,
the Term of this Lease shall end on the date of such damage as if that date had
been originally fixed in this Lease for the expiration of the Term hereof. If
this Lease shall note be terminated pursuant to this Paragraph and if the Leased
Premises is untenantable in whole or in part following such damage, the rent
payable during the period in which the Leased Premises is untenantable shall be
reduced to such extent, if any, as may be fair and reasonable under all of the
circumstances. In the event that Landlord shall fail substantially to complete
such repairs and material restoration within one hundred fifty (150) days after
the date of such damage, Tenant may at its option and as its sole remedy
terminate this Lease by delivering written notice to Landlord, whereupon this
Lease shall end on the date of such notice as if the date of such notice were
the date originally fixed in this Lease for the expiration of the Term hereof;
provided, however, that if construction is delayed because of changes,
deletions, or additions in construction requested by Tenant, strikes, lockouts,
casualties, acts of God, war, material or labor shortages, governmental
regulation or control or other causes beyond the reasonable control of Landlord,
the period for restoration, repair or rebuilding shall be extended for the
amount of time Landlord is so delayed.
In no event shall Landlord be required to rebuild, repair or replace
any part of the partitions, fixtures, additions or other improvements which may
have been placed in or about the Leased Premises by Tenant, but this exclusion
does not include the initial buildout in accordance with the plans and
specifications for Tenant by Landlord. Any insurance which may be carried by
Landlord or Tenant against loss or damage to the Building or the Leased Premises
shall be for the sole benefit of the party carrying such insurance and under its
sole control except that Landlord's insurance may be subject to control by the
holder or holders of any indebtedness secured by a mortgage or deed to secure
debt covering any interest of Landlord in the Leased Premises, the Building, or
the Property. In no event shall Landlord be required under this Lease to incur
any expenses in excess of available insurance proceeds and the deductibles for
the purpose of repairing or restoring the Building or the Premises after a fire
or other casualty.
(d) Notwithstanding anything herein to the contrary, in the event
the holder of any indebtedness secured by a mortgage or deed to secure debt
covering the Leased Premises, Building or the Property requires that any
insurance proceeds be paid to it, then Landlord shall have the right to
terminate this Lease by delivering written notice of termination to Tenant
within fifteen (15) days after such requirement is made by any such person,
whereupon the Lease shall end upon the expiration of said fifteen (15) days as
if the end of such period were the date originally fixed in this Lease for the
expiration of the Term.
(e) In the event of any damage or destruction to the Building, the
Leased Premises by any peril covered by the provisions of this Paragraph, Tenant
shall, upon notice from Landlord, remove forthwith, at its sole cost and
expense, such portion or all of the property belonging to Tenant or his
licensees from such portion or all of the Building or the Leased Premises as
Landlord shall request and Tenant hereby indemnifies and holds Landlord
14
<PAGE> 18
harmless from any loss, liability, costs, and expenses, including attorneys'
fees, arising out of any claim of damage or injury as a result of any alleged
failure to properly secure the Leased Premises prior to such removal,
21. CONDEMNATION
(a) If any substantial part of the Building, improvements, or
Leased Premises should be taken for any public or quasi-public use under
governmental law, ordinance or regulation, or by right of eminent domain, or by
private purchase in lieu thereof, and the taking would prevent or materially
interfere with the use of the Building or the Leased Premises for the purpose
for which it is then being used, this Lease shall terminate on the date title
vests in the taking authority in the same manner as if the date of such taking
were the date originally fixed in this Lease for the expiration of the Term
hereof.
(b) If part of the Building, improvements, or Leased Premises
shall be taken for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain, or by private purchase
in lieu thereof, and this Lease is not terminated as provided in subparagraph
(a) above, this Lease shall not terminate but the rent payable hereunder during
the unexpired portion of this Lease shall be reduced to such extent, if any, as
may be fair and reasonable under all of the circumstances and Landlord shall
undertake to restore the Building, improvements, and Leased Premises to a
condition suitable for Tenant's use, as near to the condition thereof
immediately prior to such taking as is reasonably feasible under all
circumstances. In no event, however shall Landlord be required under this Lease
to incur any expenses in excess of available proceeds from any taking
contemplated hereby for the purposes of restoring the Building or the Premises
after any such taking.
(c) Tenant shall not share in any condemnation award or payment in
lieu thereof or in any award for damages resulting from any grade change of
adjacent streets outside the Office Park of which the Building is a part, the
same being hereby assigned to Landlord by Tenant; provided, however, that Tenant
may separately claim and receive from the condemning authority, if legally
payable, compensation for Tenant's removal and relocation costs, for Tenant's
loss of business and/or business interruption.
(d) Notwithstanding anything to the contrary contained in this
Paragraph, if the temporary use or occupancy of any part of the Premises shall
be taken or appropriated under power of eminent domain during the Term of this
Lease, this Lease shall be and remain unaffected by such taking or appropriation
and Tenant shall continued to pay in full all rent payable hereunder by Tenant
during the Term of this Lease; in the event of any such temporary appropriation
or taking, Tenant shall be entitled to receive that portion of any award which
represents compensation for the use of occupancy of the Premises during the Term
of this Lease, and Landlord shall be entitled to receive that portion of any
award which represents the cost of restoration of the Premises and the use and
occupancy of the Premises after the end of the Term of this Lease.
(e) Notwithstanding anything to the contrary contained in this
Paragraph 21 or elsewhere in this Lease, in the event of any condemnation,
Landlord shall be entitled to receive its entire award without deduction
therefrom for any estate vested in Tenant by the Lease (none is intended), but
Tenant shall have the right to make a separate claim with the condemning
authority for, and to receive therefrom: (i) any moving expenses incurred by
Tenant as a result of such condemnation; (ii) any costs incurred or paid by
Tenant in connection with any alteration or improvement made by Tenant to the
Premises; (iii) the value of any of Tenant's property taken; (iv) any award
Tenant is entitled to receive under subparagraph (d) of this Paragraph 21; and
(v) any other separate claim which Tenant may hereafter be permitted to make
under applicable law, provided, however, that such other separate claim shall
not reduce or adversely affect the amount of the Landlord's award.
22. SALE BY LANDLORD
In the event of a sale, conveyance or assignment by Landlord of all or
any portion of the Building or Landlord's interest therein, or in or of the
Leased Premises, or if the Building or the Leased Premises comes under the
control of a mortgagee, ground lessor or similar party -- provided such
mortgagee, ground lessor, or similar party assumes Landlord's obligations (i)
under this Lease to the extent said obligations accrue after the date title to
the Building vests in the successor , and (ii) with respect to the security
deposit referred to in Paragraph 4 of this
15
<PAGE> 19
Lease -- the same shall operate to release Landlord from any future liability
upon any of the covenants or conditions, express or implied, herein contained in
favor of Tenant, and in such event Tenant agrees to look solely to the
responsibility of the successor in interest of Landlord in and to this Lease,
and to recognize such successors as Landlord or to attorn thereto and execute,
at this Landlord's request, an attornment agreement therewith.
23. RIGHT OF LANDLORD TO PERFORM
All covenants and agreements to be performed by the Tenant under any of
the terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of rent. If the Tenant shall fail to pay any
sum of money or incur any expense, other than rent, required to be paid by
Tenant hereunder, whether or not such failure constitutes a breach of this
Lease, and such failure shall continue for ten (10) days after notice thereof by
the Landlord, the Landlord may, but shall not be obligated to do so, and without
waiving or releasing the Tenant from any obligations of the Tenant, make any
such payment or incur any such expense or perform any such act on the Tenant's
part to be made or performed as in this Lease required to be adopted by Tenant.
All sums so paid by the Landlord and as necessary incidental costs together with
interest thereon at the rate of one and one-half percent (11/2%) per month,
which is eighteen percent (18%) per annum, from the date of such payment by the
Landlord, shall be payable as additional rent to the Landlord on demand, and the
Tenant covenants to pay any such sums, and the Landlord shall have, in addition
to any other right or remedy of the Landlord, the same rights and remedies in
the event of nonpayment thereof by the Tenant as in the case of default by the
Tenant in the payment of rent.
24. SURRENDER OF PREMISES
(a) Tenant shall, at least one hundred-eighty (180) days before
the last day of the Term hereof, give to Landlord a written notice of any
intention to surrender the Premises on that date, but nothing contained herein
or in the failure of Tenant to give such notice shall be construed as an
extension of the Term hereof or as consent of Landlord to any holding over by
Tenant.
(b) At the end of the Term or any renewal thereof or other sooner
termination of this Lease, the Tenant will peaceably deliver up to the Landlord
possession of the Premises, together with all improvements or additions upon or
belonging to the same, by whomsoever made, in the same condition as received, or
first installed, ordinary wear and tear, damage by fire, earthquake, act of God,
or elements alone excepted. So long as Tenant is not in default hereunder,
Tenant may, upon the termination of this Lease, remove all movable furniture and
equipment belonging to Tenant, at Tenant's sole cost, title to same remaining in
Tenant until such termination, repairing any damage caused by such removal.
Property not so removed within thirty (30) days shall be deemed abandoned by
Tenant, and title to the same shall thereupon pass to Landlord. Upon request by
Landlord, unless otherwise then or previously agreed to in writing by Landlord,
Tenant shall remove, at Tenant's sole cost, all permanent improvements by or at
the expense of Tenant and all movable furniture and equipment belonging to
Tenant and repair any damage resulting from such removal. Property not so
removed within thirty (30) days of the last day of the Term shall be abandoned
by Tenant, and title to the same shall thereupon pass to Landlord.
(c) The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof shall, at the option of Landlord, terminate all or
any existing subleases or subtenancies, or may, at the option of Landlord,
operate as an assignment to Landlord of any or all such subleases or
subtenancies.
25. WAIVER
If either Landlord or Tenant waives the performance of any term,
covenant or condition contained in this Lease, such waiver shall not be deemed
to be a waiver of any subsequent breach of the same or any other term, covenant
or condition contained herein. Furthermore, the acceptance of rent by Landlord
shall not constitute a waiver of any preceding breach by Tenant of any term,
covenant or condition of this Lease, regardless of Landlord's knowledge of such
preceding breach at the time Landlord accepted such rent. Failure by Landlord to
enforce any of the terms, covenants or conditions of this Lease for any length
of time shall not be deemed to waive or to decrease the right of Landlord to
insist thereafter upon strict performance by Tenant. Waiver by Landlord or
Tenant of any
16
<PAGE> 20
term, covenant or condition contained in this Lease may only be
made by a writing, shall be effective only with respect to the subject matter
stated therein, and only for such time and to such extent as provided therein.
26. PARKING
Provided Tenant is not in default under this or any other Lease with
Landlord, Landlord shall provide, for the non-assigned use of Tenant, eighty-one
(81) parking spaces. Said spaces shall not be reserved or otherwise designated
at any certain level or other place. Landlord reserves the right to designate
spaces at a future date. During the initial 60-month period of the Lease Term,
there shall be no additional charge to Tenant under this Lease for the parking
privileges specified in this Paragraph.
27. NOTICES
Each notice required or permitted to be given under this Lease shall be
sent by hand delivery or by depositing it with the United States Postal Service
or the official successor thereto, certified or registered mail, return receipt
requested, with adequate postage prepaid, addressed to the appropriate party as
hereinafter provided. Each such notice shall be effective upon being
hand-delivered or deposited with the United States Postal Service, as the case
may be, but the time period in which a response to any such notice must be given
or any action taken with respect thereto shall commence to run from the date of
receipt of the notice by the addressee thereof, as evidenced by the delivery
record of the messenger or courier service or by the return receipt of the
United States Postal Service, as the case may be. Rejection or other refusal by
the addressee to accept or the inability of the messenger or courier service, or
the United States Postal Service, to deliver because of a changed address of
which no notice was given, shall in any case be deemed to be the receipt of the
notice sent. The addresses of Landlord and Tenant are as follows:
Landlord: Regency Park West Associates, L.P.
2929 Lenox Road
Atlanta, Georgia 30324
With copy to: GE Capital
One Georgia Center
600 West Peachtree Street, Suite 800
Atlanta, Georgia 30308
Attn: Asset Manager
Tenant: Witness Systems Delaware, Inc.
1105 Sanctuary Parkway
Suite 210
Alpharetta, Georgia 30201
Attn: James W. Judson, President
Any party shall have the right from time to time to change the address
to which notices to it shall be sent and to specify up to two additional
addresses to which copies of notices to it shall be sent by giving to the other
party or parties at least thirty (30) days prior notice of the changed address
or additional addresses.
28. CERTAIN RIGHTS RESERVED TO LANDLORD
Landlord reserves and may exercise the following rights without
affecting Tenant's obligations hereunder:
(a) To change the name of the Building or the Office Park;
(b) To designate all sources furnishing sign painting and
lettering, towels, valet service and toilet supplies, lamps and bulbs used in
the Leased Premises;
17
<PAGE> 21
(c) To retain at all times pass keys to the Leased Premises;
(d) To grant to anyone the exclusive right to conduct any
particular business or undertaking in the Building;
(e) To close the Building after regular work hours and on legal
holidays subject, however, to Tenant's right to admittance, under such
reasonable regulations as Landlord may prescribe from time to time, which may
include by way of example but not of limitation, that persons entering or
leaving the Building identify themselves to a watchman by registration or
otherwise and that said persons establish their right to enter or leave the
Building; and
(f) To take any and all measures, including inspections, repairs,
alterations, decorations, additions and improvements to the Leased Premises or
the Building, and identification and admittance procedures for access to the
Building as may be necessary or desirable for the safety, protection,
preservation or security of the Leased Premises or the Building or Landlord's
interest, or as may be necessary or desirable in the operation of the Building.
Landlord may enter upon the Leased Premises and may reasonably exercise
any or all of the foregoing rights hereby without being deemed guilty of an
eviction or disturbance of Tenant's use or possession and without being liable
in any manner to the Tenant and without abatement of rent or affecting any of
the Tenant's obligations hereunder.
29. ABANDONMENT
Tenant shall not vacate or abandon the Premises at any time during the
Term, and if Tenant shall abandon, vacate, or surrender said Premises or be
dispossessed by process of law, or otherwise, any personal property belonging to
Tenant-and left on the Premises shall, at the option of Landlord, be deemed to
be abandoned and title thereto shall, at the option of Landlord, thereupon pass
to Landlord.
30. SUCCESSORS
Subject to the provisions of Paragraph 10 hereof, the terms, covenants,
and conditions contained herein shall be binding upon and inure to the benefit
of the heirs, successors, executors, administrators and assigns of the parties
hereto.
31. ATTORNEYS' FEES
In the event that any action or proceeding is brought to enforce any
term, covenant or condition of this Lease on the part of Landlord or Tenant, the
prevailing party shall be entitled to reasonable attorneys' fees to be fixed by
the court in such action or proceeding.
32. CORPORATE AUTHORITY
If Tenant signs as a corporation, each of the persons executing this
Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly
authorized and existing corporation, that Tenant has and is qualified to do
business in Georgia, that the corporation has full right and authority to enter
into this Lease, and that each and every one of the persons signing on behalf of
the corporation are authorized to do so. Upon Landlord's request, Tenant shall
provide Landlord with evidence reasonably satisfactory to Landlord confirming
the foregoing covenants and warranties.
33. MORTGAGEE APPROVALS
Any provisions of this Lease requiring the approval or consent of
Landlord shall not be deemed to have been unreasonably withheld if any mortgagee
(which shall include the holder of any deed to secure debt) of the Premises,
Building or Property or any portion thereof shall refuse or withhold its
approval or consent thereto. Any
18
<PAGE> 22
requirement of Landlord pursuant to this Lease which is imposed pursuant to the
direction of any such mortgagee shall be deemed to have been reasonably imposed
by Landlord if made in good faith.
34. LANDLORD'S LIEN
(INTENTIONALLY OMITTED)
35. QUIET ENJOYMENT
Landlord represents and warrants that it has full right and authority
to enter into this Lease and that Tenant, while paying the Rentals and
performing its other covenants and agreements herein set forth, shall peaceably
and quietly have, hold and enjoy the Leased Premises for the Term hereof without
hindrance or molestation from Landlord subject to the terms and provisions of
this Lease. In the event this Lease is a sublease, then Tenant agrees to take
the Leased Premises subject to the provisions of the prior leases. Landlord
shall not be liable for any interference or disturbance by other tenants or
third persons, nor shall Tenant be released from any of the obligations of this
Lease because of such interference or disturbance.
36. LIMITATION OF LANDLORD'S LIABILITY AND EXCULPATION OF PARTNERS
In no event shall Landlord's liability for breach of this Lease exceed
the amount of rent then remaining unpaid for the then current Term (exclusive of
any renewal periods which have not then actually commenced). This provision is
not intended to be a measure or agreed amount of Landlord's liability with
respect to any particular breach, and shall not be utilized by any court or
otherwise for the purpose of determining any liability of Landlord hereunder,
except only as a maximum amount not to be exceeded in any event. Furthermore,
any liability of Landlord hereunder shall be enforceable only for and out of the
interest of Landlord in the Building. Anything to the contrary contained in this
Lease notwithstanding there shall in no event be any personal or derivative
liability with respect to, arising from or related in any manner to the terms,
covenants, conditions and provisions of this Lease or their application, sought
or enforced against any persons, firms or other entities who constitute the
partners of Landlord, and Tenant hereby exculpates each and all partners of
Landlord from any and all liability arising from or relating to this Lease and
its provisions or from Landlord's status as such hereunder. Tenant shall,
subject to the rights of any ground lessor, mortgagee or holder of any security
interest, look solely to the interest of Landlord, its successors and assigns,
in the Building for the satisfaction of each and every remedy, if any, of Tenant
as against Landlord herein, including default by Landlord hereunder, and shall
in no event have or seek such satisfaction out of the separate assets of, or
from, any partner of Landlord.
37. RIGHT TO RELOCATE
If the size of Tenant's Premises shall be less than 2500 Net Usable
square feet, Landlord reserves the right to relocate Tenant during the Term of
this lease or any renewal hereof, to other office space within the Building. If
Landlord exercises this right to relocate Tenant, then any and all costs
incident to said relocation shall be the responsibility of Landlord; said costs
to be determined prior to the relocation of Tenant.
38. NO ESTATE IN TENANT
This Lease will create the relationship of Landlord and Tenant only,
and no estate shall pass out of Landlord, Tenant has only a usufruct, not
subject to levy and sale and not assignable by Tenant, except as provided for
herein and in compliance herewith.
39. DISCLAIMER OF CREATION OF PARTNERSHIP OR JOINT VENTURE
This Lease shall not be deemed to create or constitute a partnership or
joint venture of and between Landlord and Tenant for any purpose; nor is
Landlord to be deemed for any purpose a master, servant, employer, employee,
principal or agent of Tenant.
19
<PAGE> 23
40. LEASE EFFECTIVE DATE
Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option for lease, and is not effective
as a lease or otherwise until execution by both Landlord and Tenant.
41. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the Rules and
Regulations printed on Exhibit "E" annexed to this Lease and all reasonable
additions thereto as are from time to time now or hereafter at any time put into
effect by Landlord. Landlord shall not be responsible for the nonperformance by
any other tenant or occupant of the Building or the Office Park of any
obligation under said Rules and Regulations.
42. NO BROKERS
Tenant represents and warrants to Landlord that, except for Bryant &
Associates, no broker, agent, commission salesman or other person has
represented Tenant in the negotiations for and procurement of this Lease and
that, except for the commission payable to Bryant & Associates, no commission,
fee or compensation of any kind is due and payable in connection herewith to any
person or entity. Tenant and Landlord hereby acknowledge and agree that the
commission payable to Bryant & Associates in connection with the Lease is the
sole responsibility of Landlord, and that said commission shall be paid by
Landlord to Bryant & Associates in accordance with the terms of a separate
agreement. Tenant and Landlord also acknowledge that American Resurgens
Management Corp. has acted as agent for Landlord in this transaction and is to
be compensated for its services in connection therewith in accordance with a
separate agreement with Landlord. American Resurgens Management Corp. has not
acted as agent for Tenant in this transaction.
43. RECORDING
Neither this Lease, nor any memorandum hereof, shall be recorded by
Tenant without Landlords prior written consent to such recording.
44. MISCELLANEOUS
(a) The Paragraph numbers and Paragraph headings herein, and
designations of subparagraphs, are for convenience of reference only and shall
in no way define, increase, limit, or describe the scope or intent of any
provision of this Lease, which shall be construed without reference thereto.
(b) If this Lease is signed by more than one person, or if Tenant
is a partnership, joint venture, or other business organization the members of
which are subject to personal liability, the obligations and liability of each
such person or member hereunder shall be joint and several.
(c) The term "Landlord" in this Lease shall include Landlord and
its successors and assigns.
(d) The term "Tenant" or any pronoun used in place thereof shall
indicate and include the masculine, feminine or neuter genders, the singular or
plural number, individuals, firms or corporations, and each of their respective
successors, executors, administrators, and permitted assigns, according to the
context hereof.
(e) The term "Office Park" means the business park owned by Lessor
and composed of approximately 150 acres located along Rock Mill Road in Land
Lots 592, 605, 606 and 639 of the 1st District, 2nd Section, Alpharetta, Fulton
County, Georgia all as more particularly described in Exhibit "B" attached
hereto and by this referenced made a part hereof.
(f) The term "Common Area" means those portions of the Office Park
lying outside the Building which are designated as "common areas" for the use,
enjoyment and benefit of all owners or tenants of property located within the
Office Park and their lessees, sublessees and invitees.
20
<PAGE> 24
(g) Time is of the essence of this Lease and each and all of its
provisions.
(h) This Lease shall in all respects be governed by and construed
under the laws of the State of Georgia.
(i) Tenant shall have no right to hold back, offset or otherwise
fail to pay any rent, including additional rent, due or any other charges
assessed under any provision of this Lease, for or on account of any claim or
counterclaim alleged against Landlord, save and except pursuant to an order
issued with prior notice to Landlord and after a hearing by a court of record of
competent jurisdiction in the State of Georgia.
(j) This Lease, together with its Exhibits and riders, if any,
contains all the agreements of the parties hereto and supersedes any previous
negotiations or agreements, whether oral or written. There have been no
representations made by the Landlord or understandings made between the parties
other than those set forth in this Lease and its Exhibits, if any.
(k) This Lease may not be modified except by a written instrument
executed by all the parties hereto or their successors and assigns.
(1) All obligations of Tenant hereunder not fully performed as of
the expiration or earlier termination of the Term of this Lease shall survive
the expiration or earlier termination of the Term hereof.
(m) If, for any reason whatsoever, any clause, phrase, provision
or portion of this Lease, or the application thereof to any person or
circumstance, shall be or become invalid, unenforceable or ineffective, such
event shall not affect, impair or render invalid, unenforceable or ineffective
the remainder of this Lease or any other clause, phrase, provision or portion
hereof, nor shall it affect the application of any clause, phrase, provision or
portion hereof to other persons or circumstances. It is also the intention of
the parties to this Lease that in lieu of each such clause, phrase, provision or
portion of this Lease that is or may become invalid, unenforceable or
ineffective, there be added as a part of this Lease a clause, phrase, provision
or portion as like and similar in terms to such invalid, unenforceable or
ineffective clause, phrase, provision or portion as may be valid, enforceable
and effective.
(n) Whenever a period of time is herein prescribed for action to
be taken by Landlord or Tenant, the party so charged shall not be liable or
responsible for, and there shall be excluded from the computation of any such
period of time, any delays due to causes of any kind whatsoever including,
without limitation, acts or events of force majeure, which are beyond the
control of that party. The period for performance of any such delayed action by
the party so charged shall be extended for a period equivalent to the period of
such delay.
(o) Notwithstanding any other provisions of this Lease to the
contrary, if the Commencement Date hereof shall not have occurred before the
twentieth (20th) anniversary of the date hereof, this Lease shall be null and
void and neither party shall have any liability or obligation to the other
hereunder. The purpose and intent of this provision is to avoid the application
of the Rule Against Perpetuities to this Lease.
45. SPECIAL STIPULATIONS
Additional provisions of this Lease, if any, are set forth in the
Special Stipulations attached hereto and made a part hereof as Exhibit "F"'. In
the event of a conflict between the preceding provisions of this Lease and the
provisions of the Special Stipulations, Exhibit "F"', shall control.
21
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have executed this Lease under
their hands and seals the day and year first above written, each warranting to
the other that it has the authority to do so and the capacity to bind the
respective entities identified as Landlord and Tenant hereunder.
LANDLORD:
REGENCY PARK WEST ASSOCIATES, L.P.,
a Georgia limited partnership
By: General Electric Credit Equities, Inc.,
a Delaware corporation, general partner
By: /s/ Paul F. Martin
-----------------------------------------
Print Name: Paul F. Martin
---------------------------------
Print Title: Authorized Signatory
--------------------------------
(CORPORATE SEAL)
TENANT:
WITNESS SYSTEMS DELAWARE, INC.,
a Delaware corporation
As to Tenant, signed, sealed
and delivered presence of:
By: /s/ James W. Judson
-----------------------------------------
/s/ Carla B. Karic Print Name: James W. Judson
- ------------------------------ ---------------------------------
Notary Public (Affix seal and Print Title: President
commission expiration date) --------------------------------
Commission Expires: 5/30/2000
22
<PAGE> 26
EXHIBIT "A"
SANCTUARY PARK
LEASED PREMISES FLOOR PLAN
[2nd Floor Location Plan]
<PAGE> 27
EXHIBIT "B"
SANCTUARY PARK
OFFICE PARK LEGAL DESCRIPTION
ALL THAT TRACT OR PARCEL OF LAND lying and being In Land Lot 605 of the 1st
District 2nd Section, Fulton County, Georgia, and being more particularly
described as follows:
TO FIND THE TRUE PONT OF BEGINNING, commence at an iron pin found at the point
of intersection of the existing southeasterly right-of-may line of Old Roswell
Road (60 foot right-of-way) with the north line of Land Lot 592, said District,
Section and County (said point of commencement having a Georgia State Plane
(West Zone) NAD (North American Datum) 1983 value of northing 1473253.944 and
easting 2251098.642) and run thence south 89 degrees 17 minutes 16 seconds east,
along said north line of said Land Lot 592, a distance of 19.79 feet to a point;
run thence southwesterly along the arc of a curve to the right having a radius
of 3,756.40 feet a distance of 50.65 feet to a point (said last point also being
south 31 degrees 48 minutes 39 seconds west, a distance of 50.65 feet as
measured along a chord line from the terminus of the last preceding course); run
thence southeasterly along the arc of a curve to the left having a radius of
40.00 feet a distance of 97.34 feet to a point (said last point also being south
37 degrees 30 minutes 58 seconds east, a distance of 75.04 feet as measured
along a chord line from the terminus of the last preceding course); run thence
north 72 degrees 46 minutes 14 seconds east, a distance of 92.49 feet to a
point; run thence northeasterly along the arc of a curve to the right having a
radius of 490.00 feet a distance of 153.44 feet to a point (said last point also
being north 81 degrees 44 minutes 29 seconds east, a distance of 152.81 feet as
measured along a chord line from the terminus of the last preceding course); run
thence south 89 degrees 17 minutes 16 seconds east, a distance of 189.64 feet to
a point; run thence south 00 degrees 42 minutes 44 seconds west, a distance of
100.00 feet to a point; and run thence south 89 degrees 17 minutes 16 seconds
west, a distance of 88.65 feet to a point on the southerly line of Sanctuary
Parkway (private drive) at the TRUE POINT OF BEGINNING: From said true point of
beginning, run thence the following course and distances along said southerly
line of Sanctuary Parkway (private drive): south 89 degrees 17 minutes 16
seconds east, a distance of 193.83 feet to a point; southeasterly along the arc
of a curve to the right having a radius of 662.00 feet a distance of 117.62 feet
to a point (said last point also being south 84 degrees 11 minutes 52 seconds
east, a distance of 117.47 feet as measured along a chord line from the terminus
of the last preceding course); south 79 degrees 06 minutes 28 seconds east, a
distance of 75.01 feet to a point; southeasterly, easterly and northeasterly
along the arc of a curve to the left having a radius of 512.00 feet a distance
of 166.25 feet to a point (said last point also being south 88 degrees 24
minutes 36 seconds east a distance of 165.52 feet as measured along a chord line
from the terminus of the last preceding course); north 82 degrees 17 minutes 16
seconds east, a distance of 93.43 feet to a point; and northeasterly along the
arc of a curve to the right having a radius of 387.00 feet a distance of 31.24
feet to a point (said last point also being north 84 degrees 35 minutes 39
seconds east, a distance of 31.23 feet as measured along a chord line from the
terminus of the last preceding course); thence leaving said southerly line of
Sanctuary Park (private drive) and proceeding the following courses and
distances: south 02 degrees 23 minutes 43 seconds west, a distance of 394.44
feet to a point; south 07 degrees 38 minutes 44 seconds west, a distance of
273.31 feet to a point; south 24 degrees 33 minutes 54 seconds west a distance
of 294.21 feet to a point; south 84 degrees 08 minutes 46 seconds west, a
distance of 84.84 feet to a point; north 85 degrees 41 minutes 18 seconds west,
a distance of 71.17 feet to a point north 76 degrees 26 minutes 55 seconds west,
a distance of 80.76 feet to a point; north 68 degrees 31 minutes 39 seconds west
a distance of 94.37 feet to a point; north 26 degrees 34 minutes 49 seconds
west, a distance of 46.93 feet to a point; north 09 degrees 51 minutes 08
seconds east, a distance of 114.65 feet to a point; north 80 degrees 56 minutes
17 seconds west, a distance of 112.39 feet to a point; north 55 degrees 52
minutes 56 seconds west, a distance of 102.43 feet to a point; north 06 degrees
30 minutes 19 seconds east, a distance of 169.47 feet to a point; north 00
degrees 31 minutes 27 seconds west, a distance of 206.46 feet to a point; north
24 degrees 42 minutes 08 seconds east, a distance of 119.70 feet, to a point;
north 04 degrees 52 minutes 04 seconds west, a distance of 55.08 feet to a
point; and north 17 degrees 49 minutes 48 seconds west, a distance of 138.99
feet to a point on said southerly line of said Sanctuary Parkway (private drive)
at the True Point of Beginning; the foregoing courses and distances being taken
from Survey for Regency Park West Associates, L.P., dated June 10, 1996, and
certified by John E. Norton, Georgia registered land survey or #1848,
Engineering and Inspection Systems, Inc., and said property being shown as
Parcel 1 on said Survey.
Parcel 1 is the property on which the Building is constructed; the 150-acre
tract contemplated for development of the entire Office Park is depicted on
Exhibit B-1 attached hereto.
<PAGE> 28
EXHIBIT "B-1"
SANCTUARY PARK
CONCEPTUAL PLAN
Conceptual Plan for GE Capital and American Resurgens Management Corp.
Smallwood, Reynolds, Stewart, Stewart & Associates, Inc. Architects
[Conceptual Design of Office Park - Graphic]
<PAGE> 29
EXHIBIT "C"
SANCTUARY PARK
LEASED PREMISES IMPROVEMENT AGREEMENT
In consideration of Tenant's execution of the Lease to which this
Agreement forms an Exhibit, and for the mutual considerations hereinafter
recited, Landlord shall provide to the Premises and Tenant shall receive, accept
and provide the following:
SECTION (A) - ARCHITECTURAL, ENGINEERING AND OTHER SERVICES:
(1) Landlord shall provide Tenant with an allowance of Thirty Thousand
Five Hundred Sixty-Four and No/100 Dollars ($30,564.00) equivalent to One and
50/100 Dollars ($1.50) per square foot of Net Usable Area in the Leased
Premises, for use by Tenant in obtaining architectural and engineering services
prior and incident to construction of Tenant Improvements therein. Tenant, to
the extent same is in excess of the above-stated Landlord's allowance, at its
sole cost and expense and through Landlord's designated architect and/or
engineer, shall then cause to be prepared plans and specifications for Tenant's
Premises as follows:
(a) Detailed architectural drawings and specifications for
Tenant's partition plan, reflected ceiling plan, power, communication,
and telephone plan (location of data and telephone outlets with pull
boxes only), electrical outlets, finish plan, elevations, details and
sections; and
(b) Mechanical, electrical, plumbing and lighting plans and
specifications where necessary for installation to base heating and air
conditioning systems in the Building. (Landlord shall provide the
architectural and mechanical services with respect to completion of the
improvements outlined in Section B).
(2) Landlord and Tenant hereby agree that time is of the essence and
that the following sequence and schedule shall be strictly adhered to with
respect to the design and development of Construction Documents and the ultimate
construction of Improvements to Tenant's Premises:
(a) Landlord, or its designated agent shall prepare a cost
estimate based upon the preliminary drawings on or before April 14,
1997;
(b) Tenant reviews and approves or adjusts the schematic
pricing drawings and the cost estimate, and provides Landlord all
remaining information needed to develop final Plans and Specifications
by April 14, 1997;
(c) Landlord, based upon all information previously provided
and approved by Tenant, authorizes Architect to prepare final Plans and
Specifications on or before April 29,1997; and
(d) Tenant reviews and signs off on the final Plans and
Specification prepared in accordance with (2)(c) above on or before
April 29, 1997;
Upon receipt from Tenant of the approved final plans, specifications referred to
in (2)(d) above, Landlord shall obtain a minimum of three (3) competitive bids
and select a contractor, who shall substantially complete the work depicted or
otherwise described on said final plans and specifications (the "Improvement
Work") and deliver the Premises to Tenant by July 1, 1997 (subject to delays
contemplated and provided for in the Lease). Landlord shall provide Tenant with
an allowance (the "Tenant Improvement Allowance") of Three Hundred Twelve
Thousand Three Hundred Sixty-Eight and No/100 Dollars ($312,368.00), equivalent
to Fourteen and No/100 Dollars ($14.00) per square foot of Net Rentable Area in
the Leased Premises. Should the cost of all improvements to Tenant's Premises
exceed the Tenant Improvement Allowance, Tenant shall pay Landlord such excess
costs prior to the time any portion of the Tenant Improvement Allowance is
disbursed by Landlord to the contractor under the contract for Improvement Work.
Said excess costs shall be deemed additional rent under the Lease. Failure by
Tenant to pay
<PAGE> 30
any sums when due will constitute a failure to pay rent when due and be, at
Landlord's option, an event of default by Tenant under the Lease. Any
contractor-initiated change order must be reviewed and approved by Landlord and
Tenant, which review and approval will not be unreasonably withheld. In the
event that the total cost of the Improvement Work is less than $14.00 per square
foot of Net Rentable Area, Tenant shall have the right to apply any unused
portion of the Tenant Improvement Allowance up to -- but not exceeding --
$35,000.00 toward the costs associated with (i) installation of Tenant's
telephone and computer equipment; and (ii) restore decoration of premises (e.g.,
paint, wallpaper and carpet.)
(3) Should Tenant, subsequent to commencement of construction of
Improvements to its Premises, modify the Plans and Specifications in any way,
Tenant shall pay all additional costs thereby incurred by Landlord plus a fee of
ten percent (10%) of the additional cost for Landlord's cost of coordination,
supervision and overhead resulting from the revisions to said Plans and
Specifications, excluding any additional architectural and/or engineering fees.
All revised or additional Plans and Specifications are subject to Landlord's
prior review and written approval. Should any revisions or additions to the
original Plans and Specifications result in a delay of substantial completion of
the Premises, Tenant agrees that such shall constitute a "Tenant Delay".
SECTION (B) - LANDLORD'S IMPROVEMENTS:
Preliminary to completion of construction of the Tenant Improvement
Work provided for elsewhere in this Agreement, the following improvements to the
Premises (herein called "Base Building Work") shall have been or be completed by
Landlord at its expense:
(1) Perimeter walls and core walls completed, taped and bedded, ready
for paint finish;
(2) Floor - Unfinished concrete slab floor at the interior of the
Leased Premises ready to receive carpeting or other floor covering;
(3) Building - Standard 110-volt power supplied to the building core,
together with building standard power grid installed in ceiling;
(4) Men's and women's restroom facilities;
(5) Sprinkler riser and main loop;
(6) Building standard exit lights, fire extinguishers and cabinets
within common areas, including the core area;
(7) 2' X 2' ceiling grid system installed throughout with 2' X 2'
ceiling tiles stacked on the floors;
(8) Perimeter HVAC system installed from mixing boxes including
ductwork and perimeter slot diffusers;
(9) Building standard sprinkler distribution from main loop to
sprinkler heads, and building standard chrome semi-recessed sprinkler heads;
(11) Thin line (1") aluminum horizontal blinds to cover all exterior
windows.
(12) Electrical Service - Provision of at least 3.5 watts (but no more
than 3.5 watts) per usable square foot of the Leased Premises. This service
shall provide power for lighting fixtures, base and floor outlets and/or
miscellaneous equipment. All additional electrical service exceeding 3.5 watts
per usable square foot shall be separately connected and metered at the power
source. Tenant shall pay for any and all costs to submeter and all excess power
as metered on a monthly basis;
<PAGE> 31
(13) Heating, Ventilating and Air Conditioning Engineering and
installation of the base building HVAC system to provide cool and warm air
exterior zones supplied through slot diffusers in accordance with the following
specifications:
Summer Conditions
<TABLE>
<CAPTION>
Inside Temperature Outside Temperature
------------------ -------------------
<S> <C>
75 d.F dry bulb 92 d.F dry bulb
50% relative humidity 78 wet bulb
<CAPTION>
Winter Conditions
<S> <C>
Inside Temperature Outside Temperature
72 d.F dry bulb 14 d.F dry bulb
</TABLE>
Any relocation of sprinklers or addition of sprinklers will be at
Tenant's cost.
All remaining preparation of the Leased Premises shall be considered as
Tenant's Work, to be completed at Tenant's sole expense.
SECTION (C) - GENERAL PROVISIONS:
(1) Landlord will permit Tenant and its agent to enter the Premises
prior to the date specified as the Commencement Date of the Term of the Lease,
allowing Tenant to perform through its own contractors (to be first approved by
Landlord) such other work and decorations as Tenant may desire at the same time
that Landlord's contractors are working in the Premises. The foregoing license
to enter prior to the Commencement Date of the Lease Term, however, is
conditioned upon Tenant's workmen and mechanics working in harmony with and not
interfering with the labor employed by Landlord, Landlord's mechanics or
contractors or by any other Tenant(s) or their contractors, and not impeding or
interfering with Landlord's work or the progress thereof. Such access shall at
times be subject to the control and restrictions of the Landlord. Such entry
shall be deemed to be under all of the terms, covenants, provisions and
conditions of the Lease except Landlord shall not be liable in any way for any
injury, loss or damage which may occur to any of Tenant's decorations or
installations made prior to the Commencement Date of the Term of the Lease, the
making of any of same being done solely at Tenant's risk.
(2) Workers' compensation, and public liability insurance for bodily
injury and property damage, all in required amounts and with company's name and
on forms satisfactory to Landlord, shall be provided and at all times maintained
by Tenant's contractors engaged in the performance of the work, and before
proceeding with the work, certificates of such insurance shall be furnished to
Landlord.
(3) If Tenant's contractors or anyone employed by Tenant shall cause a
delay in completing Tenant's alterations, Tenant agrees that such delay will
constitute a "Tenant Delay."
(4) Should Landlord be unable to complete the work as scheduled as a
result of a "Tenant Delay," Tenant shall pay to Landlord, as Additional Rent,
one (1) day's base rent computed in accordance with the Lease for each calendar
day of "Tenant Delay," as liquidated damages and not as a penalty, it being
agreed that Landlord's damages and not as a penalty, it being agreed that
Landlord's damages for such delay would be otherwise difficult to determine.
Said Additional Rent will be due within thirty (30) days of Tenant's receipt of
Landlord' notice therefor.
<PAGE> 32
(5) Landlord, upon prior notice to Tenant, reserves the right to make
reasonable substitutions of equal or better quality and value for building
standard materials in the event of unavailability of materials or due to field
conditions.
(6) Tenant and Landlord acknowledge, by execution in their respective
spaces provided hereinbelow for that purpose; that the foregoing correctly set
forth all the obligations of Landlord and Tenant with respect thereto are hereby
extinguished and merged into this Agreement; and that each has full authority
and consent to bind the respective contracting parties.
IN WITNESS WHEREOF the parties have executed this Leased Premises
Improvement Agreement this 15th day of April, 1997.
LANDLORD:
REGENCY PARK WEST ASSOCIATES, L.P.,
a Georgia limited partnership
By: General Electric Credit Equities, Inc.,
a Delaware corporation, general partner
By: /s/ Paul F. Martin
--------------------------------------
Print Name: Paul F. Martin
------------------------------
Print Title: Authorized Signatory
-----------------------------
(CORPORATE SEAL)
TENANT:
WITNESS SYSTEMS DELAWARE, INC.,
a Delaware corporation
As to Tenant, signed, sealed
and delivered presence of:
By: /s/ James W. Judson, Jr.
--------------------------------------
/s/ Carla B. Karic Print Name: James W. Judson, Jr.
- ------------------------------ ------------------------------
Notary Public (Affix seal and Print Title: President
commission expiration date) -----------------------------
Commission Expires: 5/30/2000
<PAGE> 33
EXHIBIT "D"
SANCTUARY PARK
ESTOPPEL CERTIFICATE FORM
(Lender's Name)
Gentlemen:
The undersigned, as Tenant under that certain lease (the "Lease") dated
________________, 19__, made with _____________________________, as Landlord
(the "Landlord"), does hereby agree and certify:
1. That the copy of the Lease attached hereto as Exhibit "A" is a true
and complete copy of the Lease, and there are no amendments, modifications or
extensions of or to the Lease except as set forth immediately below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. That the term of the Lease commenced or began on
_________________19__, and the Lease is now in full force and effect.
3. That its Leased Premises at the above location have been completed
in accordance with the terms of the Lease, that it has accepted possession of
said premises, that it now occupies the same and that Tenant is paying full
lease rental.
4. That it began paying rent on _____________________19__, and that,
save only as may be required by the terms of the Lease, no rental has been paid
in advance, nor has the undersigned deposited any sums with the Landlord as
security except as set forth immediately below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. That there exist no defenses or offsets to enforcement of the Lease
by the Landlord and, so far as is known to the undersigned, the Landlord is not,
as of the date hereof, in default in the performance of the Lease, nor has the
Landlord committed any breach thereof, nor has any event occurred which, with
the passage of time or the giving of notice, or both, would constitute a default
or breach by the Landlord.
The undersigned acknowledges that you are relying on the above
representations of the undersigned in (advancing funds to refinance or purchase
the Building in which the Leased Premises are located)/(purchasing the Building
in which the Leased Premises are located) and does hereby warrant and affirm to
and for your benefit, and that of your successors and assigns, that each of the
foregoing representations is true, correct and complete as of the date hereof.
DATED:
---------------------------
TENANT:
---------------------------
By:
-------------------------------
Its:
------------------------------
<PAGE> 34
EXHIBIT "E"
SANCTUARY PARK
RULES AND REGULATIONS
1. Sidewalks, courts, ramps, parking facilities, loading docks and
areas, driveways, delivery, drop-off and pick-up areas, bus stops, halls,
passages, exits, entrances, elevators, escalators, stairways and other areas and
improvements provided by Landlord for the general use of tenants, their
employees, visitors, invitees and licensees, shall not be obstructed by Tenant
or used by it for any purpose other than for ingress and egress from the Leased
Premises. The halls, courts, parking facilities, loading docks and areas,
driveways, delivery, drop-off and pick-up areas, passages, exits, entrances,
elevators, escalators and stairways are not for the use of the general public
and Landlord shall in all cases retain the right to control and prevent access
thereto by all persons whose presence, in the judgment of Landlord, may be
prejudicial to the safety, character, reputation and interests of the Building
and its tenants; provided that nothing herein contained shall be construed to
prevent such access to persons with whom any tenant normally deals in the
ordinary course of such tenant's business unless such persons are engaged in
illegal or immoral activities. Tenant, and its employees, visitors, invitees or
licensees of any tenant, shall not go upon the roof of the Building, except as
authorized by Landlord.
2. No sign, placard, picture, name, notice, decoration or advertisement
visible horizontally or vertically from the exterior of Leased Premises shall be
inscribed, painted, affixed, installed or otherwise displayed by any tenant
either on its Premises or any interior or exterior part of the Building except
Tenant's signage at Tenant's Premises primary entrance without the prior written
consent of Landlord, and only then at the sole cost and expense of Tenant.
Landlord shall have the right to remove any such sign, placard, picture, name,
notice, decoration or advertisement without notice to and at the sole cost and
expense of tenant.
(a) If Landlord shall have given such consent to Tenant at any
time, whether before or after the execution of a lease, such consent
shall in no way operate as a waiver or release of any of the provisions
hereof or of such lease, and shall be deemed to relate only to the
particular sign, placard, picture, name, notice, decoration or
advertisement consented to by Landlord and shall not be construed as
dispensing with the necessity of obtaining the specific written consent
of Landlord with respect to any other such sign, placard, picture,
name, notice, decoration or advertisement.
(b) All approved signs or lettering on doors and walls shall
be printed, painted, affixed and inscribed at the sole expense of
Tenant by a person previously approved in writing by Landlord.
3. The directory of the Building will be provided exclusively for the
display of the name and location of tenants only, in such manner and arrangement
as may be from time to time determined by Landlord, and Landlord reserves the
right to exclude any other names therefrom.
4. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or placed
in, or used in connection with, any window or door on any premises without the
prior written consent of Landlord which consent shall not be unreasonably
withheld. In any event with the prior written consent of Landlord, all such
items shall be installed inside of Landlord's standard window covering and shall
in no way be visible from the exterior of the Building. No articles shall be
placed or kept on the window sills so as to be visible from the exterior of the
Building. No articles shall be placed against glass partitions or doors which
might appear unsightly from outside Tenant's Premises.
5. Landlord reserves the right to exclude from the Building between the
hours of 6:00 p.m. and 6:00 a.m. and at all hours on Saturdays, Sundays and
holidays all persons other than Tenant or its accompanied guests. Tenant shall
be responsible for all persons whom it allows to enter the Building and shall be
liable to Landlord for all acts of such persons.
(a) Landlord shall in no case be liable for damages or for
error with regard to the admission to or exclusion from the Building of
any person.
<PAGE> 35
(b) During the continuance of any invasion, mob, riot, public
excitement or other circumstances rendering such action advisable in
Landlord's opinion, Landlord reserves the right to prevent access to
the Building by closing tile doors, or otherwise, for the safety of
tenants and protection of the Building and property in the Building.
6. Tenant shall not employ any person or persons other than the janitor
of Landlord for the purpose of cleaning Premises unless otherwise agreed to by
Landlord in writing. Except with the written consent of Landlord no person or
persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning same. Tenant shall not cause any
unnecessary labor by reason of Tenant's carelessness or indifference in the
preservation of good order and cleanliness of Tenant's Premises. Landlord shall
in no way be responsible to any tenant for any loss of property on the Premises,
however occurring, or for any damage done to the effects of any tenant by the
Landlord's janitor or any other employee or any other person.
7. Tenant shall not obtain or maintain for use on its Premises
coin-operated vending machines or accept barbering or bootblacking services in
its Premises except from persons authorized by Landlord.
8. Tenant shall see that all doors of its Premises are closed and
securely locked and must observe strict care and caution that all water faucets
or water apparatus are entirely shut off before the tenant or its employees
leave such Premises, and that all utilities shall likewise be carefully shut off
so as to prevent waste or damage, and for any default or carelessness the tenant
shall make good all injuries sustained by other tenants or occupants of the
Building on multiple tenancy floors, all Tenants shall keep the door or doors to
the Building corridors closed at all times except for ingress and egress.
9. As more specifically provided in Tenant's lease of the Premises,
Tenant shall not waste electricity, water or air-conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Building's mechanical systems, and shall refrain from attempting to adjust any
controls.
10. No additional locks or bolts of any kind shall be placed on any
door in the building or the Premises and no lock on any door therein shall be
changed or altered in any respect. Landlord shall furnish two keys for each lock
on doors in the Premises and shall, on Tenant's request and at Tenant's expense,
provide additional duplicate keys at a cost not to exceed $1.50 per key. All
keys shall be returned to Landlord upon the termination of this lease. Landlord
may at all times keep a pass key to the Premises.
11. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever, including, but not
limited to coffee grounds shall be thrown therein, and the expense of any
breakage, stoppage or damage resulting from the violation of this Rule shall be
borne by the Tenant, if it, or its employees or invitees, shall have caused it.
12. Tenant shall not use or keep in its Premises or the Building any:
(a) ether, naptha, phosphorous, benzol, gasoline, benzine, petroleum, crude or
refined earth or coal oils, kerosene or camphene, other than in limited
quantities necessary for the operation or maintenance of office equipment; (b)
any other flammable, combustible, explosive gas or material of any kind; or (c)
any other fluid, gas or material of any kind having an offensive odor, unless
previously obtaining written consent of the Landlord. Tenant shall use no method
of heating or air-conditioning other than that supplied by Landlord.
13. No odors or vapors shall be caused or permitted to emanate from the
Premises. Tenant shall not use, keep, store or permit to be used or kept in its
Premises any foul or noxious gas or substance or permit or suffer such Premises
to be occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the Building by reason of noise, odors and/or vibrations or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds other than seeing eye dogs be brought or kept in or
about the Premises or the Building.
<PAGE> 36
14. Tenant shall not use, permit or suffer the use of the Premises or
the Building or the Common Areas of the Office Park for living, sleeping or
lodging, shall not do any cooking or conduct any restaurant, luncheonette, or
cafeteria business for the sale or service of food or beverages to persons other
than a lunchroom for its own employees and guests (in which event only equipment
approved by Underwriters' Laboratory shall be used or installed); and shall not
permit the delivery of food or beverage to the Premises, except by such persons
delivering the same as shall be approved by Landlord and only under regulations
fixed by Landlord.
15. Except with the prior written consent of Landlord, Tenant shall not
sell, permit the sale, at retail, of newspapers, magazines, periodicals, theater
tickets or any other goods or merchandise in or on any Premises, nor shall
tenant carry on, or permit or allow any employee or other person to carry on,
the business of stenography, typewriting or any similar business in or from any
Premises for the service or accommodation of occupants of any other portion of
the Building, nor shall the Premises of Tenant be used for the storage of
merchandise or for manufacturing of any kind, or the business of a public barber
shop, beauty parlor, or bootblacking parlor nor shall the Premises of Tenant be
used for any improper, immoral or objectionable purpose, or any business
activity other than the specifically provided for in Tenant's Lease.
16. If Tenant requires telegraphic, telephonic, burglar alarm or
similar services, it shall first obtain, and comply with, Landlord's instruction
in their installation. Landlord will direct electricians as to where and how
telephone, telegraph and electrical wires are to be introduced or installed. No
boring or cutting for wires will be allowed without the prior written consent of
Landlord. The location of burglar alarms, telephones, call boxes or other office
equipment affixed to all Premises shall be subject to the written approval of
Landlord.
17. Tenant shall not install any radio or television antenna,
loudspeaker or any other device on the exterior walls or the roof of the
Building. Tenant shall not user or permit operation of any musical or
sound-producing instruments or devices which may be heard outside the Premises,
or interfere with radio or television broadcasting or reception from or in the
Building or elsewhere. No signaling, telegraphic or telephonic instruments or
devices, or other wires, instruments, or devices, shall be installed in
connection with the Premises without the prior written approval of Landlord.
Such installations, and the boring or cutting for wires, shall be made at the
sole cost and expense of Tenant and under the control and direction of Landlord.
Landlord retains in all cases the right to require (i) the installation and use
of such electrical protecting devices that prevent the transmission of excessive
currents o f electricity into or through the Building, (ii) the changing of
wires and of their installation and arrangement underground or otherwise as
Landlord may direct, and (iii) compliance on the part of ail using or seeking
access to such wires with such rules as Landlord may establish relating thereto.
All such wires used by Tenant must be clearly tagged at the Building, with (i)
the number of the Premises to which said wires lead, (ii) the purpose for which
wires are used, and (iii) the name of the company operating same.
18. Tenant shall lay no linoleum, tile, carpet or any other floor
covering so that the same shall be affixed to the floor of its Premises in any
manner except as approved in writing by Landlord. The expense of repairing any
damage resulting from a violation of this rule or the removal of any floor
covering shall be borne by Tenant if it or its contractors, employees or
invitees, shall have caused the damage.
19. No furniture, freight, equipment, materials, supplies, packages,
merchandise or other property will be received in the Building or carried upon
or down the elevators except between such hours and in such elevators as shall
be designated by Landlord. Landlord shall have the right to prescribe the
weight, size and position of all safes, furniture, riles, bookcases or other
heavy equipment brought into the Building. Safes or other heavy objects shall,
if considered necessary by Landlord, stand on wood strips of such thickness as
determined by Landlord to be necessary to properly distribute the weight
thereof. Landlord will not be responsible for loss of or damage to any such
safe, equipment or property from any cause, and all damage done to the Building
by moving or maintaining any such safe, equipment or other property shall be
repaired at the expense of Tenant.
20. Business machines and mechanical equipment belonging to Tenant
which cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building shall be placed and maintained by
Tenant, at Tenant's
<PAGE> 37
expense, on vibration eliminators or other devices sufficient to eliminate noise
or vibration. The persons employed by Tenant to move such equipment in or out of
the Building must be acceptable by Landlord.
21. Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Tenant shall not mark, or drive nails, screws or drill
into, the partitions, woodwork or plaster or in any way deface such Premises or
any part thereof other than standard fasteners used to hang pictures for
decoration of the Leased Premises.
22. Tenant shall not install, maintain or operate upon the Premises any
vending machine without the written consent of the Landlord.
23. There shall not be used in any space, or in the public areas of the
Building, by Tenant or others, any hand trucks except those equipped with rubber
tires and side guards or such other material-handling equipment as Landlord may
approve. No other vehicles of any kind shall be brought by Tenant into or kept
in or about the Premises.
24. Tenant shall store all its trash and garbage within the interior of
its Premises. No materials shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash and garbage in this area
without violation of any law or ordinance governing such disposal. All trash,
garbage and refuse disposal shall be made only through entryways and elevators
provided for such purposes and at such times as Landlord may designate.
25. Canvassing, soliciting, distributing of handbills or any other
written material, and peddling in the Building or in the Common Areas or in the
Office Park, are prohibited and each tenant shall cooperate to prevent the same.
Tenant shall not make room-to-room or telephonic solicitation of business from
other tenants in the Building.
26. Landlord reserves the right to exclude or expel from the Building
any person who, in Landlord's judgment, is or may be intoxicated or under the
influence of liquor or drugs or who is or may be in violation of any of the
Rules and Regulations of the Building. The right of Landlord to exclude or expel
people from the building shall not extend to the Leased Premises.
27. Landlord shall have the right to prohibit any advertising by Tenant
which, in Landlord's opinion, tends to impair the reputation of the Building or
into desirability for offices, and upon written notice from Landlord, Tenant
will refrain from or discontinue such advertising. No Tenant shall use the name
of the Building in connection with or in prompting or advertising the business
of said Tenant except for the purpose of identifying said Tenant's address.
28. Tenant shall comply with all conservation, safety, fire protection
and evacuation procedures and regulations established by Landlord and by any
governmental agency.
29. Tenant assumes any and all responsibility for protecting its
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed.
30. The requirements of Tenant will be attended to only upon
application at or telephone call to the office of the Building by an authorized
individual. Employees of Landlord shall not perform any work or do anything
outside of their regular duties except upon special instructions from Landlord,
and no employees of Landlord will admit any person (Tenant or otherwise) to any
office without specific instructions from Landlord.
31. All wallpaper or vinyl fabric materials which any tenant may
install on painted walls shall be applied with a strippable adhesive. The use of
nonstrippable adhesives will cause damage to the walls when materials are
removed, and repairs made necessary thereby shall be made by Landlord at
Tenant's expense.
<PAGE> 38
32. Tenant shall provide and maintain hard surface protective mats
under all desk chairs which are equipped with casters to avoid excessive wear
and tear to carpeting. If Tenant fails to provide such mats, the cost of carpet
repair or replacement made necessary by such excessive wear and tear shall be
charged to and paid for by Tenant.
33. Tenant will refer all contractors, contractors' representatives and
installation technicians rendering any service to Tenant to Landlord for
Landlord's supervision, approval, and control before performance of any
contractual service. This provision shall apply to all work performed in the
Building, including installations of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment or any other physical portion of
the Building.
34. Tenant shall give prompt notice to Landlord of any accidents to or
defects in plumbing, electrical fixtures, or heating apparatus so that such
accidents or defects may be attended to properly.
35. Only workmen employed, designated or approved by Landlord may be
employed for repairs, installations, alterations, painting, material moving, and
other similar work that may be done on the Premises.
36. Tenant shall not use the Premises or permit the Premises, the
Building or the Office Park or permit any of same to be used for photographs,
multilith or multigraph reproductions except in connection with its own
business.
37. Smoking is prohibited at all times in all interior lobbies,
hallways, corridors, elevators, restrooms and other interior public areas of the
Building and of all Buildings in the Office Park. Tenant shall so advise its
employees and invitees and cooperate with Landlord in the enforcement of this
policy. Within the Premises, Tenant shall enforce the Fulton County Clean Indoor
Air Ordinance of May 20, 1993, as same may be from time to time amended or
modified.
38. Tenant may utilize the Building's freight elevator only with prior
permission of Landlord's property manager and then upon such reasonable
conditions and at such times as are designated thereby.
39. The consumption of food or beverage and the playing of radios, tape
recorders, records, or any other electronic playing devices is strictly
prohibited in all lobbies and other public areas of the Building.
40. Landlord reserves and shall have the right to make and adopt, from
time to time, such other and further reasonable rules and regulations, and such
amendments, modifications, supplements and additions to these Rules and
Regulations, and to revoke or rescind the same, as in Landlord's sole reasonable
judgment may be needed for the safety, security, care and cleanliness of the
Building, the Common Areas and the Office Park and for the occupancy of the
Building or for preservation of good order therein and agrees to provide a copy
thereof to Tenant prior to implementation of such further or additional rules
and regulations.
41. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of Premises in the Building.
42. All tenants of the Building, as well as their respective employees,
agents, clients, customers, guests, invitees and licensees, shall abide by and
be responsible for the observance of all of these Rules and regulations, and
such additional rules and regulations as are hereafter adopted by Landlord.
43. Notwithstanding anything to the contrary in these Rules and
Regulations, all approvals needed of Landlord must be in writing. Landlord may
waive any one or more of these Rules and Regulations for the benefit of any
particular tenant or tenants, but no such waiver by Landlord shall be construed
as a waiver of such Rules and Regulations in favor of any other tenant of
tenants, nor prevent Landlord from thereafter enforcing any such Rules and
regulations against that tenant or any or all tenants of the Building.
<PAGE> 39
EXHIBIT "F"
SANCTUARY PARK
SPECIAL STIPULATIONS
1. Tenant Improvement Allowance. Landlord will provide a Tenant
Improvement Allowance, to be computed, expended and applied in accordance with a
Leased Premises Improvement Agreement attached to the Lease as Exhibit "C,"
slab-to-slab, of Fourteen Dollars ($14.00) per square foot of Net Rentable Area
in the Premises. Additionally, Landlord will provide ceiling grid and slot
diffusers in place, with ceiling tiles stacked on the floors of the Premises.
2. Space Planning, Architectural and Engineering. Landlord shall
provide Tenant with an allowance of One and 50/100 Dollars ($1.50) per square
foot of Net Usable Area in the Premises for the preparation of preliminary floor
plans, design fees, construction drawings and final floor plans and construction
documents (including engineering and mechanical plans) based on building
standard finishes.
3. Building, Premises and Parking Access. Tenant will have access to
the Premises, the Building and exterior parking facilities twenty-four (24)
hours per day, seven (7) days per week, fifty-two (52) weeks per year. The
Building will contain four (4) elevators, one of which will be designated as a
dual use elevator for both freight and passenger service. The use of the freight
elevator will require prior notice to the Building's management.
4. Security. The Building's security system consists of a computerized
card-activated access control system for entry into the Building twenty-four
(24) hours a day, seven days a week.
5. Signage. Tenant identification will be available on the Building's
lobby directory and at the Tenant's Premises primary entrance.
6. On-Site Management. Landlord will manage the Building and the Office
Park, and the other buildings within the Office Park, with an on-site management
staff located within the Office Park.
7. Heating, Ventilation & Air Conditioning. Notwithstanding the
provisions of Paragraph 13 of the Lease, Landlord shall provide heating,
ventilation, and air conditioning services to the Premises from 8:00 A.M. to
7:00 P.M. on weekdays and 8:00 A.M. to 2:00 P.M. on Saturdays. After-hours
heating, ventilating and air conditioning service will be provided by Landlord
to Tenant upon Tenant's request, provided that Tenant, as a condition to
Landlord's provision of said after-hours service, shall pay to Landlord a
reasonable charge for said service as determined from time to time by Landlord;
the initial cost of said after-hours service is anticipated to be Fifty Dollars
($50.00) per hour per air handler unit.
8. Further Explanation of CPI Adjustments. In elaboration of the
provisions of Paragraph 3(d), the initial CPI adjustment shall be made as of
January 1, 1998, Thereafter, all CPI adjustments shall be made on an annual
basis, effective as of January 1 of each year following 1998. All CPI
adjustments will be made as to only that portion of Base Monthly Rental which is
other than initial Operating Expenses of the Building (as that figure increases
from time to time throughout the Lease Term due to prior CPI adjustments).
By way of illustration, the initial amount of the Base Monthly Rental
which represents Operating Expenses of the Building is Five and 85/100 Dollars
($5.85) per square foot of Net Rentable Area in the Building; the initial
Monthly Base Rental is Twenty and 50/100 Dollars ($20.50) per square foot of Net
Rentable Area in the Premises; the portion of initial Monthly Base Rental which
is exclusive of initial Operating Expenses of the Building is, therefore,
Fourteen and 65/100 Dollars ($14.65) per square foot of Net Rentable Area.
Thus, by way of further illustration only, and assuming that the CPI on
January 1, 1997 is four hundred (400), and increases to four hundred ten (410)
by the end of the month immediately preceding the date of the first escalation
computation, the escalation would be computed as follows:
<PAGE> 40
[$20.5-45.85=$14.65] x [410-400] 10
------------------ -------- ---
400 400 = 400 = .025%]
$14.65 x.025%=$0.37 (Escalation for CPI effective January 1, 1998)
$14.65 + $.37=$15.02 (Escalated Portion of Monthly Base Rental effective
January 1, 1998)
9. Explanation of Operating Expense Escalation. In elaboration of the
provisions of Paragraph 3(f) of the Lease, that portion of initial Monthly
Rental representing Operating Expenses of the Building (initially $1,057,334.85,
the product of $5.85 per square foot of Net Rentable Area multiplied by 180,741
total square feet of Net Rentable Area) shall be escalated (to the extent the
Operating Expenses of the Building exceed the expense stop of $5.85 per square
foot) on an annual basis as of the first day of each calendar year succeeding
1997.
The amount of the escalation shall be Tenant's proportionate share of
the actual amount of increase in Operating Expenses of the Building from period
to period. Thus, by way of illustration only, if during the course of the
initial year of the Lease Term the Operating Expenses of the Building increase
from one year to the next by Fifty Thousand Dollars ($50,000,00), and since
Tenant's Leased Premises will initially constitute 12% of the total Net Rentable
Area of the Building, then this component of Monthly Rental would be escalated
by $500.00, effective January 1, 1998, and would be computed as follows:
<TABLE>
<S> <C>
Escalated Total Operating Expense $1,107,334.85
Less Initial Total Operating Expense ($5.00) $1,057,334.85
Total Operating Expense Escalation $ 50,000.00 x [22,312 RSF
----------
180,741 RSF =.12 or 12%]
$6,000.00 + 12 = $500.00 per month
(Tenant's Monthly Share of Operating Expense
Escalation effective January 1, 1998)
</TABLE>
10. Option to Extend. Tenant shall have the right to extend the Term of
this Lease for one (1) period of five (5) years (the "Extension Period") by
delivering to Landlord written notice of Tenant's desire to so extend the Term
of this Lease on or before the two hundred seventieth (270th) day immediately
preceding the expiration date of the Term; provided, however, that Tenant's
election to so extend the Term of this Lease shall be ineffective unless Tenant
and Landlord agree upon the current fair market rental rate to be paid by Tenant
to Landlord during the Extension Period, said agreement to be evidenced in
writing and signed by Landlord and Tenant on or before the one hundred eightieth
(180th) day immediately preceding the expiration date of the Term. If Landlord
and Tenant so agree upon a fair market rental rate for the Premises during the
Extension Period, all other terms of this Lease shall remain in effect with
respect to the Extension Period.
11. Premises Delivery Date. Landlord shall exercise commercially
reasonable efforts -- and shall endeavor -- to complete and deliver the Premises
to Tenant on or before July 1, 1997.
12. Right of First Offer. In the event any additional tenant space
becomes available on the second (2nd) floor of the Building, Landlord shall,
subject to any then-existing rights other tenants in the Building may have with
respect to said space, notify Tenant of (i) the specific space available, and
(ii) the terms in which Landlord would be willing to lease said space to Tenant.
If Tenant wishes to lease this space, Tenant shall have five (5) days after such
notice within which to provide written notice to Landlord of its election to
lease such space. If Tenant elects to lease such space, space shall be
incorporated into Tenant's existing lease at the then current rental rate.
Tenant shall have an improvement allowance of $0.24 per rentable square foot (if
partially finished ceiling space) from Landlord for each full month remaining of
the original Lease Term. Landlord shall provide a formal lease amendment to
Tenant regarding such space reflecting the agreed upon terms and conditions and
if Tenant shall
<PAGE> 41
fail to execute a lease amendment promptly or fails to timely notify Landlord of
its intent to exercise its right, then Landlord is free to lease such space.
13. Fiber Optics. Landlord shall provide for fiber optics telephone
cabling to the Building's main telephone room.
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between WITNESS
SYSTEMS, INC., a Delaware corporation ("Company"), and DAVID GOULD
("Executive") is hereby entered into as of the 2nd day of February, 1999 (the
"Effective Date").
In consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
1. Employment and Duties. Company shall employ Executive as Chief
Executive Officer during the term of his employment as set forth in this
Agreement and Executive hereby accepts such employment. Executive shall report
to the Board of Directors of Company and shall have duties and responsibilities
as set forth on EXHIBIT A and/or as may be assigned, from time to time, by the
Board of Directors of Company (the "Duties").
2. Compensation.
A. Base Salary and Guaranteed Bonus. During the Term (as
defined below), Company shall pay to Executive a base salary ("Base Salary") of
Two Hundred Twenty-Five Thousand and No/100 Dollars ($225,000.00) per year
(subject to annual review and adjustment beginning in December 1999), payable
in arrears in accordance with the Company's standard payroll practices for
senior executives (but in no event less frequently than in equal semi-monthly
payments). In the event of a Disability, to the extent payments are received
under an employer-sponsored disability program, the payments of Base Salary
hereunder are to be reduced by an amount equal to such disability payments. The
Company shall pay to Executive a bonus (the "Guaranteed Bonus") equivalent to
the sum of (i) the amount of interest due and payable pursuant to those certain
promissory notes to be delivered to Company by Executive in connection with
Executive's purchase of shares of Company's common stock within the six month
period immediately following the Effective Date (the "Notes"), and (ii) the
aggregate amount of tax liability incurred by Executive by reason of Guaranteed
Bonus payments pursuant to this Section 2.A., for so long as interest remains
due and payable under either of the Notes. The Guaranteed Bonus shall be
payable annually, with the first such payment being due and payable on the
first day of the first month in which interest is due and payable under either
of the Notes. Company's obligations to pay the Guaranteed Bonus pursuant to
this Section 2.A. shall continue for so long as interest remains due and
payable under either of the Notes, notwithstanding the earlier termination of
this Agreement or Executive's employment with Company.
B. Incentive Compensation. During the Term of this Agreement,
Executive shall be eligible for annual incentive compensation (the "Incentive
Compensation"), provided that the Goals (as defined below) of said program are
met by Executive. The Incentive Compensation program shall be based upon the
achieving of certain revenue and/or profit goals and/or other goals proposed by
Executive and approved by the Company's Board of Directors (the "Goals"). The
Incentive Compensation Program shall target an annual bonus of Forty Thousand
and No/100 Dollars ($40,000.00) for Executive's first year of employment. Upon
the
<PAGE> 2
establishment of the program and Goals, the parties agree to attach the terms
and conditions thereof hereto as EXHIBIT B, which shall constitute a part of
this Agreement.
C. Employee Benefit Programs. Executive shall be eligible to
participate in all employee benefit programs generally available to senior
management employees of the Company, including medical and hospitalization
programs, and employee stock option and bonus plans generally made available to
employees of Executive's employment status, now or hereafter made available,
subject to the terms and conditions of such programs, including eligibility. It
is understood that Company reserves the right to modify and rescind any program
or adopt new programs in its sole discretion. Company may, in its sole
discretion, maintain key man life insurance on the life of Executive and
designate Company as the beneficiary. Executive agrees to execute any documents
necessary to effect such policy.
D. Vacation. Executive shall accrue four (4) weeks of vacation
during each calendar year during the term of this Agreement (with such vacation
time pro-rated for 1999). Vacation time shall be taken at such time as not to
materially interfere with the business of Company. Vacation time may not be
carried forward from one (1) calendar year to another.
E. Stock Awards and Option Grants. Executive shall be entitled
to receive options to acquire shares of the Company's Common Stock and awards
of shares consistent with the agreements attached as Schedule A.
F. Business Expenses. The Executive shall be entitled to be
reimbursed for reasonable business expenses incurred by him in connection with
his services hereunder in accordance with the Company's policies and procedures
for its senior executives.
3. Relocation. Employee shall relocate his primary personal residence
to the greater Atlanta area and be entitled to reimbursement for the reasonable
costs of moving his primary household's furnishings, including the costs of
packing, loading, transporting and unloading by a professional moving company
("Moving Costs"). Employee shall provide estimates of Moving Costs for prior
Board approval. Employee agrees to maintain receipts and other records
necessary for the Board to determine that such requested reimbursements are for
reasonable expenses. In addition to reimbursement for Moving Costs incurred
with respect to his relocation to the greater Atlanta, Georgia area, Employee
shall be reimbursed for the reasonable costs of disposing of his current
residence, including actual realtor's fees, legal fees, closing costs, and up
to two (2) prepaid interest points on the purchase of a home in the Atlanta
area ("Real Estate Costs"); provided, that Employee secures the Board's prior
approval (which approval shall not be unreasonably withheld) for each such
amount, and provided further that the maximum reimbursement for Moving Costs
and Real Estate Costs be One Hundred Thousand and NO/100 Dollars ($100,000.00).
Executive shall also be reimbursed for two (2) months mortgage payments on his
home in the Boston area if he continues to own such home while also having
purchased a home in the Atlanta area. To the extent payments to Executive by
Company pursuant to this Section 3 are taxable to Executive, Company shall
reimburse Executive for such tax liability.
-2-
<PAGE> 3
4. Term. The term of employment of Executive under this Agreement
shall be for a period of one (1) year (the "Term") commencing on the date
hereof and ending on the one (1) year anniversary thereof, subject to earlier
termination as provided in Section 5. Unless either party provides written
notice to the other party at least thirty (30) days prior to the end of a Term,
this Agreement shall automatically renew for successive one (1) year Terms.
Notwithstanding the foregoing, Company's obligations to pay the Guaranteed
Bonus pursuant to Section 2.A. shall continue for so long as interest remains
due and payable under either of the Notes.
5. Early Termination.
A. For Cause.
(i) Notwithstanding the foregoing, Company may terminate
the employment of Executive "for cause" (as hereinafter defined) at any time
upon written notice effective immediately. For purposes of this Agreement,
"Cause" shall mean that, prior to any termination pursuant to this Section
5.A., Executive shall:
(1) Have committed a willful act which has a material
adverse effect on the Company or its business; or
(2) Have been convicted of, or entered a plea of
"guilty" or "no contest" to a felony.
For purposes of this Agreement, no act or failure to act on the part
of Executive shall be deemed "willful" if it was due primarily to an error in
judgment or negligence, but shall be deemed "willful" only if done or omitted
to be done by Executive not in good faith and without reasonable belief that
his action or omission was in the best interest of the Company.
Executive shall not be deemed to have been terminated for "Cause"
hereunder unless and until there shall have been delivered to Executive a copy
of a resolution duly adopted by the affirmative vote of not less than a
majority of the Board of Directors of the Company then in office at a meeting
of the Board called and held for such purpose, after reasonable notice to
Executive and an opportunity for Executive, together with his counsel (if
Executive chooses to have counsel present at such meeting), to be heard before
the Board, finding that, in the good faith opinion of the Board, Executive had
committed an act constituting "Cause" as herein defined and specifying the
particulars thereof in detail. Nothing herein will limit the right of Executive
or his beneficiaries to contest the validity or propriety of any such
determination.
(ii) Upon termination of Executive's employment for Cause,
Company shall have no further obligation to pay any compensation to Executive
for periods after the effective date of the termination for Cause, except for
Base Salary which accrued as of the termination date and reimbursement for
expenses incurred prior to the termination date pursuant to Section 2.F.
hereof. In addition, the right to exercise any vested stock option shall
terminate immediately following the effective date of the termination of
employment for Cause.
B. Termination Upon Death or Total and Permanent Disability.
-3-
<PAGE> 4
(i) The employment of Executive shall terminate upon his
death or, ten (10) business days after written notice by Company of
termination, upon or during the continuance of the Total and Permanent
Disability (as hereinafter defined) of Executive.
(ii) Upon termination as a result of death or Executive's
Total and Permanent Disability, Company shall have no further obligation to pay
any compensation for periods after the effective date of such termination,
except for Base Salary which accrued as of the termination date and
reimbursement for expenses incurred prior to the termination date pursuant to
Section 2.F. hereof. The term "Total and Permanent Disability" means the
suffering by Executive of a Disability for a continuous period in excess of one
hundred eighty (180) days, unless extended in writing by Company. A Total and
Permanent Disability shall be deemed to commence upon the expiration of such
one hundred eighty (180) day period.
(iii) For purposes hereof, the terms "Disabled" or
"Disability" shall mean the suffering by Executive of a physical or mental
condition resulting from bodily injury, disease or mental disorder when renders
Executive incapable of continuing his usual and customary duties in an
efficient manner as an employee of Company, despite reasonable accommodation on
the part of Company. No Disability shall be deemed to exist until Executive
shall be unable to perform such duties hereunder for seven (7) consecutive
days, and after such Disability continues for seven (7) consecutive days, then
the same shall be deemed to have existed from the first (1st) day of such
Disability. At the end of any Disability (other than a Disability that results
in a Total and Permanent Disability), Executive shall return to work, and this
Agreement shall continue as though such Disability had not occurred.
If Executive desires to return to work at the end of any Disability,
but there is a dispute as to whether Executive is able to perform his or her
duties hereunder or if there is a dispute as to whether Executive is Disabled
or has suffered a Total and Permanent Disability, the issue shall be submitted
to a Board of Arbiters consisting of three (3) persons: one (1) physician who
specializes in the physical or mental condition which resulted in the
Disability (hereinafter referred to as a "Specialist") shall be appointed on
behalf of Company by the Board of Directors of Company (with Executive having
no vote on this question); the second (2nd) Specialist shall be appointed by
Executive and a third (3rd) Specialist shall be appointed by the two (2)
Specialists so appointed. If a majority of the Specialists determine that
Executive is able to perform his or her duties hereunder on a full-time basis,
Executive shall be permitted to return to work under the provisions hereof.
Executive agrees to submit medical records requested and to submit to such
examination and testing requested by such physician.
C. Change in Control. In the event of a Change in Control (as
hereinafter defined) of Company, and either termination by the Company without
Cause or termination by Executive with Good Reason within six (6) months after
the Change in Control, Executive shall be entitled to receive, and Company
shall pay within ten (10) business days of the date of the termination of
employment a lump sum payment equal to twelve (12) times Executive's then
monthly Base Salary.
The term "Change in Control" means:
-4-
<PAGE> 5
(i) approval of the shareholders of Company of a merger,
consolidation or other reorganization in each case, with respect to which
persons who were the shareholders of Company immediately prior to such merger,
consolidation or other reorganization, immediately thereafter, do not own more
than fifty percent (50%) of the combined voting power entitled to vote
generally in the election of directors of the merged, consolidated or
reorganized Company's then outstanding voting securities; or
(ii) sale of all or substantially all of the assets of
Company.
(iii) the sale of common stock of the Company to the
general public pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission (other than a registration
statement solely covering an employee benefit plan or corporate
reorganization).
"Good Reason" shall mean any of the events set forth below which
are not cured within fifteen (15) days following written notice thereof by
Executive to Company:
(i) Any reduction in Executive's Base Salary;
(ii) A material reduction in Executive's job function,
duties or responsibilities, or a change in Executive's reporting relationship
such that he is required to report to someone other than the Company's Board of
Directors or the Chairman of the Board;
(iii) The failure to have Executive elected to the
Company's Board of Directors; or
(iv) Any material breach of any of the terms of this
Agreement by the Company.
provided, however, that "Good Reason" shall not include a specific event
described in the preceding clause (i), (ii), (iii) or (iv) unless Executive
actually terminates his employment with the Company within one hundred and
twenty (120) days after the occurrence of such event.
D. Termination by Company Without Cause and Termination by
Executive with Good Reason Generally. In the event (i) Company terminates the
employment of Executive, except for Cause pursuant to Section 5.A. above, or
(ii) Executive terminates his employment with Good Reason, and the provisions
of Section 5.C. above do not apply, Company shall pay Executive, as its sole
and exclusive liability hereunder, an amount equal to twelve (12) months of the
Executive's then current monthly base salary. Payment hereunder shall be made
monthly. In the event Executive finds reasonably comparable employment with a
salary and bonus compensation program similar to that provided by Company
following the date of termination, the monthly payments shall immediately
cease.
6. Confidential Information.
A. Company may disclose to Executive certain Confidential
Information (defined below). Executive acknowledges and agrees that Company has
a reasonable,
-5-
<PAGE> 6
competitive business interest in the Confidential Information and the
Confidential Information is the sole and exclusive property of Company (or a
third party providing such information to Company) and that Company or such
third party owns all worldwide rights therein under patent, copyright, trade
secret, confidential information, moral right or other property right.
Executive acknowledges and agrees that the disclosure of the Confidential
Information to Executive does not confer upon Executive any license, interest
or rights of any kind in or to the Confidential Information. Executive may use
the Confidential Information solely for the benefit of Company while Executive
is employed by Company. Except in the performance of services for Company,
Executive shall hold in confidence and not reproduce, distribute, transmit,
reverse engineer, decompile, disassemble, or transfer, directly or indirectly,
in any form, by any means, or for any purpose, the Confidential Information or
any portion thereof. Executive agrees to return to Company, upon request by
Company, the Confidential Information and all materials relating thereto.
B. Executive acknowledges that his obligations with regard to
the Confidential Information shall remain in effect while Executive is engaged
by Company and for a period of two (2) years thereafter.
"Confidential Information" shall mean any confidential or proprietary
information possessed by Company or relating to Company's business, including,
without limitation, any confidential "know-how", trade secrets, customer lists,
details of client or consultant contracts, current and anticipated customer
requirements, pricing policies, price lists, market studies, business plans,
operational methods, marketing plans or strategies, product development
techniques or plans, computer software programs (including object code and
source code), data and documentation, data base technologies, systems,
structures and architectures, inventions and ideas, past, current and planned
research and development, compilations, devices, methods, techniques,
processes, financial information and data, business acquisition plans and new
personnel acquisition plans; provided, however, that Executive shall not be
restricted from disclosing or using Confidential Information that: (i) is or
becomes generally available to the public other than as a result of an
unauthorized disclosure; (ii) becomes available to Executive in a manner that
is not in contravention of applicable law from a source that is not bound by a
confidential relationship with Company or by a confidentiality or other similar
agreement; (iii) was known to Executive on a non-confidential basis and not in
contravention of applicable law or a confidentiality or other similar agreement
before its disclosure to Executive by Company or one of Company's agents or
employees or (iv) is required to be disclosed by law, court order or other
legal process; provided, however, that in the event disclosure is required by
law, Executive shall provide Company with prompt notice of such requirement so
that Company may seek an appropriate protective order prior to any such
required disclosure by Executive. Confidential Information may include, but not
be limited to, future business plans, licensing strategies, advertising
campaigns, information regarding customers, employees and independent
contractors and the terms and conditions of this Agreement.
7. Non-Solicitation.
A. Customers. During Executive's employment with Company and
for a period of twelve (12) months thereafter (the "Restricted Period"),
Executive shall not, on his own
-6-
<PAGE> 7
behalf or on behalf of any person, firm, partnership, association, corporation
or business organization, entity or enterprise ("Other Entity"), solicit,
contact, call upon, communicate with or attempt to communicate with any
customer of Company, or any representative of any customer of Company, with a
view to providing products and/or services in the Business of Company provided
that the restrictions set forth in this Section 7.A. shall apply only to
customers of Company, or representatives of customers of Company, with which
Company had contact during the two (2) year period immediately preceding
termination of his employment with Company (or shorter period if Executive has
not then been engaged by Company for two (2) years). Business of the Company
means shall include the design, sale or support of Computer Software. For this
purpose, Computer Software shall mean that software which is used by businesses
for quality monitoring or performance analysis in a Call Center or Customer
Contact Center.
B. Employees/Independent Contractors. During the Restricted
Period, Executive shall not, on his own behalf or on behalf of any Other
Entity, recruit or hire, or attempt to recruit or hire, any employees or
independent contractors of Company who were employed or engaged by Company, as
the case may be, during the one (1) year period prior to the termination of his
employment with Company (or shorter period if Executive has not then been
engaged by Company for one (1) year).
8. Non-Competition. During the Restricted Period, Executive shall
not on his own behalf or on behalf of any Other Entity, perform the duties and
services Executive performs for Company for, or own a material financial
interest in, any Other Entity that is competitive with the business of the
Company or any of its subsidiaries (as such business is conducted on the first
(1st) day of the Restricted Period) within the following designated counties in
the State of Georgia: Cherokee, Clayton, Cobb, DeKalb, Fayette, Forsyth,
Fulton, Gwinnett, Henry, and Newton (the "Territory"). The ownership of an
interest constituting not more than five percent (5%) of the outstanding debt
or equity in a corporation, the shares of which are traded on a recognized
stock exchange or traded in the over-the-counter market, even though that
corporation may be a competitor of the Company or any of its subsidiaries,
shall not be deemed a material financial interest in a competitor.
9. Acknowledgment. The parties hereto agree that: (i) the Restricted
Period and Territory contained in this Agreement are reasonably necessary for
the protection of Company's legitimate business interests and that the
Territory is the area in which Executive shall perform (or currently perform)
services for Company; (ii) by having access to information concerning
employees, independent contractors and customers of Company, Executive shall
obtain a competitive advantage as to such parties; (iii) Executive's covenants
and agreements contained in this Agreement are reasonably necessary to protect
the interests of Company in whose favor said covenants and agreements are
imposed in light of the nature of Company's Business and Executive's
involvement in such Business; (iv) the restrictions imposed by this Agreement
are not greater than are necessary for the protection of Company in light of
the substantial harm that Company shall suffer should Executive breach any of
the provisions of said covenants or agreements and (v) Executive's covenants
and agreements contained in this Agreement form material consideration for this
Agreement, the Acquisition Agreement and Executive's employment by Company.
-7-
<PAGE> 8
10. Remedy for Breach. Executive agrees that the remedies at law of
Company for any actual or threatened breach by Executive of the covenants
contained in Sections 6. through 8. of this Agreement would be inadequate and
that Company shall be entitled to specific performance of the covenants in such
paragraphs, including entry of an ex parte, temporary restraining order in
state or federal court, preliminary and permanent injunctive relief against
activities in violation of such paragraphs, or both, or other appropriate
judicial remedy, writ or order, in addition to any damages and legal expenses
(including attorney's fees) which Company may be legally entitled to recover.
Executive acknowledges and agrees that the covenants contained in Sections 6.
through 8. of this Agreement shall be construed as agreements independent of
any other provision of this or any other agreement between the parties hereto,
and that the existence of any claim or cause of action by Executive against
Company, whether predicated upon this or any other agreement, shall not
constitute a defense to the enforcement by Company of said covenants.
11. No Prior Agreements. Executive hereby represents and warrants to
Company that the execution of this Agreement by Executive and Executive's
employment by Company and the performance of Executive's duties hereunder shall
not violate or be a breach of any agreement with a former employer, client or
any other person or entity.
12. Assignment; Binding Effect. Executive understands that Executive
has been selected for employment by Company on the basis of Executive's
personal qualifications, experience and skills. Executive agrees, therefore,
that Executive cannot assign all or any portion of Executive's performance
under this Agreement. Subject to the preceding two (2) sentences, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives,
successors and assigns.
13. Complete Agreement. This Agreement is not a promise of future
employment. Executive has no oral representations, understandings or agreements
with Company or any of its officers, directors or representatives covering the
same subject matter as this Agreement. This Agreement hereby supersedes any
other employment agreements or understandings, written or oral, between Company
and Executive. This written Agreement is the final, complete and exclusive
statement and expression of the agreement between Company and Executive and of
all the terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of Company and Executive,
and no term of this Agreement may be waived except by writing signed by the
party waiving the benefit of such term.
14. Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
<TABLE>
<S> <C>
To Company: Witness Systems, Inc.
Suite 210
1105 Sanctuary Parkway
Alpharetta, Georgia 30004
Attention: James W. Judson
</TABLE>
-8-
<PAGE> 9
<TABLE>
<S> <C>
With a Copy to: Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attention: John C. Yates, Esq.
To Executive: David Gould
1880 Durand Mill Drive
Atlanta, Georgia 30307
</TABLE>
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. Mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party
may change the address for notice by notifying the other party of such change
in accordance with this Section 14.
15. Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. This
Agreement shall be enforced separately and independently of any other agreement
involving the parties hereto. The Section headings herein are for reference
purposes only and are not intended in any way to describe, interpret, define or
limit the extent or intent of the Agreement or of any part hereof.
16. Governing Law. This Agreement shall in all respects be construed
according to the laws of the State of Georgia.
17. Successors. This Agreement shall be binding upon and inure to the
benefit of the heirs, legal representatives, successors, and permitted assigns
of the parties. The obligations of Company pursuant to this Agreement,
including without limitation, Company's obligations with respect to payment of
the Guaranteed Bonus pursuant to Section 2.A., shall be binding upon Company's
successors and assigns.
18. Counterparts. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute, but one and the same instrument.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY:
Witness Systems, Inc.
By:/s/ James W. Judson, Jr.
-----------------------------------------
Its: Chairman of the Board and Director
-------------------------------------
EXECUTIVE:
/s/ David Gould
--------------------------------------------
David Gould
-10-
<PAGE> 11
EXHIBIT A
TO EMPLOYMENT AGREEMENT
Duties of Executive
OVERALL RESPONSIBILITY:
Chief Executive Officer
The Chief Executive Officer shall be the chief executive officer of
the Corporation and shall have such powers as may be delegated to him by the
Board of Directors of the Company. He shall manage the direction and operations
of the Company to insure optimal return on both short-term and long-term
investment and growth prospects and shall have general and active management of
the operations of the Company.
<PAGE> 1
EXHIBIT 10.8
PROMISSORY NOTE
$1,461,383.43 March 31, 1999
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned, DAVID GOULD ("Borrower"),
promises to pay to the order of WITNESS SYSTEMS, INC., a Delaware corporation
(the "Lender"), in lawful money of the United States of America constituting
legal tender in payment of all debts and dues, public and private, the
principal amount of One Million Four Hundred Sixty-One Thousand Three Hundred
Eighty-Three Dollars and 43/100 ($1,461,383.43).
1. INTEREST. From and after the date hereof (until maturity or
default as hereinafter provided), interest on the principal amount outstanding
shall accrue at a fixed rate equal to 6.41% per annum, compounded annually and
computed on the basis of a 365-day year.
2. PAYMENT.
(a) Interest on the outstanding principal balance of the
indebtedness evidenced hereby shall be payable annually with the initial
payment due on or before March 31, 2000.
(b) On March 30, 2008, the entire outstanding principal balance
of the indebtedness evidenced hereby shall be due and payable in full.
(c) Notwithstanding anything herein to the contrary, the entire
outstanding principal balance of the indebtedness evidenced hereby and all
accrued but unpaid interest shall be due and payable in full upon the first to
occur of the following:
(i) Approval of the shareholders of Company of a merger,
consolidation or other reorganization in each case, with respect
to which persons who were the shareholders of Company immediately
prior to such merger, consolidation or other reorganization,
immediately thereafter, do not own more than fifty percent (50%)
of the combined voting power entitled to vote generally in the
election of directors of the merged, consolidated or reorganized
Company's then outstanding voting securities; provided, however,
Borrower shall not be required to pay the entire outstanding
principal balance of the indebtedness evidenced hereby until such
time as Borrower receives cash or marketable securities pursuant
to such merger, consolidation or other reorganization sufficient
in value or amount to pay such balance;
(ii) Sale of all or substantially all of the assets of
Company; or
(iii) Twenty-four (24) months following the sale of common
stock of the Company to the general public pursuant to a
registration statement filed with and declared effective by the
Securities and Exchange Commission (other than a registration
statement solely covering an employee benefit plan or corporate
reorganization).
3. PREPAYMENT. This Note may be prepaid in whole or in part without
penalty, provided that any partial prepayment shall be in integral multiples of
$1,000.00.
4. SECURITY. The indebtedness evidenced by this Note and the
obligations created hereby are secured by those certain stock certificates
issued in the name of Borrower pursuant to that certain
<PAGE> 2
Restricted Stock Award Agreement by and between Lender and Borrower dated March
31, 1999 (the "Restricted Stock Agreement").
5. EVENT OF DEFAULT. If the Borrower fails to make any payment of
principal or interest as the same becomes due and payable, and such failure is
not cured within five (5) business days after written notice thereof or at any
time thereafter during the continuance of any such event, the holder may, with
or without notice to the Borrower, declare this Note and the indebtedness
evidenced hereby to be forthwith due and payable, whereupon this Note and the
indebtedness evidenced hereby shall become forthwith due and payable, without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived.
6. RECOURSE. With respect to the principal amount hereof, Borrower
shall be personally liable for the obligations evidenced hereby to the extent
of, but not in excess of, Three Hundred Sixty-Five Thousand Three Hundred
Forty-Five Dollars and 86/100 ($365,345.86). Borrower shall be personally
liable for one hundred percent (100%) of the interest which becomes due and
payable pursuant to this Note.
7. PAYMENT IN SHARES. Borrower may make any payment due and payable
or otherwise permitted hereunder by delivery of shares of Lender's common stock
owned (and fully vested) to Lender that have been owned (and fully paid for)
for at least six (6) months. For purposes of payments hereunder, any shares of
Lender's common stock shall be valued as follows:
(a) at the greater of $2.99 or then current fair market value
(as determined by the Board) up to 75% of the principal hereof or
$1,096,037.57, and
(b) at then fair market value (as determined by the Board) for
the balance of the principal and all interest payable hereunder.
8. WAIVERS. Borrower hereby waives demand, presentment for payment,
notice of dishonor, protest, and notice of protest and diligence in collection
or bringing suit and agree that the holder hereof may accept partial payment,
or release or exchange security or collateral, without discharging or releasing
any unreleased collateral or the obligations evidenced hereby. Borrower further
waives any and all rights of exemption, both as to personal and real property,
under the constitution or laws of the United States or the State of Georgia.
9. ATTORNEYS' FEES. Borrower agrees to pay reasonable attorneys'
fees and costs actually incurred by the holder hereof in collecting on this
Note, whether by suit or otherwise.
10. UNCONDITIONAL PAYMENT. Borrower is and shall be obligated to pay
principal and any and all other amounts which become payable hereunder
absolutely and unconditionally and without any abatement, postponement,
diminution or deduction and without any reduction for counterclaim or setoff.
In the event that at any time any payment received by Lender hereunder shall be
deemed by a court of competent jurisdiction to have been a voidable preference
or fraudulent conveyance under any bankruptcy, insolvency or other debtor
relief law, then the obligation to make such payment shall survive any
cancellation or satisfaction of this Note or return thereof to Borrower and
shall not be discharged or satisfied with any prior payment thereof or
cancellation of this Note, but shall remain a valid and binding obligation
enforceable in accordance with the terms and provisions hereof, and such
payment shall be immediately due and payable upon demand.
-2-
<PAGE> 3
11. MISCELLANEOUS. As used herein, the terms "Borrower," "Lender" and
"holder" shall be deemed to include their respective successors, legal
representatives and assigns, whether by voluntary action of the parties or by
operation of law. This Note is given under the seal of the party hereto, and it
is intended that this Note is and shall constitute and have the effect of a
sealed instrument according to law. This Note has been negotiated, and is being
executed and delivered in the State of Georgia, or if executed elsewhere, shall
become effective upon the Lender's receipt and acceptance of the executed
original of this Note in the State of Georgia; provided, however, that the
Lender shall have no obligation to give, nor shall Borrower be entitled to
receive, any notice of such acceptance for this Note to become a binding
obligation of Borrower. Borrower hereby submits to jurisdiction in the State of
Georgia. This Note shall be governed by and be construed in accordance with the
laws of the State of Georgia. It is intended, and the Borrower and the holder
hereof specifically agree, that the laws of the State of Georgia governing
interest shall apply to this Note and to this transaction. This Note may not be
modified except by written agreement signed by the Borrower and the holder
hereof, or by their respective successors or assigns.
12. TIME OF ESSENCE. TIME IS OF THE ESSENCE in connection with this
Note.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered as of the date first set forth above.
BORROWER:
/s/ Jon Ezrine /s/ David Gould
- ------------------------------------ -----------------------------
Witness David Gould
-3-
<PAGE> 1
EXHIBIT 10.9
WITNESS SYSTEMS, INC.
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT is made and entered into as of this 31st day of March,
1999 (the "Award Date"), by and between Witness Systems, Inc. (the "Company"), a
Delaware corporation, and David Gould (the "Employee").
BACKGROUND
A. The Company has adopted the Witness Systems, Inc. Stock Incentive
Plan (the "Plan") for the purpose of securing and retaining the services of
officers, directors, key employees, and consultants of the Company, by promoting
and increasing their personal interests in the welfare of the Company and by
providing incentives to those who are primarily responsible for the operations
of the Company and for shaping and carrying out the long-range plans of the
Company and aiding in its continued growth and financial success.
B. A Committee of the Board of Directors of the Company (the
"Committee") has authorized the grant to Employee of a restricted stock award
under the Plan to purchase shares of the common stock, par value $.01 ("Common
Stock"), of the Company.
C. The Company and Employee wish to confirm herein the terms,
conditions, and restrictions of the restricted stock award.
For and in consideration of the premises, the mutual covenants
contained herein, and other good and valuable consideration, the parties hereto
agree:
SECTION 1.
AWARD OF SHARES
1.1 Award of Shares. Subject to the terms, restrictions, limitations,
and conditions stated herein and in the Plan, the Company hereby awards to
Employee 488,757 shares of Common Stock (the "Bonus Shares") with a value as of
the Award Date of $2.99 per share (the "Award Date Value"). As consideration for
the grant of the Bonus Shares, Employee hereby agrees to deliver to the Company
a promissory note payable for the purchase price of $1,461,383.43 (488,757
shares x $2.99 per share) in substantially the form attached hereto as EXHIBIT A
(the "Promissory Note").
1.2. Vesting of Bonus Shares. Employee shall become vested in the Bonus
Shares as described in the vesting schedule attached hereto as SCHEDULE I (the
"Vesting Schedule"), except that the Board of Directors may, in its sole
discretion, waive the Vesting Schedule, in which case all Bonus Shares shall
become fully vested. The Bonus Shares which have become vested pursuant to the
Vesting Schedule or by virtue of waiver of the Vesting Schedule by the Board of
Directors are herein referred to as the "Vested Bonus Shares" and all Bonus
Shares which are not Vested Bonus Shares are sometimes herein referred to as the
"Unvested Bonus Shares."
<PAGE> 2
1.3 Additional Condition to Bonus Shares. In the event that Employee
does not file an election pursuant to Section 83(b) of the Internal Revenue Code
of 1986, as amended, with the Internal Revenue Service within thirty (30) days
of the date hereof, Employee must deliver to the Company, within ten (10) days
after the occurrence of an event in the Vesting Schedule, pursuant to which some
or all of the Bonus Shares become Vested Bonus Shares (a "Vesting Date"), either
a certified check payable to the Company in the amount of all withholding tax
obligations (whether federal, state or local) imposed on the Company by reason
of the vesting of the Bonus Shares, or the Withholding Election described in
Section 1.4, in order to not forfeit the Bonus Shares.
1.4 Optional Withholding Election. In lieu of paying the withholding
tax obligation in cash, as described in Section 1.3, Employee may elect to have
the actual number of Vested Bonus Shares reduced by the smallest number of whole
shares of Common Stock which, when multiplied by the fair market value of the
Common Stock on the Vesting Date as determined by the Board of Directors, is
sufficient to satisfy the minimum amount of the withholding tax obligations
imposed on the Company by reason of the vesting of the Bonus Shares (the
"Withholding Election"). Employee may make a Withholding Election only if all of
the following conditions are met:
(a) the Withholding Election must be made on or prior to the
date on which the amount of tax required to be withheld is determined
(the "Tax Date") by executing and delivering to the Company a properly
completed Notice of Withholding Election, in substantially the form of
EXHIBIT B attached hereto;
(b) any Withholding Election made will be irrevocable;
however, the Board of Directors may, in its sole discretion, disapprove
and give no effect to any Withholding Election; and
(c) if Employee is required to file beneficial ownership
reports pursuant to Subsection (a) of Section 16 of the Securities
Exchange Act of 1934, at any time during a period in which some or all
of the Bonus Shares vest, then the Withholding Election must be made
either (A) at least six months prior to the Tax Date applicable to the
Vesting Date of Bonus Shares, or (B) prior to the Tax Date and in any
ten-day period beginning on the third day following the release of the
Company's quarterly or annual summary statement of sales and earnings.
1.5. Investment Representations. Employee hereby represents, warrants,
covenants, and agrees with the Company as follows:
(a) The Bonus Shares being acquired by Employee will be
acquired for Employee's own account without the participation of any
other person, with the intent of holding the Bonus Shares for
investment and without the intent of participating, directly or
indirectly, in a distribution of the Bonus Shares and not with a view
to, or for resale in connection with, any distribution of the Bonus
Shares, nor is Employee aware of the existence of any distribution of
the Bonus Shares;
-2-
<PAGE> 3
(b) Employee is not acquiring the Bonus Shares based upon any
representation, oral or written, by any person with respect to the
future value of, or income from, the Bonus Shares but rather upon an
independent examination and judgment as to the prospects of the
Company;
(c) The Bonus Shares were not offered to Employee by means of
publicly disseminated advertisements or sales literature, nor is
Employee aware of any offers made to other persons by such means;
(d) Employee is able to bear the economic risks of the
investment in the Bonus Shares, including the risk of a complete loss
of my investment therein;
(e) Employee understands and agrees that the Bonus Shares will
be issued and sold to Employee without registration under any state law
relating to the registration of securities for sale, and will be issued
and sold in reliance on the exemptions from registration under the
Securities Act of 1933 (the "1933 Act"), provided by Sections 3(b)
and/or 4(2) thereof and the rules and regulations promulgated
thereunder;
(f) The Bonus Shares cannot be offered for sale, sold or
transferred by Employee other than pursuant to: (A) an effective
registration under the 1933 Act or in a transaction otherwise in
compliance with the 1933 Act; and (B) evidence satisfactory to the
Company of compliance with the applicable securities laws of other
jurisdictions. The Company shall be entitled to rely upon an opinion of
counsel satisfactory to it with respect to compliance with the above
laws;
(g) The Company will be under no obligation to register the
Bonus Shares or to comply with any exemption available for sale of the
Bonus Shares without registration or filing, and the information or
conditions necessary to permit routine sales of securities of the
Company under Rule 144 of the 1933 Act are not now available and no
assurance has been given that it or they will become available. The
Company is under no obligation to act in any manner so as to make Rule
144 available with respect to the Bonus Shares;
(h) Employee has and has had complete access to and the
opportunity to review and make copies of all material documents related
to the business of the Company, including, but not limited to,
contracts, financial statements, tax returns, leases, deeds, and other
books and records. Employee has examined such of these documents as
Employee has wished and is familiar with the business and affairs of
the Company. Employee realizes that the purchase of the Bonus Shares is
a speculative investment and that any possible profit therefrom is
uncertain;
(i) Employee has had the opportunity to ask questions of and
receive answers from the Company and any person acting on its behalf
and to obtain all material information reasonably available with
respect to the Company and its affairs. Employee has received all
information and data with respect to the Company which Employee has
requested and which Employee has deemed relevant in connection with the
evaluation of the merits and risks of Employee's investment in the
Company;
-3-
<PAGE> 4
(j) Employee has such knowledge and experience in financial
and business matters that Employee is capable of evaluating the merits
and risks of the purchase of the Bonus Shares hereunder and Employee is
able to bear the economic risk of such purchase; and
(k) The agreements, representations, warranties, and covenants
made by Employee herein extend to and apply to all of the Bonus Shares
of the Company issued to Employee pursuant to this restricted stock
award. Acceptance by Employee of the certificate representing such
Bonus Shares shall constitute a confirmation by Employee that all such
agreements, representations, warranties, and covenants made herein
shall be true and correct at that time.
SECTION 2.
RESTRICTIONS ON BONUS SHARES
2.1 Restrictions on Unvested Bonus Shares.
(a) Forfeiture Upon Cessation of Employment. All Unvested
Bonus Shares shall automatically revert back to the Company immediately
upon cessation of Employee's employment by the Company for any reason.
Executive shall be entitled to payment of the Award Date Value of all
such Unvested Bonus Shares which may be accomplished by appropriate
reduction in the principal of the Promissory Note. The parties hereto
acknowledge that all Unvested Bonus Shares shall become Vested Bonus
Shares upon a Change of Control as described on SCHEDULE I hereto,
provided Executive is employed by the Company at such time.
(b) Restrictions on Transfer of Unvested Bonus Shares.
Unvested Bonus Shares shall not be transferable by Employee for any
reason or in any manner, including by will or intestacy.
(c) Termination of Restrictions. The restrictions contained in
this Section 2.1 shall continue in effect, notwithstanding the earlier
termination or expiration of this Agreement, until the Bonus Shares
become Vested Bonus Shares.
2.2. Right of First Refusal. Before any Vested Bonus Shares held by
Employee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company shall have an assignable right of first refusal
to purchase the Vested Bonus Shares on the terms and conditions set forth in
this Section 2.2 (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Vested
Bonus Shares shall deliver to the Company a written notice (the
"Notice") stating (i) the Holder's bona fide intention to sell or
otherwise transfer such Vested Bonus Shares, (ii) the name of each
proposed purchaser or other transferee ("Proposed Transferee"), (iii)
the number of Vested Bonus Shares to be transferred to each Proposed
Transferee, and (iv) the bona fide cash price or other consideration
for which the Holder proposes to transfer the Vested
-4-
<PAGE> 5
Bonus Shares (the "Offered Price"); in addition, by providing the
Notice, the Holder is deemed to be offering to sell the Vested Bonus
Shares at the Offered Price to the Company.
(b) Exercise of Right of First Refusal. At any time within
thirty (30) days after receipt of the Notice, the Company or its
assignee may, by giving written notice to the Holder, elect to purchase
all, but not less than all, of the Vested Bonus Shares proposed to be
transferred to any one or more of the Proposed Transferees, at the
purchase price determined in accordance with Subsection (c) below.
(c) Purchase Price. The purchase price for the Vested Bonus
Shares purchased under this Section 2.2 shall be the Offered Price. If
the Offered Price includes consideration other than cash, the cash
equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the purchase price shall be made, at
the option of the Company or its assignee, either (i) in cash (by
check), by cancellation of all or a portion of any outstanding
indebtedness of the Holder to the Company or such assignee, or by any
combination thereof within thirty (30) days after receipt of the Notice
or (ii) in the manner and at the time(s) set forth in the Notice.
(e) Holder's Right to Transfer. If the Vested Bonus Shares
proposed in the Notice to be transferred to a given Proposed Transferee
are not purchased by the Company and/or its assignee as provided in
this Section 2.2, then the Holder may sell or otherwise transfer such
Vested Bonus Shares to that Proposed Transferee at the Offered Price or
at a higher price, provided that such sale or other transfer is
consummated within one hundred and twenty (120) days after the date of
the Notice and provided further that any such sale or other transfer is
effected in accordance with any applicable securities laws and the
Proposed Transferee agrees in writing that the provisions of this
Section 2.2 shall continue to apply to the Vested Bonus Shares in the
hands of such Proposed Transferee. If the Vested Bonus Shares described
in the Notice are not transferred to the Proposed Transferee within
such period, a new Notice shall be given to the Company, and the
Company shall again be offered the Right of First Refusal, before any
Vested Bonus Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the
contrary contained in this Section 2.2 notwithstanding, the transfer of
any or all of the Vested Bonus Shares, during Employee's lifetime or on
Employee's death by will or intestacy, to Employee's immediate family
or to a trust for the benefit of Employee or Employee's immediate
family shall be exempt from the provisions of this Section; provided,
that as a condition to receiving the Vested Bonus Shares, the
transferee or other recipient shall agree in writing to receive and
hold the Vested Bonus Shares so transferred subject to the provisions
of this Agreement, and to transfer such Vested Bonus Shares no further
except in accordance with the terms of this Agreement. As used herein,
"immediate family" shall mean Employee's spouse, lineal descendant or
antecedent, father, mother, brother or sister.
-5-
<PAGE> 6
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Vested Bonus Shares upon the first
sale of Common Stock of the Company to the general public pursuant to a
registration statement filed with and declared effective by the
Securities and Exchange Commission (other than a registration statement
solely covering an employee benefit plan or corporate reorganization).
2.3. Company's Repurchase Option for Vested Bonus Shares. The Company
shall have the option to repurchase all or a portion of the Vested Bonus Shares
on the terms and conditions set forth in this Section 2.3 (the "Repurchase
Option") if Employee should cease to be employed by the Company for any reason,
including death or Disability, as defined in that certain Employment Agreement
between Employee and the Company dated February 2, 1999 (the "Employment
Agreement").
(a) Exercise of Repurchase Option. At any time within sixty
(60) days after the Termination Date (as defined below), the Company or
its assignee may elect to repurchase any or all of the Vested Bonus
Shares by giving Employee (or Employee's personal representative, as
the case may be) written notice of exercise of the Repurchase Option.
(b) Purchase Price. The purchase price for Vested Bonus Shares
purchased pursuant to this Section 2.3 shall be the "fair market value"
of such Shares on the Termination Date. For purposes of this Section
2.3, "fair market value" of the Vested Bonus Shares shall be determined
in the good faith and sole discretion of the Board of Directors.
(c) Payment of Repurchase Price. The repurchase price shall be
payable, at the option of the Company or its assignee, by (i) check,
(ii) by cancellation of all or a portion of any outstanding
indebtedness of Employee to the Company or such assignee, (iii) to the
extent Employee has no outstanding indebtedness to the Company or its
assignee, by delivery of a promissory note of the Company payable in
equal annual installments over a four (4) year period from the date of
repurchase at per annum interest rate equal to the prime rate as
announced by the Company's principal bank as of the Termination Date
or, if the Company has no principal bank, that rate announced as of the
Termination Date by the Wall Street Journal as the prevailing "prime
rate" of interest per annum, or (iv) any combination of the above.
(d) Termination of Repurchase Rights. The Right of Repurchase
shall terminate as to any Vested Bonus Shares upon the first sale of
common stock of the Company to the general public pursuant to a
registration statement filed with and declared effective by the
Securities and Exchange Commission (other than a registration statement
solely covering an employee benefit plan or corporate reorganization).
2.4. Pledging of Bonus Shares. If the Company incurs indebtedness and
in connection therewith, at the time the Employee receives his Vested Bonus
Shares, all other shareholders of the Company have either pledged their shares
of Common Stock, or have been asked to pledge their shares of Common Stock for
the benefit of certain lenders of the Company, the Employee, if
-6-
<PAGE> 7
so requested by the Company, shall pledge any Vested Bonus Shares which are not
already pledged to the Company or its assignee on the same terms and conditions
as the other shareholders of the Company and shall take such actions as may be
required to accomplish the pledge as may be requested by the Company.
2.5. Lockup Agreement. Employee agrees, in connection with any public
offering of the Company's securities, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Bonus Shares without the prior written consent of the
Company or such underwriters, as the case may be, from the effective date of
such registration for so long as the Company or the underwriters may specify,
but in any event not to exceed 180 days. Employee agrees to execute and deliver
such other documents and agreements as the Company or such underwriters may
reasonably request to further evidence these commitments.
2.6. Right of Termination Unaffected. Nothing in this Agreement shall
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company to terminate Employee's employment or association with the
Company at any time, for any reason or no reason, with or without cause. For
purposes of this Agreement, Employee shall be considered to be employed by the
Company if Employee is employed pursuant to the Employment Agreement or is an
officer, director or full-time employee of the Company or any parent or
subsidiary of the Company or if the Board of Directors determines that Employee
is rendering substantial services as a part-time employee, consultant,
contractor or advisor to the Company or any parent or subsidiary of the Company.
Subject to the provisions of that certain Employment Agreement between Company
and Employee dated February 2, 1999 (the "Employment Agreement"), the Board of
Directors shall have discretion to determine whether Employee has ceased to be
employed by or associated with the Company or any parent or subsidiary and the
effective date on which such employment or association is terminated (the
"Termination Date").
SECTION 3.
GENERAL PROVISIONS
3.1 Change in Capitalization. If the number of outstanding shares of
the Common Stock shall be increased or decreased by a change in par value,
split-up, stock split, reverse stock split, reclassification, distribution of
common stock dividend, or other similar capital adjustment, an appropriate
adjustment shall be made by the Board of Directors in the number and kind of
Bonus Shares, such that Employee's proportionate interest shall be maintained as
before the occurrence of the event. No fractional shares shall be issued in
making such adjustment. All adjustments made by the Board of Directors under
this Section shall be final, binding, and conclusive.
3.2. Legends. Each certificate representing the Bonus Shares shall be
endorsed with the following legend and Employee shall not make any transfer of
the Bonus Shares without first complying with the restrictions on transfer
described in such legend:
-7-
<PAGE> 8
TRANSFER IS RESTRICTED
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF
FIRST REFUSAL AND OTHER RESTRICTIONS ON TRANSFER SET FORTH IN A
RESTRICTED STOCK AWARD AGREEMENT DATED MARCH 31, 1999, A COPY OF WHICH
IS AVAILABLE FROM THE COMPANY.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, OR HYPOTHECATED UNLESS (1) THERE IS AN EFFECTIVE
REGISTRATION UNDER SUCH ACT COVERING SUCH SECURITIES, (2) THE TRANSFER
IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR (3)
THE ISSUER RECEIVES AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT.
Employee agrees that the Company may also endorse any other legends
required by applicable federal or state securities laws.
The Company need not register a transfer of the Bonus Shares, and may
also instruct its transfer agent, if any, not to register the transfer of the
Bonus Shares unless the conditions specified in the foregoing legends are
satisfied.
3.3 Removal of Legend and Transfer Restrictions.
(a) Any legend endorsed on a certificate pursuant to Section
3.2 and the stop transfer instructions with respect to the Bonus Shares
shall be removed and the Company shall issue a certificate without such
legend to the holder thereof if such Bonus Shares are registered under
the Securities Act and a prospectus meeting the requirements of Section
10 of the Securities Act is available.
(b) The restrictions described in the second sentence of the
legend set forth in Section 3.2 may be removed at such time as
permitted by Rule 144(k) promulgated under the Securities Act.
3.4. Governing Laws. This Agreement shall be construed, administered
and enforced according to the laws of the State of Georgia; provided, however,
no Bonus Shares shall be issued except, in the reasonable judgment of the Board
of Directors, in compliance with exemptions under applicable state securities
laws of the state in which Employee resides, and/or any other applicable
securities laws.
3.5. Successors. This Agreement shall be binding upon and inure to the
benefit of the heirs, legal representatives, successors, and permitted assigns
of the parties.
3.6. Notice. Except as otherwise specified herein, all notices and
other communications under this Agreement shall be in writing and shall be
deemed to have been
-8-
<PAGE> 9
given if personally delivered or if sent by registered or certified United
States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
3.7. Severability. In the event that any one or more of the provisions
or portion thereof contained in this Agreement shall for any reason be held to
be invalid, illegal, or unenforceable in any respect, the same shall not
invalidate or otherwise affect any other provisions of this Agreement, and this
Agreement shall be construed as if the invalid, illegal or unenforceable
provision or portion thereof had never been contained herein.
3.8. Entire Agreement. Subject to the terms and conditions of the Plan,
this Agreement expresses the entire understanding and agreement of the parties
with respect to the subject matter. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
3.9. Violation. Any transfer, pledge, sale, assignment, or
hypothecation of the Bonus Shares or any portion thereof shall be a violation of
the terms of this Agreement and shall be void and without effect.
3.10. Headings. Paragraph headings used herein are for convenience of
reference only and shall not be considered in construing this Agreement.
3.11. Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are thereby aggrieved shall have the right
to specific performance and injunction in addition to any and all other rights
and remedies at law or in equity, and all such rights and remedies shall be
cumulative.
3.12. No Employment Rights Created. Neither the establishment of the
Plan nor the award of Bonus Shares hereunder shall be construed as giving
Employee the right to continued employment with the Company.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed and sealed this Agreement
on the day and year first set forth above.
WITNESS SYSTEMS, INC.
By: /s/ James W. Judson, Jr.
-----------------------------------------
Title: Chairman of the Board of Directors
--------------------------------------
DAVID GOULD
/s/ David Gould
--------------------------------------------
-10-
<PAGE> 11
SCHEDULE I
TO
WITNESS SYSTEMS, INC.
RESTRICTED STOCK AWARD AGREEMENT
Vesting Schedule
"Vested Bonus Shares" means:
168,395 of the Bonus Shares shall be Vested Bonus Shares as of the date
hereof.
77,999 of the Bonus Shares shall become Vested Bonus Shares on February
2, 2000.
The remaining 242,363 Bonus Shares shall become Vested Bonus Shares in
36 equal monthly installments, with the first installment vesting on March 2,
2000.
Notwithstanding anything herein to the contrary, (i) all vesting shall
cease immediately upon cessation of Employee's employment by the Company for any
reason, including death or Disability (as defined in the Employment Agreement),
and (ii) all Unvested Bonus Shares shall become fully vested upon a Change of
Control. For this purpose, Change of Control shall mean:
(a) Approval of the shareholders of Company of a merger,
consolidation or other reorganization in each case, with respect to
which persons who were the shareholders of Company immediately prior to
such merger, consolidation or other reorganization, immediately
thereafter, do not own more than fifty percent (50%) of the combined
voting power entitled to vote generally in the election of directors of
the merged, consolidated or reorganized Company's then outstanding
voting securities;
(b) Sale of all or substantially all of the assets of
Company; or
(c) The sale of common stock of the Company to the general
public pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission (other than a
registration statement solely covering an employee benefit plan or
corporate reorganization).
<PAGE> 12
EXHIBIT A
TO
WITNESS SYSTEMS, INC.
RESTRICTED STOCK AWARD AGREEMENT
Form of Promissory Note
[See Separate Exhibit filed herewith]
<PAGE> 13
EXHIBIT B
TO
WITNESS SYSTEMS, INC.
RESTRICTED STOCK AWARD AGREEMENT
Notice of Withholding Election
TO: WITNESS SYSTEMS, INC.
FROM:
----------------
RE: Withholding Election
This election relates to the Restricted Stock Award identified in
Paragraph 3 below. I hereby certify that:
(1) My correct name and social security number and my
current address are set forth at the end of this document.
(2) I am (check one, whichever is applicable).
[ ] the original recipient of the Restricted
Stock Award.
[ ] the legal representative of the estate of
the original recipient of the Restricted Stock Award.
[ ] a legatee of the original recipient of the
Restricted Stock Award.
[ ] the legal guardian of the original recipient
of the Restricted Stock Award.
(3) The Restricted Stock Award pursuant to which this
election is made is dated and was issued under the Witness Systems,
Inc. Stock Incentive Plan (the "Plan") in the name of David Gould for
488,757 shares of Common Stock. This election relates to
_________________ shares of Common Stock issuable upon vesting of the
Bonus Shares, provided that the numbers set forth above shall be deemed
changed as appropriate to reflect stock splits and other adjustments
contemplated by the applicable Plan provisions.
(4) In connection with any future vesting of the
Restricted Stock Award with respect to the Bonus Shares, I hereby elect
to have certain of the shares issuable pursuant to the exercise
withheld by the Company for the purpose of having the value of the
shares applied to pay federal, state, and local, if any, taxes arising
from the exercise. The shares to be withheld shall have, as of the Tax
Date applicable to the exercise, a fair market
-11-
<PAGE> 14
value equal to the minimum statutory tax withholding requirement under
federal, state, and local law in connection with the exercise.
(5) This Withholding Election is made prior to the Tax
Date and is otherwise timely made.
(6) I understand that this Withholding Election may not
be revised, amended or revoked by me but is subject to the disapproval
of the Board of Directors.
(7) I further understand that, if this Withholding
Election is not disapproved by the Board of Directors, the Company
shall withhold from the Vested Bonus Shares a number of shares of
Common Stock having the value specified in Paragraph 4 above.
(8) The Plan has been made available to me by the
Company, I have read and understand the Plan and I have no reason to
believe that any of the conditions therein to the making of this
Withholding Election have not been met. Capitalized terms used in this
Notice of Withholding Election without definition shall have the
meanings given to them in the Plan.
Dated: 3/31/99 /s/ David Gould
------------------------------ -----------------------------------
Legal Signature
David Gould
- ------------------------------------ -----------------------------------
Social Security Number Name (Printed)
1880 Durand Mill Drive
-----------------------------------
Street Address
Atlanta, GA 30307
-----------------------------------
City, State, Zip Code
-2-
<PAGE> 1
EXHIBIT 10.10
FORM OF
PROMISSORY NOTE
$__________ __________, 1999
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned, _________________ ("Borrower"),
promises to pay to the order of WITNESS SYSTEMS, INC., a Delaware corporation
(the "Lender"), in lawful money of the United States of America constituting
legal tender in payment of all debts and dues, public and private, the principal
amount of ____________________________________________ and No/100 ($_________).
1. INTEREST. From and after the date hereof (until maturity or
default as hereinafter provided), interest on the principal amount outstanding
shall accrue at the fixed rate equal to ____% per annum, compounded annually and
computed on the basis of a 365-day year.
2. PAYMENT.
(a) Interest on the outstanding principal balance of the
indebtedness evidenced hereby shall be payable annually with the initial payment
due on or before July 31, 2000.
(b) On July 31, 2003 (the "Maturity Date"), the entire
outstanding principal balance of the indebtedness evidenced hereby shall be due
and payable in full.
(c) Notwithstanding anything herein to the contrary, the
entire outstanding principal balance of the indebtedness evidenced hereby and
all accrued but unpaid interest shall be due and payable in full upon the first
to occur of the following:
(i) The Maturity Date;
(ii) Ninety (90) days following the Company's
consummation of a merger, consolidation or other
reorganization in each case, with respect to which persons who
were the shareholders of Company immediately prior to such
merger, consolidation or other reorganization, immediately
thereafter, do not own more than fifty percent (50%) of the
combined voting power entitled to vote generally in the
election of directors of the merged, consolidated or
reorganized Company's then outstanding voting securities;
provided, however, in the event that Borrower does not receive
cash or marketable securities pursuant to or immediately
following such transaction sufficient in value or amount to
pay such balance, Borrower shall be allowed to pay the
outstanding principal balance of the indebtedness evidenced
hereby and all accrued but unpaid interest in thirty-six (36)
monthly installments beginning ninety (90) days after such
transaction;
(iii) Ninety (90) days following consummation of a
sale of all or substantially all of the assets of Company;
provided, however, in the event that Borrower does not receive
cash or marketable securities pursuant to or immediately
following such transaction sufficient in value or amount to
pay such balance, Borrower shall be allowed to pay the
outstanding principal balance of the indebtedness evidenced
hereby and all accrued but unpaid interest in thirty-six (36)
monthly installments beginning ninety (90) days after such
transaction;
<PAGE> 2
(iv) Twenty-four (24) months following the sale
of common stock of the Company to the general public pursuant
to a registration statement filed with and declared effective
by the Securities and Exchange Commission (other than a
registration statement solely covering an employee benefit
plan or corporate reorganization);
(v) Ninety (90) days following the effective
date of termination of Borrower's employment with the Company,
if such termination is by reason of Borrower's voluntary
resignation or a termination by the Company for "cause," as
defined in any applicable Employment Agreement; or
(vi) Ninety (90) days following the effective
date of termination of Borrower's employment with the Company,
if such termination is by the Company and other than for
"cause," as defined in any applicable Employment Agreement,
unless otherwise agreed to by Lender and Borrower.
3. PREPAYMENT. This Note may be prepaid in whole or in part
without penalty, provided that any partial prepayment shall be in integral
multiples of $1,000.00.
4. SECURITY. The indebtedness evidenced by this Note and the
obligations created hereby are secured by (i) those certain shares of common
stock of Lender purchased by Borrower pursuant to a Subscription Agreement of
even date herewith and (ii) such securities as described on EXHIBIT A hereto.
5. EVENT OF DEFAULT. If the Borrower fails to make any payment of
principal or interest as the same becomes due and payable, and such failure is
not cured within five (5) business days after written notice thereof or at any
time thereafter during the continuance of any such event, the holder may, with
or without notice to the Borrower, declare this Note and the indebtedness
evidenced hereby to be forthwith due and payable, whereupon this Note and the
indebtedness evidenced hereby shall become forthwith due and payable, without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived.
6. RECOURSE. Borrower shall be personally liable for the
obligations evidenced hereby.
7. PAYMENT IN SHARES. Borrower may make any payment due and
payable or otherwise permitted hereunder by delivery of shares of Lender's
common stock owned (and fully vested) to Lender that have been owned (and fully
paid for) for at least six (6) months. For purposes of payments hereunder, any
shares of Lender's common stock shall be valued at the then fair market value
(as determined by the Board).
8. WAIVERS. Borrower hereby waives demand, presentment for
payment, notice of dishonor, protest, and notice of protest and diligence in
collection or bringing suit and agree that the holder hereof may accept partial
payment, or release or exchange security or collateral, without discharging or
releasing any unreleased collateral or the obligations evidenced hereby.
Borrower further waives any and all rights of exemption, both as to personal and
real property, under the constitution or laws of the United States or the State
of Georgia.
9. ATTORNEYS' FEES. Borrower agrees to pay reasonable attorneys'
fees and costs actually incurred by the holder hereof in collecting on this
Note, whether by suit or otherwise.
10. UNCONDITIONAL PAYMENT. Borrower is and shall be obligated to
pay principal and any and all other amounts which become payable hereunder
absolutely and unconditionally and without any
-2-
<PAGE> 3
abatement, postponement, diminution or deduction and without any reduction for
counterclaim or setoff. In the event that at any time any payment received by
Lender hereunder shall be deemed by a court of competent jurisdiction to have
been a voidable preference or fraudulent conveyance under any bankruptcy,
insolvency or other debtor relief law, then the obligation to make such payment
shall survive any cancellation or satisfaction of this Note or return thereof to
Borrower and shall not be discharged or satisfied with any prior payment thereof
or cancellation of this Note, but shall remain a valid and binding obligation
enforceable in accordance with the terms and provisions hereof, and such payment
shall be immediately due and payable upon demand.
11. TRANSFER OF SECURITIES. Borrower hereby acknowledges that the
Securities will not be transferable pursuant to Rule 144 promulgated under the
Securities Exchange Act of 1933 until the entire principal balance of this Note
is paid in full.
12. MISCELLANEOUS. As used herein, the terms "Borrower," "Lender"
and "holder" shall be deemed to include their respective successors, legal
representatives and assigns, whether by voluntary action of the parties or by
operation of law. This Note is given under the seal of the party hereto, and it
is intended that this Note is and shall constitute and have the effect of a
sealed instrument according to law. This Note has been negotiated, and is being
executed and delivered in the State of Georgia, or if executed elsewhere, shall
become effective upon the Lender's receipt and acceptance of the executed
original of this Note in the State of Georgia; provided, however, that the
Lender shall have no obligation to give, nor shall Borrower be entitled to
receive, any notice of such acceptance for this Note to become a binding
obligation of Borrower. Borrower hereby submits to jurisdiction in the State of
Georgia. This Note shall be governed by and be construed in accordance with the
laws of the State of Georgia. It is intended, and the Borrower and the holder
hereof specifically agree, that the laws of the State of Georgia governing
interest shall apply to this Note and to this transaction. This Note may not be
modified except by written agreement signed by the Borrower and the holder
hereof, or by their respective successors or assigns.
13. TIME OF ESSENCE. TIME IS OF THE ESSENCE in connection with
this Note.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered as of the date first set forth above.
BORROWER:
- ---------------------------------- --------------------------------------
Witness Name:
---------------------------------
-3-
<PAGE> 4
EXHIBIT A
FORM OF
SUBSCRIPTION AGREEMENT
WITNESS SYSTEMS, INC.
THE SHARES TO WHICH THIS SUBSCRIPTION AGREEMENT PERTAINS HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF THE UNITED STATES OF
AMERICA (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE REGULATORY AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THE MEMORANDUM OR ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SHARES ARE OFFERED
PURSUANT TO EXEMPTIONS PROVIDED BY SECTION 4(2) OF THE 1933 ACT, REGULATION D
THEREUNDER, CERTAIN STATE SECURITIES LAWS, AND CERTAIN RULES AND REGULATIONS
PROMULGATED PURSUANT THERETO. THE SHARES MAY NOT BE TRANSFERRED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS AS CONTAINED IN A SHAREHOLDERS' AGREEMENT, A COPY OF
WHICH IS ON FILE AT THE COMPANY AND WHICH IS AVAILABLE WITHOUT CHARGE UPON
REQUEST TO THE SECRETARY OF COMPANY.
1. Offer to Subscribe. __________ (hereinafter, the "Investor")
hereby offers to subscribe for ______ shares (the "Shares") of the common stock,
$0.01 par value (the "Common Stock"), of Witness Systems, Inc., a Delaware
corporation (the "Company"), at a price of $____ per share. The Investor
acknowledges that the Company will rely on this offer, which may not be
canceled, rescinded or otherwise revoked by the Investor.
2. Acceptance of Subscription. The Investor agrees that this
subscription is subject to acceptance by the Company, and that the Company
reserves the right to reject this subscription without notice. The Investor
hereby agrees to become subject to that certain Amended and Restated
Stockholders' Agreement, dated on or about the date hereof (the "Stockholders'
Agreement"), a copy of which has been provided to the Investor, and the Investor
agrees to take all actions necessary to evidence his agreement to be so bound,
including executing a joinder to the Stockholders' Agreement.
3. Representations and Agreements of Investor. In order to induce
the Company to accept this subscription, the Investor warrants, represents,
covenants and agrees as follows, acknowledging that the Company is relying on
the accuracy and completeness of these representations and agreements in
complying with its obligations under applicable securities laws:
a. Risks of Investment. The Investor recognizes that
investment in the Company involves a high degree of risk which may result in the
loss of the total amount of the investment. The Investor acknowledges that he
has carefully considered all risks incident to the purchase of the Shares,
including but not limited to the following:
(i) There is no assurance that the Company's operations
will be profitable in the future. The likelihood of success of the
Company is speculative and the Investor is familiar with the many
problems, difficulties, complications and delays frequently encountered
in the operation and development of expanding businesses.
<PAGE> 5
(ii) The purchase price for the Shares has been determined
by the Company and may not bear any relationship to the anticipated
assets, book value, earnings or net worth of the Company or any other
recognized criteria and cannot be considered to be indication of the
anticipated value of the Company.
(iii) The Company expects to spend a significant amount of
funds to expand its business. The Company's capital requirements will
depend on numerous factors, including the commercial acceptance of the
Company's services and its success in obtaining government contracts.
To the extent that funds generated from operations together with the
net proceeds from this offering are insufficient, the Company will have
to raise additional funds to meet its capital requirements. If
additional funds are raised through the issuance of equity securities,
the percentage ownership of the shareholders of the Company will be
reduced and shareholders may experience additional dilution. No
assurance can be given that additional financing will be available on
acceptable terms, if at all. If adequate funds are not available, the
Company may have to, among other things, reduce substantially or
eliminate expenditures for the development and marketing of its
products.
(iv) The market in which the Company competes is extremely
competitive. There can be no assurance that the Company's competitors
will not succeed in developing products or technologies that will gain
greater market acceptance than those of the Company or that would
render the Company's products and technologies obsolete. The Company
may also face increased competition in the future from new entrants
into its markets. In addition, many of the Company's competitors have
substantially greater financial, technical, marketing and human
resources capabilities than the Company.
(v) The Company is engaged in a business characterized by
rapid developments and intense competition. Competition can be expected
to increase as technological advances are made and commercial
applications broaden, and other companies attempt to infringe, if they
have not already infringed, intellectual property owned by the Company.
The Company competes with companies, many of which have more capital,
more extensive development capabilities and greater marketing and human
resources than the Company.
(vi) The Investor understands that, by virtue of being a
minority shareholder of the Company, it, he will have limited control
over or influence in the management or control of the Company.
b. Additional Information. The Investor has previously
been advised that the Investor would have an opportunity to review all pertinent
facts concerning the Company and obtain any additional information that the
Investor might request, to the extent possessed or obtainable without
unreasonable effort and expense. The Investor acknowledges that it has chosen
not to request any additional information. If additional information is
requested, then a written request should be submitted.
c. Status of Investor. The Investor (i) has substantial
knowledge and experience in business and financial matters which enable him to
evaluate the merits and risks of making investment decisions of this type; (ii)
has the ability to bear the economic risk of this investment and the ability, at
the present time, to afford a complete loss of such investment; and (iii) has
adequate means of providing for his current needs and possible personal and
business contingencies and has no need for liquidity of this investment.
-5-
<PAGE> 6
d. Consultation with Own Advisors. The Investor has been
advised to consult with the Investor's own attorney regarding legal matters
concerning the Company and to consult with independent tax advisors regarding
the tax consequences of investing in the Company.
e. Unregistered Securities. The Investor understands
that the Shares have not been registered under the 1933 Act, in reliance upon
the exemption from the registration requirements thereof provided in Section
4(2) of the 1933 Act, and that the Shares have not been registered under state
securities laws. The Investor understands that, consequently, the Investor must
bear the economic risk of the investment for an indefinite period of time
because the Shares cannot be offered for sale or sold without registration under
the 1933 Act and applicable state securities laws or compliance with applicable
exemptions from registration.
f. Transfer Restrictions. The Investor recognizes that
he may not be able to sell or dispose of the Shares, as no public market for the
Shares exists. In addition, the Investor is aware that the Investor's right to
transfer the Shares will be subject to the provisions of the Stockholders'
Agreement, a copy of which has been given to the Investor.
g. Shares Being Acquired for Investment. The Investor is
the sole party in interest as to his participation in and subscription to the
Company. The Investor is acquiring the Shares solely for investment for the
Investor's own account and has no present intent, agreement, understanding or
arrangement to subdivide, sell, assign, transfer or otherwise dispose of all any
part of the Shares to any other person or entity.
h. Accuracy of Information. All information that the
Investor has provided to the Company concerning the Investor, the Investor's
financial position and the Investor's knowledge of financial and business
matters including all information contained herein, is correct and complete as
of the date hereof and if there should be any adverse change in such information
prior to this subscription being accepted, the Investor will immediately provide
the Company with such information. The Investor recognizes that the sale of the
Shares to the Investor will be based upon the Investor's representations,
warranties and statements set forth herein and hereby agrees to indemnify the
Company and each officer, director or other controlling person thereof, for any
liability or expense, including costs and reasonable attorney's fees, which they
may incur by reason of, or in connection with, any misrepresentation made by the
Investor in this Subscription Agreement, any breach of the Investor's warranties
and/or failure by the Investor to fulfill any of the Investor's covenants or
agreements set forth herein or arising out of the sale or distribution of any
Shares by the Investor in violation of the 1933 Act or any other applicable
state or federal securities laws.
i. Legends. The undersigned understands and agrees that
the following restrictions and limitations are applicable to the undersigned's
purchase and resales or other transfers of the Shares pursuant to the 1933 Act.
(i) The undersigned agrees that the Shares shall
not be sold or otherwise transferred unless the Shares are registered under the
1933 Act and state securities laws or are exempt therefrom.
(ii) Legends in substantially the following form
have been or will be placed on the certificate(s) or other document(s), if any,
evidencing the Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
-6-
<PAGE> 7
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY
NOT BE SOLD OR OTHERWISE TRANSFERRED, EXCEPT UPON DELIVERY TO
THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH
TRANSFER OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER
EVIDENCE AS MAY BE SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OF REGULATION PROMULGATED
THEREUNDER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
AN AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED ON OR
ABOUT THE DATE HEREOF, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE CORPORATION, AND SUCH SHARES MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT IN STRICT ACCORDANCE WITH THE
TERMS OF SUCH STOCKHOLDERS' AGREEMENT. A COPY OF SUCH
STOCKHOLDERS' AGREEMENT WILL BE FURNISHED WITHOUT CHARGE TO
THE RECORD HOLDER OF THIS CERTIFICATE UPON RECEIPT BY THE
CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED
OFFICE OF A WRITTEN REQUEST FROM THE RECORD HOLDER REQUESTING
SUCH COPY.
(iii) Stop transfer instructions have been or will
be imposed with respect to the Shares so as to restrict resale or other transfer
thereof, subject to the further items hereof, including the provisions of the
legends set forth in subparagraph b above.
4. Representations and Warranties of the Company. The Company
represents to the Investor as follows:
(a) Organization and Standing; Corporate Power. The
Company is a corporation duly organized and validly existing under and by virtue
of, the laws of the State of Delaware and is in good standing under such laws.
The Company has all requisite corporate power and authority to enter into this
Subscription Agreement and to carry out and perform its other obligations
hereunder.
(b) Authorization. All corporate action on the part of
the Company and its directors, officers and shareholders necessary for the
authorization, execution,, delivery and performance of all obligations of the
Company under the Subscription Agreement and any document contemplated thereby,
for the authorization, issuance and delivery of the Shares.
(c) Validity of Stock. The Shares, when issued, sold and
delivered in compliance with the provisions of this Subscription Agreement, will
be validly issued, fully paid and nonassessable, will be free of any liens or
encumbrances.
5. Miscellaneous.
(a) No Assignment of Subscription. The Investor agrees
not to transfer or assign this Subscription Agreement or any of the Investor's
interest herein.
-7-
<PAGE> 8
(b) Entire Agreement. This Subscription Agreement
constitutes the entire agreement among the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed by all
parties.
(c) Governing Law. This Subscription Agreement will be
enforced, governed and construed in all respects in accordance with the laws of
the State of Georgia.
IN WITNESS WHEREOF, subject to acceptance by the Company, the
undersigned has completed this Subscription Agreement to evidence his
subscription to the Company by his execution on this _______ day of _________,
1999.
-----------------------------------
Name:
THIS SUBSCRIPTION AGREEMENT IS
HEREBY ACCEPTED AS OF THE ____
DAY OF _______________, 1999.
WITNESS SYSTEMS, INC.
By:
----------------------------
David Gould, President
-8-
<PAGE> 1
EXHIBIT 10.11
PROMISSORY NOTE
$72,402.00 July 27, 1999
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned, JOHN M. ABRAHAM ("Borrower"),
promises to pay to the order of WITNESS SYSTEMS, INC., a Delaware corporation
(the "Lender"), in lawful money of the United States of America constituting
legal tender in payment of all debts and dues, public and private, the principal
amount of Seventy-Two Thousand Four Hundred Two Dollars and No/100 ($72,402.00).
1. INTEREST. From and after the date hereof (until maturity or default
as hereinafter provided), interest on the principal amount outstanding shall
accrue at the fixed rate equal to 6.41% per annum, compounded annually and
computed on the basis of a 365-day year.
2. PAYMENT.
(a) Interest on the outstanding principal balance of the
indebtedness evidenced hereby shall be payable annually with the initial payment
due on or before July 31, 2000.
(b) On July 31, 2003 (the "Maturity Date"), the entire outstanding
principal balance of the indebtedness evidenced hereby shall be due and payable
in full.
(c) Notwithstanding anything herein to the contrary, the entire
outstanding principal balance of the indebtedness evidenced hereby and all
accrued but unpaid interest shall be due and payable in full upon the first to
occur of the following:
(i) The Maturity Date;
(ii) Ninety (90) days following the Company's consummation of a
merger, consolidation or other reorganization in each case, with
respect to which persons who were the shareholders of Company
immediately prior to such merger, consolidation or other
reorganization, immediately thereafter, do not own more than fifty
percent (50%) of the combined voting power entitled to vote
generally in the election of directors of the merged, consolidated
or reorganized Company's then outstanding voting securities;
provided, however, in the event that Borrower does not receive cash
or marketable securities pursuant to or immediately following such
transaction sufficient in value or amount to pay such balance,
Borrower shall be allowed to pay the outstanding principal balance
of the indebtedness evidenced hereby and all accrued but unpaid
interest in thirty-six (36) monthly installments beginning ninety
(90) days after such transaction;
(iii) Ninety (90) days following consummation of a sale of all
or substantially all of the assets of Company; provided, however, in
the event that Borrower does not receive cash or marketable
securities pursuant to or immediately following such transaction
sufficient in value or amount to pay such balance, Borrower shall be
allowed to pay the outstanding principal balance of the indebtedness
evidenced hereby and all accrued but unpaid interest in thirty-six
(36) monthly installments beginning ninety (90) days after such
transaction;
<PAGE> 2
(iv) Twenty-four (24) months following the sale of common stock
of the Company to the general public pursuant to a registration
statement filed with and declared effective by the Securities and
Exchange Commission (other than a registration statement solely
covering an employee benefit plan or corporate reorganization);
(v) Ninety (90) days following the effective date of
termination of Borrower's employment with the Company, if such
termination is by reason of Borrower's voluntary resignation or a
termination by the Company for "cause," as defined in any applicable
Employment Agreement; or
(vi) Twenty Four (24) months following the effective date of
termination of Borrower's employment with the Company, if such
termination is by the Company and other than for "cause," as defined
in any applicable Employment Agreement.
3. PREPAYMENT. This Note may be prepaid in whole or in part without
penalty, provided that any partial prepayment shall be in integral multiples of
$1,000.00.
4. SECURITY. The indebtedness evidenced by this Note and the
obligations created hereby are secured by (i) those certain shares of common
stock of Lender purchased by Borrower pursuant to a Subscription Agreement of
even date herewith and (ii) Series A and B Preferred Shares in a number
sufficient to secure the entire amount of this indebtedness.
5. EVENT OF DEFAULT. If the Borrower fails to make any payment of
principal or interest as the same becomes due and payable, and such failure is
not cured within five (5) business days after written notice thereof or at any
time thereafter during the continuance of any such event, the holder may, with
or without notice to the Borrower, declare this Note and the indebtedness
evidenced hereby to be forthwith due and payable, whereupon this Note and the
indebtedness evidenced hereby shall become forthwith due and payable, without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived.
6. RECOURSE. Borrower shall be personally liable for the obligations
evidenced hereby.
7. PAYMENT IN SHARES. Borrower may make any payment due and payable or
otherwise permitted hereunder by delivery of shares of Lender's common stock
owned (and fully vested) to Lender that have been owned (and fully paid for) for
at least six (6) months. For purposes of payments hereunder, any shares of
Lender's common stock shall be valued at the then fair market value (as
determined by the Board).
8. WAIVERS. Borrower hereby waives demand, presentment for payment,
notice of dishonor, protest, and notice of protest and diligence in collection
or bringing suit and agree that the holder hereof may accept partial payment, or
release or exchange security or collateral, without discharging or releasing any
unreleased collateral or the obligations evidenced hereby. Borrower further
waives any and all rights of exemption, both as to personal and real property,
under the constitution or laws of the United States or the State of Georgia.
9. ATTORNEYS' FEES. Borrower agrees to pay reasonable attorneys' fees
and costs actually incurred by the holder hereof in collecting on this Note,
whether by suit or otherwise.
10. UNCONDITIONAL PAYMENT. Borrower is and shall be obligated to pay
principal and any and all other amounts which become payable hereunder
absolutely and unconditionally and without any
<PAGE> 3
abatement, postponement, diminution or deduction and without any reduction for
counterclaim or setoff. In the event that at any time any payment received by
Lender hereunder shall be deemed by a court of competent jurisdiction to have
been a voidable preference or fraudulent conveyance under any bankruptcy,
insolvency or other debtor relief law, then the obligation to make such payment
shall survive any cancellation or satisfaction of this Note or return thereof to
Borrower and shall not be discharged or satisfied with any prior payment thereof
or cancellation of this Note, but shall remain a valid and binding obligation
enforceable in accordance with the terms and provisions hereof, and such payment
shall be immediately due and payable upon demand.
11. TRANSFER OF SECURITIES. Borrower hereby acknowledges that the
Securities will not be transferable pursuant to Rule 144 promulgated under the
Securities Exchange Act of 1933 until the entire principal balance of this Note
is paid in full.
12. MISCELLANEOUS. As used herein, the terms "Borrower," "Lender" and
"holder" shall be deemed to include their respective successors, legal
representatives and assigns, whether by voluntary action of the parties or by
operation of law. This Note is given under the seal of the party hereto, and it
is intended that this Note is and shall constitute and have the effect of a
sealed instrument according to law. This Note has been negotiated, and is being
executed and delivered in the State of Georgia, or if executed elsewhere, shall
become effective upon the Lender's receipt and acceptance of the executed
original of this Note in the State of Georgia; provided, however, that the
Lender shall have no obligation to give, nor shall Borrower be entitled to
receive, any notice of such acceptance for this Note to become a binding
obligation of Borrower. Borrower hereby submits to jurisdiction in the State of
Georgia. This Note shall be governed by and be construed in accordance with the
laws of the State of Georgia. It is intended, and the Borrower and the holder
hereof specifically agree, that the laws of the State of Georgia governing
interest shall apply to this Note and to this transaction. This Note may not be
modified except by written agreement signed by the Borrower and the holder
hereof, or by their respective successors or assigns.
13. TIME OF ESSENCE. TIME IS OF THE ESSENCE in connection with this
Note.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered as of the date first set forth above.
BORROWER:
/s/ David Gould /s/ John M. Abraham
- ---------------------------- ---------------------------
Witness John M. Abraham
<PAGE> 4
SUBSCRIPTION AGREEMENT
WITNESS SYSTEMS, INC.
THE SHARES TO WHICH THIS SUBSCRIPTION AGREEMENT PERTAINS HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF THE UNITED STATES OF
AMERICA (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE REGULATORY AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THE MEMORANDUM OR ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SHARES ARE OFFERED
PURSUANT TO EXEMPTIONS PROVIDED BY SECTION 4(2) OF THE 1933 ACT, REGULATION D
THEREUNDER, CERTAIN STATE SECURITIES LAWS, AND CERTAIN RULES AND REGULATIONS
PROMULGATED PURSUANT THERETO. THE SHARES MAY NOT BE TRANSFERRED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS AS CONTAINED IN A SHAREHOLDERS' AGREEMENT, A COPY OF
WHICH IS ON FILE AT THE COMPANY AND WHICH IS AVAILABLE WITHOUT CHARGE UPON
REQUEST TO THE SECRETARY OF COMPANY.
1. Offer to Subscribe. JOHN M. ABRAHAM (hereinafter, the "Investor")
hereby offers to subscribe for 13,553 shares (the "Shares") of the common stock,
$0.01 par value (the "Common Stock"), of Witness Systems, Inc., a Delaware
corporation (the "Company"), at a price of $5.35 per share. The Investor
acknowledges that the Company will rely on this offer, which may not be
canceled, rescinded or otherwise revoked by the Investor.
2. Acceptance of Subscription. The Investor agrees that this
subscription is subject to acceptance by the Company, and that the Company
reserves the right to reject this subscription without notice. The Investor
hereby agrees to become subject to that certain Amended and Restated
Stockholders' Agreement, dated on or about the date hereof (the "Stockholders'
Agreement"), a copy of which has been provided to the Investor, and the Investor
agrees to take all actions necessary to evidence his agreement to be so bound,
including executing a joinder to the Stockholders' Agreement.
3. Representations and Agreements of Investor. In order to induce the
Company to accept this subscription, the Investor warrants, represents,
covenants and agrees as follows, acknowledging that the Company is relying on
the accuracy and completeness of these representations and agreements in
complying with its obligations under applicable securities laws:
a. Risks of Investment. The Investor recognizes that investment in
the Company involves a high degree of risk which may result in the loss of the
total amount of the investment. The Investor acknowledges that he has carefully
considered all risks incident to the purchase of the Shares, including but not
limited to the following:
(i) There is no assurance that the Company's operations will be
profitable in the future. The likelihood of success of the Company is
speculative and the Investor is familiar with the many problems,
difficulties, complications and delays frequently encountered in the
operation and development of expanding businesses.
(ii) The purchase price for the Shares has been determined by
the Company and may not bear any relationship to the anticipated
assets, book value, earnings or net worth of the Company or any other
recognized criteria and cannot be considered to be indication of the
anticipated value of the Company.
<PAGE> 5
(iii) The Company expects to spend a significant amount of funds
to expand its business. The Company's capital requirements will depend
on numerous factors, including the commercial acceptance of the
Company's services and its success in obtaining government contracts.
To the extent that funds generated from operations together with the
net proceeds from this offering are insufficient, the Company will have
to raise additional funds to meet its capital requirements. If
additional funds are raised through the issuance of equity securities,
the percentage ownership of the shareholders of the Company will be
reduced and shareholders may experience additional dilution. No
assurance can be given that additional financing will be available on
acceptable terms, if at all. If adequate funds are not available, the
Company may have to, among other things, reduce substantially or
eliminate expenditures for the development and marketing of its
products.
(iv) The market in which the Company competes is extremely
competitive. There can be no assurance that the Company's competitors
will not succeed in developing products or technologies that will gain
greater market acceptance than those of the Company or that would
render the Company's products and technologies obsolete. The Company
may also face increased competition in the future from new entrants
into its markets. In addition, many of the Company's competitors have
substantially greater financial, technical, marketing and human
resources capabilities than the Company.
(v) The Company is engaged in a business characterized by rapid
developments and intense competition. Competition can be expected to
increase as technological advances are made and commercial applications
broaden, and other companies attempt to infringe, if they have not
already infringed, intellectual property owned by the Company. The
Company competes with companies, many of which have more capital, more
extensive development capabilities and greater marketing and human
resources than the Company.
(vi) The Investor understands that, by virtue of being a
minority shareholder of the Company, it, he will have limited control
over or influence in the management or control of the Company.
b. Additional Information. The Investor has previously been
advised that the Investor would have an opportunity to review all pertinent
facts concerning the Company and obtain any additional information that the
Investor might request, to the extent possessed or obtainable without
unreasonable effort and expense. The Investor acknowledges that it has chosen
not to request any additional information. If additional information is
requested, then a written request should be submitted.
c. Status of Investor. The Investor (i) has substantial knowledge
and experience in business and financial matters which enable him to evaluate
the merits and risks of making investment decisions of this type; (ii) has the
ability to bear the economic risk of this investment and the ability, at the
present time, to afford a complete loss of such investment; and (iii) has
adequate means of providing for his current needs and possible personal and
business contingencies and has no need for liquidity of this investment.
d. Consultation with Own Advisors. The Investor has been advised
to consult with the Investor's own attorney regarding legal matters concerning
the Company and to consult with independent tax advisors regarding the tax
consequences of investing in the Company.
-2-
<PAGE> 6
e. Unregistered Securities. The Investor understands that the
Shares have not been registered under the 1933 Act, in reliance upon the
exemption from the registration requirements thereof provided in Section 4(2) of
the 1933 Act, and that the Shares have not been registered under state
securities laws. The Investor understands that, consequently, the Investor must
bear the economic risk of the investment for an indefinite period of time
because the Shares cannot be offered for sale or sold without registration under
the 1933 Act and applicable state securities laws or compliance with applicable
exemptions from registration.
f. Transfer Restrictions. The Investor recognizes that he may not
be able to sell or dispose of the Shares, as no public market for the Shares
exists. In addition, the Investor is aware that the Investor's right to transfer
the Shares will be subject to the provisions of the Stockholders' Agreement, a
copy of which has been given to the Investor.
g. Shares Being Acquired for Investment. The Investor is the sole
party in interest as to his participation in and subscription to the Company.
The Investor is acquiring the Shares solely for investment for the Investor's
own account and has no present intent, agreement, understanding or arrangement
to subdivide, sell, assign, transfer or otherwise dispose of all any part of the
Shares to any other person or entity.
h. Accuracy of Information. All information that the Investor has
provided to the Company concerning the Investor, the Investor's financial
position and the Investor's knowledge of financial and business matters
including all information contained herein, is correct and complete as of the
date hereof and if there should be any adverse change in such information prior
to this subscription being accepted, the Investor will immediately provide the
Company with such information. The Investor recognizes that the sale of the
Shares to the Investor will be based upon the Investor's representations,
warranties and statements set forth herein and hereby agrees to indemnify the
Company and each officer, director or other controlling person thereof, for any
liability or expense, including costs and reasonable attorney's fees, which they
may incur by reason of, or in connection with, any misrepresentation made by the
Investor in this Subscription Agreement, any breach of the Investor's warranties
and/or failure by the Investor to fulfill any of the Investor's covenants or
agreements set forth herein or arising out of the sale or distribution of any
Shares by the Investor in violation of the 1933 Act or any other applicable
state or federal securities laws.
i. Legends. The undersigned understands and agrees that the
following restrictions and limitations are applicable to the undersigned's
purchase and resales or other transfers of the Shares pursuant to the 1933 Act.
(i) The undersigned agrees that the Shares shall not be sold
or otherwise transferred unless the Shares are registered under the
1933 Act and state securities laws or are exempt therefrom.
(ii) Legends in substantially the following form have been or
will be placed on the certificate(s) or other document(s), if any,
evidencing the Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED, EXCEPT UPON DELIVERY TO THE
CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR
-3-
<PAGE> 7
SUCH TRANSFER OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER
EVIDENCE AS MAY BE SATISFACTORY TO THE CORPORATION TO THE EFFECT
THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OF REGULATION PROMULGATED
THEREUNDER.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED ON OR ABOUT
THE DATE HEREOF, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THE CORPORATION, AND SUCH SHARES MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN STRICT ACCORDANCE WITH THE TERMS OF SUCH
STOCKHOLDERS' AGREEMENT. A COPY OF SUCH STOCKHOLDERS' AGREEMENT
WILL BE FURNISHED WITHOUT CHARGE TO THE RECORD HOLDER OF THIS
CERTIFICATE UPON RECEIPT BY THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS OR REGISTERED OFFICE OF A WRITTEN REQUEST FROM
THE RECORD HOLDER REQUESTING SUCH COPY.
(iii) Stop transfer instructions have been or will be
imposed with respect to the Shares so as to restrict resale or
other transfer thereof, subject to the further items hereof,
including the provisions of the legends set forth in
subparagraph b above.
4. Representations and Warranties of the Company. The Company
represents to the Investor as follows:
(a) Organization and Standing; Corporate Power. The Company is a
corporation duly organized and validly existing under and by virtue of, the laws
of the State of Delaware and is in good standing under such laws. The Company
has all requisite corporate power and authority to enter into this Subscription
Agreement and to carry out and perform its other obligations hereunder.
(b) Authorization. All corporate action on the part of the Company
and its directors, officers and shareholders necessary for the authorization,
execution,, delivery and performance of all obligations of the Company under the
Subscription Agreement and any document contemplated thereby, for the
authorization, issuance and delivery of the Shares.
(c) Validity of Stock. The Shares, when issued, sold and delivered
in compliance with the provisions of this Subscription Agreement, will be
validly issued, fully paid and nonassessable, will be free of any liens or
encumbrances.
5. Miscellaneous.
(a) No Assignment of Subscription. The Investor agrees not to
transfer or assign this Subscription Agreement or any of the Investor's interest
herein.
(b) Entire Agreement. This Subscription Agreement constitutes the
entire agreement among the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by all parties.
(c) Governing Law. This Subscription Agreement will be enforced,
governed and construed in all respects in accordance with the laws of the State
of Georgia.
-4-
<PAGE> 8
IN WITNESS WHEREOF, subject to acceptance by the Company, the
undersigned has completed this Subscription Agreement to evidence his
subscription to the Company by his execution on this 27th day of July, 1999.
/s/ John M. Abraham
----------------------------
John M. Abraham
THIS SUBSCRIPTION AGREEMENT IS
HEREBY ACCEPTED AS OF THE 2ND
DAY OF AUGUST, 1999.
WITNESS SYSTEMS, INC.
By: /s/ David Gould
-------------------------------
David Gould, President
-5-
<PAGE> 1
EXHIBIT 10.12
FORM OF
STOCK REPURCHASE AGREEMENT
This STOCK REPURCHASE AGREEMENT ("Agreement") is made and entered into
effective as of this ___ day of August, 1999, by and between WITNESS SYSTEMS,
INC., a Georgia corporation (the "Company") and _______________ ("Stockholder").
WHEREAS, Stockholder is the owner of ______ shares of the $.01 par
value per share common stock (the "Common Stock") of the Company; and
WHEREAS, Stockholder desires to sell to the Company, and the Company
desires to repurchase and redeem ______ shares of Common Stock owned by
Stockholder (the "Repurchased Shares") on the terms set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
promises contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties do mutually
agree as follows:
1. REPURCHASE OF REPURCHASED SHARES. On the date hereof and subject to
the terms and conditions of this Agreement, Stockholder shall transfer to the
Company all of the Repurchased Shares, free and clear of all liens,
encumbrances, equities and claims, for the total purchase price of __________
______________________________ ($______) (the "Purchase Price"). The Purchase
Price shall be payable by delivery of same day funds in the amount of the
Purchase Price concurrently with execution of this Agreement.
2. CLOSING. The closing of the transactions contemplated herein (the
"Closing") shall occur concurrently with the execution hereof. At the Closing,
the parties shall tender delivery of the documents and instruments as indicated
below:
(a) Stockholder:
(i) an executed copy of this Agreement; and
(ii) a stock certificate(s) representing the Repurchased
Shares, duly endorsed for transfer to the Company or
a Lost Certificate Affidavit and Indemnity Agreement
in a form satisfactory to the Company in the event
Stockholder cannot locate such stock certificate.
(b) The Company:
(i) an executed copy of this Agreement;
(ii) same day funds in the form of a cashier's check or
wire transfer in the amount of the Purchase Price.
<PAGE> 2
3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER.
(a) Stockholder represents and warrants to the Company and
agrees that Stockholder has full power and authority to execute, deliver, and
carry out the terms of this Agreement and that this Agreement constitutes a
valid and binding obligation of Stockholder, enforceable against the Stockholder
in accordance with its terms. Neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, has
constituted or will constitute or result in a default or violation of any term
or provision of any agreement to which Stockholder is a party.
(b) Stockholder represents and warrants to the Company with
respect to the Repurchased Shares that: (i) Stockholder has the unrestricted
power and the unqualified right to sell, assign, and deliver to the Company
good, valid, and marketable title to the Repurchased Shares, free and clear of
any liens, claims, encumbrances and equitable rights, (ii) no option, contract,
or other agreement exists pursuant to which any person or entity has any right
to purchase or otherwise acquire, now or in the future, any portion of any of
the Repurchased Shares, and (iii) Stockholder neither owns nor holds any option,
warrant, convertible security, or any right, contractual or otherwise, to
purchase or acquire any additional interests in the Company.
(c) There is no action, suit or proceeding, claim, inquiry,
arbitration or investigation pending, or to the knowledge of the Stockholder,
threatened against the Stockholder, which would impair the ability of the
Stockholder to consummate the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to Stockholder that
the Company has full power and authority to execute, deliver and carry out the
terms of this Agreement and that the Company has duly and validly authorized,
executed and delivered this Agreement. The Company further represents and
warrants to Stockholder that this Agreement constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
(b) Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, has constituted or
will constitute or result in a default or violation of any term or provision of
any agreement to which the Company is a party.
(c) There is no action, suit or proceeding, claim, inquiry,
arbitration or investigation pending, or to the knowledge of the Company,
threatened against the Company, which would impair the ability of the Company to
consummate the transactions contemplated by this Agreement.
-2-
<PAGE> 3
(d) The Company has not prepared a prospectus or other similar
documentation related to an initial public offering of its Common Stock and does
not anticipate that such an offering will be made in the next three months.
5. INDEMNIFICATION.
(a) Stockholder agrees to indemnify and hold the Company and
its affiliates, stockholders, directors, officers and representatives harmless
from any claims, damages, charges, liabilities, demands, expenses, lawsuits or
other obligations of any nature (including, but not limited to, attorneys fees
and costs), threatened, asserted or secured against, incurred, sustained or
suffered in connection with, arising out of, resulting from or incident to any
breach of any representation, warranty, covenant or agreement of Stockholder
hereunder.
(b) The Company agrees to indemnify and hold harmless
Stockholder from any claims, damages, charges, liabilities, demands, expenses,
lawsuits or other obligations of any nature (including, but not limited to,
attorneys fees and costs), asserted or secured against, incurred, sustained or
suffered in connection with, arising out of, resulting from or incident to any
breach of any representation, warranty, covenant or agreement of the Company
hereunder.
6. NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and sent by
certified or registered mail, return receipt requested and shall be deemed to
have been given when delivered to the address specified below, or to such other
address as may be specified by any party by notice to the other parties.
7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective heirs, legal
representatives, successors and assigns.
8. ENTIRE AGREEMENT. This Agreement contains all the terms and
conditions of the understandings of the parties relating to the subject matter
of this Agreement and supersedes any and all prior and contemporaneous
agreements, whether oral or written, respecting the within subject matter.
9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original as against any
party whose signature appears thereon, and all of such counterparts shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories. This Agreement may be executed and delivered by fax (telecopier);
any original signatures that are initially delivered by fax shall be physically
delivered with reasonable promptness thereafter.
10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia.
11. STOCKHOLDER ACKNOWLEDGMENT. Stockholder hereby specifically
and expressly acknowledges each of the following:
-3-
<PAGE> 4
(i) the fair market value of the Repurchased Shares is
speculative and unknown at this time;
(ii) the Purchase Price may not reflect the fair market
value of the Repurchased Shares;
(iii) the fair market value of the Common Stock may increase
dramatically following the date hereof;
(iv) the Company has sold shares of its Series C Convertible
Preferred Stock at a purchase price that exceeds the Purchase Price;
(v) the Company may in the future consummate an initial
public offering of the Common Stock, which would likely result in a
substantial increase in the fair market value of the Common Stock;
(vi) any shares Common Stock to be retained by Stockholder
following the repurchase contemplated hereby shall remain subject to
that certain Stockholders' Agreement, dated March 18, 1997, by and
among the Company and its stockholders;
(vii) Stockholder has been provided with the opportunity to
speak with and ask questions of the officers, directors, other
stockholders of the Company and the Company's legal counsel, and to
review documents and information regarding the Company and the
repurchase contemplated hereby; and
(viii) Stockholder has not relied on any representations,
promises or agreements of any other person in determining to consummate
the repurchase contemplated hereby, other than the representations
contained in this Agreement. Stockholder further acknowledges that he
has been represented by an attorney regarding legal matters concerning
this Agreement.
[SIGNATURES ON FOLLOWING PAGE]
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have hereto set their hands and seals
as of the day and year first written above.
COMPANY: STOCKHOLDER:
WITNESS SYSTEMS, INC.
By:
------------------------------------- ------------------------------------
Chief Financial Officer
Address: 1105 Sanctuary Parkway
Suite 210 Address for notices for Stockholder:
Alpharetta, Georgia 30004
Attn.: Chief Executive Officer
-5-
<PAGE> 1
EXHIBIT 10.13
GREYROCK CAPITAL, A BANK OF AMERICA COMPANY
LOAN AND SECURITY AGREEMENT
BORROWER: WITNESS SYSTEMS, INC.
ADDRESS: 1105 SANCTUARY PARKWAY
SUITE 210
ALPHARETTA, GEORGIA 30004
DATE: JUNE 24, 1999
This Loan and Security Agreement is entered into on the above date
between GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation
('GC"), whose address is 10880 Wilshire Boulevard, Suite 1850, Los Angeles,
California 90024 and the borrower named above ("Borrower"), whose chief
executive office is located at the above address ("Borrower's Address"). The
Schedule to this Agreement (the "Schedule") being signed concurrently is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. GC will make loans to Borrower (the "Loans"), in amounts
determined by GC in its sole discretion, up to the amounts (the "Credit Limit")
shown on the Schedule, provided no Default or Event of Default has occurred and
is continuing. If at any time or for any reason the total of all outstanding
Loans and all other Obligations exceeds the Credit Limit, Borrower shall
immediately pay the amount of the excess to GC, without notice or demand.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement or in another written agreement signed by GC and
Borrower. Interest shall be payable monthly, on the last day of the month.
Interest may, in GC's discretion, be charged to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as the other Loans.
1.3 FEES. Borrower shall pay GC the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to GC and are not
refundable.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to GC a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, Investment Property and General Intangibles, including,
without limitation, all of Borrower's Deposit Accounts, all money, all
collateral in which GC is granted a security interest pursuant to any other
present or future agreement, all property now or at any time in the future in
GC's possession, and all proceeds (including proceeds of any insurance policies,
proceeds of letters of credit, proceeds of proceeds and claims against third
parties), all products of the foregoing, and all books and records related to
any of the foregoing.
-1-
<PAGE> 2
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce GC to enter into this Agreement and to make Loans,
Borrower represents and warrants to GC as follows, and Borrower covenants that
the following representations will continue to be true, and that Borrower will
at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is
and will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (iii) do not violate Borrower's articles or certificate of
incorporation, or Borrower's bylaws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give GC 30 days prior written notice before changing its name or
doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give GC at least 30 days' prior written
notice before opening any additional place of business, changing its chief
executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. GC now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend GC and the Collateral against all claims of
others. So long as any Loan is outstanding which is a term loan, none of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third .party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by GC, use its best efforts to cause such third party to execute and
deliver to GC, in form acceptable to GC, such waivers and subordinations as GC
shall specify, so as to ensure that GC's rights in the Collateral are, and will
continue to be, superior to the rights
-2-
<PAGE> 3
of any such third party. Borrower will keep in full force and effect, and will
comply with all the terms of, any lease of real property where any of the
Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, ordinary wear and tear excepted, and Borrower will not
use the Collateral for any unlawful purpose. Borrower will immediately advise GC
in writing of any material loss or damage to the Collateral. Borrower will
maintain the validity of, and otherwise maintain, preserve and protect, its
patents, trademarks, copyrights and other intellectual property in accordance
with prudent business practices.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial
statements now or in the future delivered to GC have been, and will be, prepared
in conformity with generally accepted accounting principles and now and in the
future will completely and fairly reflect the financial condition of Borrower,
at the times and for the periods therein stated. Between the last date covered
by any such statement provided to GC and the date hereof, there has been no
material adverse change in the financial condition or business of Borrower.
Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has
timely filed, and will timely file, all tax returns and reports required by
applicable law, and Borrower has timely paid, and will timely pay, all
applicable taxes, assessments, deposits and contributions now or in the future
owed by Borrower. Borrower may, however, defer payment of any contested taxes,
provided that Borrower (i) in good faith contests Borrower's obligation to pay
the taxes by appropriate proceedings promptly and diligently instituted and
conducted, (ii) notifies GC in writing of the commencement of, and any material
development in, the proceedings, and (iii) posts bonds or takes any other steps
required to keep the contested taxes from becoming a lien upon any of the
Collateral. Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower which could not reasonably be expected to have a
material adverse effect on the financial condition or business of Borrower.
Borrower has paid, and shall continue to pay all amounts necessary to fund all
present and future pension, profit sharing and deferred compensation plans in
accordance with their terms, and Borrower has not and will not withdraw from
participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or any other governmental agency. Borrower shall, at all
times, utilize the services of an outside payroll service providing for the
automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of Borrower, or
in any material impairment in the ability of Borrower to carry on its business
in substantially the same manner as it is now being conducted. Borrower will
promptly inform GC in writing
-3-
<PAGE> 4
of any claim, proceeding, litigation or investigation in the future threatened
by written communication to Borrower or instituted by or against Borrower
involving any single claim of $100,000 or more, or involving $200,000 or more in
the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely
for lawful business purposes.
3.12 YEAR 2000 COMPLIANCE. The Borrower has (i) initiated a review and
assessment of all areas within its and each of its subsidiaries' business and
operations (including those affected by suppliers and vendors) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by the Borrower or any of its subsidiaries (or its suppliers
and vendors) may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem
on a timely basis, and (iii) to date, implemented that plan in accordance with
that timetable. The Borrower reasonably believes that all computer applications
(including those of its suppliers and vendors) that are material to its or any
of its subsidiaries' business and operations will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after January
1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure
to do so could not reasonably be expected to have material adverse effect. The
Borrower will promptly notify GC in the event the Borrower discovers or
determines that any computer application (including those of its suppliers and
vendors) that is material to its or any of its subsidiaries' business and
operations will not be Year 2000 compliant on a timely basis, except to the
extent that such failure could not reasonably be expected to have a material
adverse effect.
4. RECEIVABLES AND INVESTMENT PROPERTY.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to GC that each Receivable with respect to which Loans are requested by
Borrower shall, on the date each Loan is requested and made, represent an
undisputed, bona fide, existing, unconditional obligation of the Account Debtor
created by the sale, delivery, and acceptance of goods or the rendition of
services, in the ordinary course of Borrower's business.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE.
Borrower represents and warrants to GC as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall comply
with all applicable laws and governmental rules and regulations. All signatures
and endorsements on all documents, instruments, and agreements relating to all
Receivables are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES AND INVESTMENT
PROPERTY. Borrower shall deliver to GC transaction reports and loan requests,
schedules and assignments of all Receivables, and schedules of collections, all
on GC's standard forms; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit GC's security interest and other
rights in all of Borrower's Receivables, nor shall GC's failure to advance or
lend against a specific Receivable affect or limit GC's security interest and
other rights therein. Together with each such schedule and assignment, or later
if requested by GC, Borrower shall famish GC with copies (or, at GC's request,
originals) of all contracts, orders, invoices, and other similar documents, and
all original shipping instructions, delivery receipts, bills of lading, and
other evidence of delivery, for any goods the sale or disposition of which gave
rise to such
-4-
<PAGE> 5
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also famish to GC an aged accounts receivable trial balance in
such form and at such intervals as GC shall request. In addition, Borrower shall
deliver to GC the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Receivables, immediately upon receipt thereof and in the same form as
received, with all necessary endorsements, and, upon the request of GC, Borrower
shall deliver to GC all letters of credit and also all certificated securities
with respect to any Investment Property, with all necessary endorsements, and
obtain such account control agreements with securities intermediaries and take
such other action with respect to any Investment Property, as GC shall request,
in form and substance satisfactory to GC. Upon request of GC Borrower
additionally shall obtain consents from any letter of credit issuers with
respect to the assignment to GC of any letter of credit proceeds.
4.4 COLLECTION OF RECEIVABLES AND INVESTMENT PROPERTY INCOME. Borrower
shall have the right to collect all Receivables and retain all Investment
Property payments and distributions, unless and until a Default or an Event of
Default has occurred. Borrower shall hold all payments on, and proceeds of, and
distributions with respect to, Receivables and Investment Property in trust for
GC, and Borrower shall deliver all such payments, proceeds and distributions to
GC, within one business day after receipt of the same, in their original form,
duly endorsed, to be applied to the Obligations in such order as GC shall
determine. Upon the request of GC, any such distributions and payments with
respect to any Investment Property held in any securities account shall be held
and retained in such securities account as part of the Collateral.
4.5 DISPUTES. Borrower shall notify GC promptly of all disputes or
claims relating to Receivables on the regular reports to GC. Borrower shall not
forgive, or settle any Receivable for less than payment in full, or agree to do
any of the foregoing, except that Borrower may do so, provided that: (i)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to GC on the regular reports provided to GC; (ii) no Default or Event
of Default has occurred and is continuing; and (iii) taking into account all
such settlements and forgiveness, the total outstanding Loans and other
Obligations will not exceed the Credit Limit.
4.6 RETURNS. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower shall promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor in
the appropriate amount (sending a copy to GC, as and when requested by GC). In
the event any attempted return occurs after the occurrence of any Event of
Default Borrower shall (i) not accept any return without GC's prior written
consent, (ii) hold the returned Inventory in trust for GC, (iii) segregate all
returned Inventory from all of Borrower's other property, (iv) conspicuously
label the returned Inventory as GC's property, and (v) immediately notify GC of
the return of any Inventory, specifying the reason for such return, the location
and condition of the returned Inventory, and on GC's request deliver such
returned Inventory to GC.
4.7 VERIFICATION. GC may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or GC or such other name as GC may choose, and GC or its designee may,
at any time, notify Account Debtors that it has a security interest in the
Receivables.
4.8 NO LIABILITY. GC shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement
-5-
<PAGE> 6
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall GC be deemed to be responsible for any of Borrower's obligations under any
contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve GC from liability for its own gross negligence or willful
misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to GC, in such form and amounts as GC may
reasonably require, and Borrower shall provide evidence of such insurance to GC,
so that GC is satisfied that such insurance is, at all times, in full force and
effect. All such insurance policies shall name GC as an additional loss payee,
and shall contain a lenders loss payee endorsement in form reasonably acceptable
to GC. Upon receipt of the proceeds of any such insurance, GC shall apply such
proceeds in reduction of the Obligations as GC shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, GC shall release to Borrower insurance proceeds with respect
to Equipment totaling less than $100,000, which shall be utilized by Borrower
for the replacement of the Equipment with respect to which the insurance
proceeds were paid. GC may require reasonable assurance that the insurance
proceeds so released will be so used. If Borrower fails to provide or pay for
any insurance, GC may, but is not obligated to, obtain the same at Borrower's
expense. Borrower shall promptly deliver to GC copies of all reports made to
insurance companies.
5.2 REPORTS. Borrower, at its expense, shall provide GC with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as GC shall from time to time reasonably
specify.
5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and
on one business day's notice, GC, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records. GC
shall take reasonable steps to keep confidential all information obtained in any
such inspection or audit, but GC shall have the right to disclose any such
information to its auditors, regulatory agencies, and attorneys, and pursuant to
any subpoena or other legal process. The foregoing inspections and audits shall
be at Borrower's expense and the charge therefor shall be $600 per person per
day (or such higher amount as shall represent GC's then current standard charge
for the same), plus reasonable out-of-pockets expenses. Borrower shall not be
charged more than $3,000 per audit (plus reasonable out-of-pockets expenses) or
for more than two audits per calendar year, nor shall audits be done more
frequently than four times per calendar year, provided that the foregoing limits
shall not apply after the occurrence of a Default or Event of Default, nor shall
they restrict GC's right to conduct audits at its own expense (whether or not a
Default or Event of Default has occurred). Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first obtaining GC's written consent, which may be conditioned upon such
accounting firm, service bureau or other third party agreeing to give GC the
same rights with respect to access to books and records and related rights as GC
has under this Agreement.
5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other
disposition of any Collateral shall be delivered, in kind, by Borrower to GC in
the original form in which received by Borrower not later than the following
business day after receipt by Borrower, to be applied to the Obligations in such
order as GC shall determine; provided that, if no Default or Event of Default
has occurred and is continuing, and if no term loan is outstanding hereunder,
then Borrower shall not be obligated to remit to GC the proceeds of the sale of
Equipment which is sold in the ordinary course of business, in a good-faith
arm's length transaction. Except for the proceeds of the sale of Equipment as
set
-6-
<PAGE> 7
forth above, Borrower shall not commingle proceeds of Collateral with any of
Borrower's other funds or property, and shall hold such proceeds separate and
apart from such other funds and property and in an express trust for GC. Nothing
in this Section limits the restrictions on disposition of Collateral set forth
elsewhere in this Agreement.
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule,
Borrower shall not, without GC's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
material transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except that, provided no Default or Event of Default
has occurred and is continuing, Borrower may (a) sell finished Inventory in the
ordinary course of Borrower's business, (b) if no term loan is outstanding
hereunder, sell Equipment in the ordinary course of business, in good faith
arm's length transactions, and (c) license or sublicense on a non-exclusive
basis intellectual property in the ordinary course of Borrower's business; (v)
store any Inventory or other Collateral with any warehouseman or other third
party; (vi) sell any Inventory on a sale-or return, guaranteed sale,
consignment, or other contingent basis; (vii) make any loans of any money or
other assets; (viii) incur any debts, outside the ordinary course of business,
which would have a material, adverse effect on Borrower or on the prospect of
repayment of the Obligations; (ix) guarantee or otherwise become liable with
respect to the obligations of another party or entity; (x) pay or declare any
dividends on Borrower's stock (except for dividends payable solely in stock of
Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's stock except out of the net proceeds of any equity
issuance; (xii) make any change in Borrower's capital structure which would have
a material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or (xiii) dissolve or elect to dissolve; or (xiv) agree to do any
of the foregoing.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against GC with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to GC, make available
Borrower and its officers, employees and agents, and Borrower's books and
records, without charge, to the extent that GC may deem them reasonably
necessary in order to prosecute or defend any such suit or proceeding.
5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify GC in
writing of any change in its officers or directors, the opening of any new bank
account or other deposit account, the opening of any new securities account, and
any material adverse change in the business or financial affairs of Borrower.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
GC, to execute all documents and take all actions, as GC may deem reasonably
necessary or useful in order to perfect and maintain GC's perfected security
interest in the Collateral, and in order to fully consummate the transactions
contemplated by this Agreement.
5.9 INDEMNITY. Borrower hereby agrees to indemnify GC and hold GC
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses (including
attorneys' fees), of every nature, character and description, which GC may
sustain or incur based upon or arising out of any of the Obligations, any actual
or alleged failure to collect and pay over any withholding or other tax relating
to Borrower or its employees, any relationship or agreement between GC and
Borrower, any actual or alleged failure of GC to comply with any writ of
attachment or other legal process relating to Borrower or any of its property,
or any other matter, cause or thing whatsoever occurred, done, omitted or
suffered to be done by GC relating to Borrower or the Obligations (except any
such amounts sustained or incurred as the result of the gross negligence or
willful misconduct of GC or any of its directors, officers, employees, agents,
attorneys, or any other person affiliated with or
-7-
<PAGE> 8
representing GC). Notwithstanding any provision in this Agreement to the
contrary, the indemnity agreement set forth in this Section shall survive any
termination of this Agreement and shall for all purposes continue in full force
and effect.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three business days after
written notice of termination is given to GC; or (ii) by GC at any time after
the occurrence of an Event of Default, without notice, effective immediately. If
this Agreement is terminated by Borrower or by GC under this Section 6.2,
Borrower shall pay to GC a termination fee (the "Termination Fee") in the amount
shown on the Schedule. The Termination Fee shall be due and payable on the
effective date of termination and thereafter shall bear interest at a rate equal
to the highest rate applicable to any of the Obligations.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding letters of
credit issued based upon an application, guarantee, indemnity or similar
agreement on the part of GC, then on such date Borrower shall provide to GC cash
collateral in an amount equal to 110% of the face amount of all such letters of
credit plus all interest, fees and costs due or (in GC's estimation) likely to
become due in connection therewith, to secure all of the Obligations relating to
said letters of credit, pursuant to GC's then standard form cash pledge
agreement. Notwithstanding any termination of this Agreement, all of GC's
security interests in all of the Collateral and all of the terms and provisions
of this Agreement shall continue in full force and effect until all Obligations
have been paid and performed in full; provided that, without limiting the fact
that Loans are subject to the discretion of GC, GC may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of GC, nor shall any such termination
relieve Borrower of any Obligation to GC, until all of the Obligations have been
paid and performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement GC shall promptly deliver to
Borrower termination statements, requests for reconveyances and such other
documents as may be reasonably required to terminate GC's security interests.
-8-
<PAGE> 9
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give GC immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to GC by Borrower or any
Guarantor or any of Borrower's or any Guarantor's officers, employees or agents,
now or in the future, shall be untrue or misleading in a material respect; or
(b) Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall
fail to perform any non-monetary Obligation which by its nature cannot be cured;
or (e) Borrower shall fail to perform any other nonmonetary Obligation, which
failure is not cured within 5 business days after the date performance is due;
or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other
than a Permitted Lien) is made on all or any part of the Collateral which is not
cured within 10 days after the occurrence of the same; or (g) any default or
event of default occurs under any obligation secured by a Permitted Lien, which
is not cured within any applicable cure period or waived in writing by the
holder of the Permitted Lien; or (h) Borrower or any Guarantor breaches any
material contract or obligation, which has or may reasonably be expected to have
a material adverse effect on Borrower's or such Guarantor's business or
financial condition; or (i) dissolution, termination of existence, insolvency or
business failure of Borrower or any Guarantor; or appointment of a receiver,
trustee or custodian, for all or any part of the property of, assignment for the
benefit of creditors by, or the commencement of any proceeding by Borrower or
any Guarantor under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect; or (j) the commencement of any
proceeding against Borrower or any Guarantor under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect,
which is not cured by the dismissal thereof within 45 days after the date
commenced; or (k) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing; or (l) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit securities or other
property or asset pledged by any other Person to secure any or all of the
Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such Person under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, or (m) Borrower or
any Guarantor makes any payment on account of any indebtedness or obligation
which has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits or terminates its
subordination agreement; or (n) there shall be a change in the record or
beneficial ownership of an aggregate of more than 20% of the outstanding shares
of stock of Borrower, in one or more transactions, compared to the ownership of
outstanding shares of stock of Borrower in effect on the date hereof, without
the prior written consent of GC; or (o) Borrower or any Guarantor shall
generally not pay its debts as they become due, or Borrower or any Guarantor
shall conceal, remove or transfer any part of its property, with intent to
hinder, delay or defraud its creditors, or make or suffer any transfer of any of
its property which may be fraudulent under any bankruptcy, fraudulent conveyance
or similar law; or (p) there shall be a material adverse change in Borrower's or
any Guarantor's business or financial condition. GC may cease making any Loans
hereunder during any of the above cure periods, and thereafter if an Event of
Default has occurred.
7.2 REMEDIES. Upon the occurrence and during the continuance of any
Event of Default, GC, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any
-9-
<PAGE> 10
part of the Obligations to be immediately due, payable, and performable,
notwithstanding any deferred or installment payments allowed by any instrument
evidencing or relating to any Obligation; (c) Take possession of any or all of
the Collateral wherever it may be found, and for that purpose Borrower hereby
authorizes GC without judicial process to enter onto any of Borrower's premises
without interference to search for, take possession of, keep, store, or remove
any of the Collateral, and remain on the premises or cause a custodian to remain
on the premises in exclusive control thereof, without charge for so long as GC
deems it reasonably necessary in order to complete the enforcement of its rights
under this Agreement or any other agreement; provided, however, that should GC
seek to take possession of any of the Collateral by Court process, Borrower
hereby irrevocably waives: (i) any bond and any surety or security relating
thereto required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any requirement that GC
retain possession of, and not dispose of, any such Collateral until after trial
or final judgment; (d) Require Borrower to assemble any or all of the Collateral
and make it available to GC at places designated by GC which are reasonably
convenient to GC and Borrower, and to remove the Collateral to such locations as
GC may deem advisable; (e) Complete the processing, manufacturing or repair of
any Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, GC shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time GC obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. GC shall have the right to conduct
such disposition on Borrower's premises without charge, for such time or times
as GC deems reasonable, or on GC's premises, or elsewhere and the Collateral
need not be located at the place of disposition. GC may directly or through any
affiliated company purchase or lease any Collateral at any such public
disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) Demand payment
of, and collect any Receivables and General Intangibles comprising Collateral
and, in connection therewith, Borrower irrevocably authorizes GC to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof, and, in GC's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables, General Intangibles and the like for
less than face value; (h) Collect, receive, dispose of and realize upon any
Investment Property, including withdrawal of any and all funds from any
securities accounts; and (i) Demand and receive possession of any of Borrower's
federal and state income tax returns and the books and records utilized in the
preparation thereof or referring thereto. All reasonable attorneys' fees,
expenses, costs, liabilities and obligations incurred by GC with respect to the
foregoing shall be added to and become part of the Obligations, shall be due on
demand, and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
GC agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by GC,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, GC may
-10-
<PAGE> 11
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. GC shall be free to
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable. Without limiting the generality of the
foregoing, Borrower recognizes that GC may be unable to make a public sale of
any or all of the Investment Property, by reason of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for investment and not with a view to
any distribution thereof shall be considered a commercially reasonable sale.
7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance
of any Event of Default, without limiting GC's other rights and remedies,
Borrower grants to GC an irrevocable power of attorney coupled with an interest,
authorizing and permitting GC (acting through any of its employees, attorneys or
agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but GC agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that GC may, in its sole discretion, deem advisable in
order to perfect and maintain GC's security interest in the Collateral, or in
order to exercise a right of Borrower or GC, or in order to fully consummate all
the transactions contemplated under this Agreement, and all other present and
future agreements; (b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
GC's Collateral or in which GC has an interest; (c) Execute on behalf of
Borrower, any invoices relating to any Receivable, any draft against any Account
Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy,
any Notice of Lien, claim of mechanic's, materialman's or other lien, or
assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take
control in any manner of any cash or non-cash items of payment or proceeds of
Collateral; endorse the name of Borrower upon any instruments, or documents,
evidence of payment or Collateral that may come into GC's possession; (e)
Endorse all checks and other forms of remittances received by GC; (f) Pay,
contest or settle any lien, charge, encumbrance, security interest and adverse
claim in or to any of the Collateral, or any judgment based thereon, or
otherwise take any action to terminate or discharge the same; (g) Grant
extensions of time to pay, compromise claims and settle Receivables and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give GC the same rights of access and other rights with respect
thereto as GC has under this Agreement; (k) Execute and deliver to any
securities intermediary or other Person any entitlement order, account control
agreement or other notice, document or instrument with respect to any Investment
Property; and (l) Take any action or pay any sum required of Borrower pursuant
to this Agreement and any other present or future agreements. Any and all
reasonable sums paid and any and all reasonable costs, expenses, liabilities,
obligations and reasonable attorneys' fees incurred by GC with respect to the
foregoing shall be added to and become part of the Obligations, shall be payable
on demand, and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations. In no event shall GC's rights under the
foregoing power of attorney or any of GC's other rights under this Agreement be
deemed to indicate that GC is in control of the business, management or
properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale or other disposition of the Collateral shall be applied by GC first to the
reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by GC in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as GC shall
-11-
<PAGE> 12
determine in its sole discretion. Any surplus shall be paid to Borrower or other
persons legally entitled thereto; Borrower shall remain liable to GC for any
deficiency. If, GC, in its sole discretion, directly or indirectly enters into a
deferred payment or other credit transaction with any purchaser at any sale of
Collateral, GC shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of
purchase price or deferring the reduction of the Obligations until the actual
receipt by GC of the cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, GC shall have all the other rights and remedies
accorded a secured party under the California Uniform Commercial Code and under
all other applicable laws, and under any other instrument or agreement now or in
the future entered into between GC and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
GC of one or more of its rights or remedies shall not be deemed an election, nor
bar GC from subsequent exercise or partial exercise of any other rights or
remedies. The failure or delay of GC to exercise any rights or remedies shall
not operate as a waiver thereof, but all rights and remedies shall continue in
full force and effect until all of the Obligations have been fully paid and
performed.
8. DEFINITIONS. As used in this agreement the following terms have the following
meanings:
"Account Debtor" means the obligor on a Receivable.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Agreement" and "this Agreement" means this Loan and Security Agreement
and all modifications and amendments thereto, extensions thereof, and
replacements therefor.
"Business Day" means a day on which GC is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in
the State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the
Code.
"Eligible Receivables" means Receivables arising in the ordinary course
of Borrower's business from the sale of goods or rendition of services, which
will be deemed eligible for borrowing based on the following considerations (the
"Eligibility Requirements"): (i) the Receivable must not be outstanding for more
than 120 days from its invoice date, (ii) the Receivable must not be subject to
any contingencies (including Receivables arising from sales on consignment,
guaranteed sale or other terms pursuant to which payment by the Account Debtor
may be conditional), (iii) the Receivable must not be subject to any dispute
between Borrower and the Account Debtor, (iv) the Receivable must not be owing
from an Affiliate of Borrower, (v) the Receivable must not be owing from an
Account Debtor which is subject to any insolvency or bankruptcy proceeding, or
which fails or goes out of a material portion of its business, (vi)
-12-
<PAGE> 13
the Receivable must not be owing from an Account Debtor to whom Borrower is or
may be liable for goods purchased from such Account Debtor or otherwise, (vii)
the Receivable must not violate any representation or warranty set forth in this
Agreement, (viii) the Receivable must not be one in which GC does not have a
first-priority, valid, perfected security interest, unless approved by GC, and
(ix) the Receivable must not be one which GC, in its sole judgment exercised in
good faith discretion, believes the collection of which is insecure or may not
be paid by reason of the Account Debtor's financial inability to pay, or deems
ineligible on such other credit and/or collateral considerations as GC in its
good faith discretion deems appropriate. If more than 50% of the Receivables
owing from an Account Debtor are outstanding more than 120 days from their
invoice date (without regard to unapplied credits) or are otherwise not Eligible
Receivables, then all Receivables owing from that Account Debtor will be deemed
ineligible for borrowing.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
patents, patent applications, trademarks and the goodwill of the business
symbolized thereby, names; trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against GC, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims including life insurance, key man
insurance, credit insurance, liability insurance, property insurance and other
insurance), tax refunds and claims, computer programs, discs, tapes and tape
files, claims under guaranties, security interests or other security held by or
granted to Borrower, all rights to indemnification and all other intangible
property of every kind and nature (other than Receivables).
"Guarantor" means any Person who has guaranteed any of the Obligations.
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including all raw
materials, work in process, finished goods and goods in transit), and all
materials and supplies of every kind, nature and description which are or might
be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Investment Property" means any and all investment property of
Borrower, including all securities, whether certificated or uncertificated
security entitlements, securities accounts, commodity contracts and commodity
accounts, and all financial assets held in any securities account or otherwise,
wherever located, and whether now existing or hereafter acquired or arising.
-13-
<PAGE> 14
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to GC, whether evidenced by this Agreement or any note or
other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by GC in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, loan fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement between Borrower and GC.
"Permitted Liens" means the following: (i) purchase money security
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens which are subordinate to the security interest in favor of
GC and are consented to in writing by GC (which consent shall not be
unreasonably withheld); (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. GC will have the
right to require, as a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest or lien sign an
intercreditor agreement on GC's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of GC, and
agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an. Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute
therefor of Bank of America NT & SA ("B of A") whether or not that rate is the
lowest interest rate charged by B of A. If the Prime Rate, as so defined, is
unavailable on any date of determination, "Prime Rate" shall mean the highest of
the prime rates published in the Wall Street Journal, on such date of
determination, as the base rate on corporate loans at large United States money
center commercial banks, as determined in good faith by GC, which determination
shall be conclusive absent manifest error.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, documents and all other forms of obligations
at any time owing to Borrower, all guaranties and other security therefor, all
merchandise returned to or repossessed by Borrower, and all rights of stoppage
in transit and all other rights or remedies of an unpaid vendor, lienor or
secured party.
Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with generally accepted accounting principles, consistently
-14-
<PAGE> 15
applied. All other terms contained in this Agreement; unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by GC (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by GC on account of the Obligations three Business Days after receipt by
GC of immediately available funds. GC shall not, however, be required to credit
Borrower's account for the amount of any item of payment which is unsatisfactory
to GC in its discretion, and GC may charge Borrower's Loan account for the
amount of any item of payment which is returned to GC unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the
Obligations may be applied, and in GC's sole discretion reversed and reapplied,
to the Obligations, in such order and manner as GC shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNT. GC may, in its discretion, require that
Borrower pay monetary Obligations in cash to GC, or charge them to Borrower's
Loan account in which event they will bear interest at the same rate applicable
to the Loans.
9.4 MONTHLY ACCOUNTINGS. GC shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by GC) unless Borrower
notifies GC in writing to the contrary within sixty days after each account is
rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service, or by facsimile, or by regular first-class mail, or certified mail
return receipt requested, addressed to GC or Borrower at the addresses shown in
the heading to this Agreement or at any other address designated in writing by
one party to the other party. All notices shall be deemed to have been given
upon delivery in the case of notices personally delivered, or at the expiration
of one business day following delivery to the private delivery service, or one
day after the date sent by facsimile, or two business days following the deposit
thereof in the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and GC and supersede all
prior and contemporaneous negotiations and oral representations and agreements,
all of which are merged and integrated in this Agreement. There are no oral
understandings. representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
9.8 WAIVERS. The failure of GC at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and
-15-
<PAGE> 16
GC shall not waive or diminish any right of GC later to demand and receive
strict compliance therewith. Any waiver of any default shall not waive or affect
any other default, whether prior or subsequent, and whether or not similar. None
of the provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to GC shall be deemed to have been waived by
any act or knowledge of GC or its agents or employees, but only by a specific
written waiver signed by an authorized officer of GC and delivered to Borrower.
Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement
extension or renewal of any commercial paper, instrument account, General
Intangible, document or guaranty at any time held by GC on which Borrower is or
may in any way be liable, and notice of any action taken by GC, unless expressly
required by this Agreement.
9.9 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of GC.
9.10 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.11 ATTORNEYS' FEES AND COSTS. Borrower shall reimburse GC for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit and other reasonable costs incurred by GC, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any reasonable attorneys' fees and costs
GC incurs in order to do the following: prepare and negotiate this Agreement and
the documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek. to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim third-party claim, or other claim; examine, audit, copy,
and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce GC's
security interest in, the Collateral; and otherwise represent GC in any
litigation relating to Borrower. If either GC or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its reasonable costs and attorneys'
fees, including (but not limited to) reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order, decree,
award or judgment. All attorneys' fees and costs to which GC may be entitled
pursuant to this Paragraph shall immediately become part of Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations.
9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and GC; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of GC, and any prohibited assignment shall be
void. No consent by GC to any assignment shall release Borrower from its
liability for the Obligations.
9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.14 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against GC, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Agreement, or any other
present or future document or agreement, or any other transaction contemplated
-16-
<PAGE> 17
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by GC, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of GC, or on any other person authorized to
accept service on behalf of GC, within thirty (30) days thereafter. Borrower
agrees that such one-year period is a reasonable and sufficient time for
Borrower to investigate and act upon any such claim or cause of action. The
one-year period provided herein shall not be waived, tolled, or extended except
by the written consent of GC in its sole discretion. This provision shall
survive any termination of this Agreement or any other present or future
agreement.
9.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and GC acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including,"
whenever used in this Agreement, shall mean "including (but not limited to)."
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against GC or Borrower under any rule of construction or
otherwise.
9.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of GC and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to GC to enter into this Agreement, Borrower (i) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at GC's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (ii) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (iii) waives any and all rights Borrower may have to
object to the jurisdiction of any such court, or to transfer or change the venue
of any such action or proceeding.
-17-
<PAGE> 18
9.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GC EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GC AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF GC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GC OR BORROWER, IN ALL OF
THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
WITNESS SYSTEMS, INC.
BY: /s/ Dave Gould
---------------------------------------
President or Vice President
By: /s/ Jon Ezrine
---------------------------------------
Secretary or Ass't Secretary
GREYROCK CAPITAL,
a Division of NationsCredit Commercial
Corporation
By: /s/ Lisa Nagano
---------------------------------------
Title: SVP
------------------------------------
-18-
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Witness Systems UK Limited
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Witness Systems, Inc.:
The audits referred to in our report dated November 18, 1999 included
the related financial statement schedule as of September 30, 1999, and for each
of the years in the three-year period ended December 31, 1998 and for the nine-
month period ended September 30, 1999, 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 this financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents 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 headings "Selected Consolidated Financial Data"
and "Experts" in the registration statement.
/s/ KPMG LLP
Atlanta, Georgia
November 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 6,706
<ALLOWANCES> 438
<INVENTORY> 0
<CURRENT-ASSETS> 7,020
<PP&E> 3,715
<DEPRECIATION> 1,977
<TOTAL-ASSETS> 8,919
<CURRENT-LIABILITIES> 9,268
<BONDS> 0
22,113
0
<COMMON> 57
<OTHER-SE> (24,729)
<TOTAL-LIABILITY-AND-EQUITY> 8,919
<SALES> 14,936
<TOTAL-REVENUES> 14,936
<CGS> 2,900
<TOTAL-COSTS> 2,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 138
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> (6,560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,560)
<EPS-BASIC> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
