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FILE NO. 333-96263
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ISKY, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MARYLAND 7389 52-1347069
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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6740 ALEXANDER BELL DRIVE, SUITE 300
COLUMBIA, MARYLAND 21046
410-312-1515
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
RICHARD T. HEBERT
CHIEF EXECUTIVE OFFICER
ISKY, INC.
6740 ALEXANDER BELL DRIVE, SUITE 300
COLUMBIA, MARYLAND 21046
410-312-1515
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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<S> <C>
ANTHONY H. RICKERT, ESQUIRE STEPHEN A. RIDDICK, ESQUIRE
Piper Marbury Rudnick & Wolfe LLP Brobeck, Phleger & Harrison LLP
1200 Nineteenth Street, NW 701 Pennsylvania Avenue, N.W., Suite 220
Washington, D.C. 20036-2412 Washington, D.C. 20004
(202) 861-3900 (202) 220-6000
Fax: (202) 223-2085 Fax: (202) 220-5200
</TABLE>
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Approximate date of commencement of proposed sale to the public: as soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 5,750,000 shares $13.00 $74,750,000 $19,734(3)
</TABLE>
(1) Includes 750,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) under the Securities Act.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION DATED APRIL 3, 2000
5,000,000 SHARES
[LOGO]
COMMON STOCK
This is the initial public offering of common stock by iSKY, Inc. We are
selling 5,000,000 shares of common stock. It is currently estimated that the
initial public offering price per share will be between $11.00 and $13.00.
------------------------
There is currently no public market for the common stock. We have applied to
have our common stock designated for trading on the Nasdaq National Market under
the symbol "ISKY."
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<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before offering expenses, to iSKY................. $ $
</TABLE>
The underwriters may also purchase up to 600,000 additional shares of common
stock from us and 150,000 shares from a selling shareholder at the public
offering price, less the underwriting discount, within 30 days from the date of
this prospectus to cover over-allotments.
Delivery of the shares of common stock will be made on or about ,
2000.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CHASE H&Q DEUTSCHE BANC ALEX. BROWN
WILLIAM BLAIR & COMPANY
, 2000
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[Inside Front Cover]
[A picture showing a customer relationship associate linked by arrows to a
picture of a customer through icons depicting our multi-channel communications
tools including: text chat, e-mail, frequently asked questions, web screen
synchronization, telephone and facsimile. The customer relationship associate is
also connected by arrows to an icon representing the iSKY database and customer
relationship tools]
<PAGE>
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Use of Proceeds............................................. 8
Dividend Policy............................................. 8
Capitalization.............................................. 9
Dilution.................................................... 10
Selected Historical Financial Data.......................... 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Business.................................................... 19
Management.................................................. 35
Certain Transactions........................................ 44
Principal Stockholders...................................... 45
Description of Capital Stock................................ 47
Shares Eligible for Future Sale............................. 49
Underwriting................................................ 51
Legal Matters............................................... 54
Experts..................................................... 54
Where You Can Find More Information......................... 54
Index to Financial Statements............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE INFORMATION UNDER "RISK FACTORS" BEGINNING
ON PAGE 4 AND THE FINANCIAL STATEMENTS BEGINNING ON PAGE F-1, BEFORE MAKING AN
INVESTMENT DECISION.
OUR BUSINESS
iSKY provides a complete customer service solution to both electronic
businesses and traditional companies seeking to enhance their customers'
interaction with them over the internet and through traditional communication
methods, before, during and after a purchase. Our services use interactive
one-to-one communications through a variety of media including text conversation
over the internet, e-mail, voice conversations over the internet, telephone and
facsimile, enhanced by personalized data collection and management that occurs
during the interaction, to find, win, keep and enhance profitable customer
relationships. In addition, we are able to collect valuable customer data which
provides insights into buying behavior, responses to different sales channels,
the effectiveness of promotions and trends in customer service issues. Our
services enable our clients to provide high quality customer care and to
establish long-term relationships with customers that are critical to the
ability of internet-based and traditional businesses to maintain their
competitive positions. Both internet-based and traditional businesses often lack
the expertise, resources and infrastructure necessary to provide top quality
customer support and as a result may look for a solution from a third party to
fulfill this need.
OUR COMPETITIVE ADVANTAGES
We believe our competitive advantages include:
- Integrated customer loyalty management solution.
- Unique data management and web-based reporting capabilities.
- Flexible infrastructure that can easily be modified to handle larger
volumes of transactions.
- Diverse and long-term client relationships.
- Experienced management team.
OUR GROWTH STRATEGY
The key elements of our growth strategy include the following:
- Rapidly expand and enhance existing client relationships.
- Expand client base in key vertical markets.
- Promote the iSKY brand.
- Pursue acquisitions and strategic partnerships.
- Expand our presence abroad.
OUR HISTORY
iSKY was incorporated in Maryland as Original Research Corporation on
May 8, 1984, changed its name to Sky Alland Research, Inc. on May 5, 1989, and
changed its name to iSKY on February 4, 2000. We began offering, on a test
basis, our integrated internet-based services in September 1999. We have
experienced operating losses and net losses for the past two years and rely on
financing to support our operating and capital requirements. Our principal
executive offices are located at 6740 Alexander Bell Drive, Suite 300, Columbia,
Maryland 21046. Our telephone number is (410) 312-1515. Our website is located
at www.isky.com. Information contained in this website does not constitute part
of this prospectus and is not incorporated into this prospectus by reference.
1
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THE OFFERING
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<S> <C>
Common stock offered by us.................................. 5,000,000 shares
Common stock to be outstanding after the offering........... 18,334,754 shares
Use of proceeds............................................. General corporate purposes, working
capital needs and payment of debt
and accrued preferred stock
dividends.
Proposed Nasdaq National Market Symbol...................... "ISKY"
</TABLE>
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UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE
UNDERWRITERS DO NOT EXERCISE THEIR OPTION TO PURCHASE AN ADDITIONAL 600,000
SHARES OF COMMON STOCK FROM US TO COVER OVER-ALLOTMENTS. THE NUMBER OF
OUTSTANDING SHARES USED IN THIS PROSPECTUS IS 13,334,754 AND EXCLUDES 2,361,120
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS AND
4,824,360 SHARES OF COMMON STOCK AVAILABLE FOR THE FUTURE GRANT OF STOCK OPTIONS
UNDER OUR STOCK OPTION PLANS.
SUMMARY FINANCIAL INFORMATION
The following table presents summary financial data for iSKY. This data
should be read in conjunction with the financial statements and related notes
included elsewhere in this prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The pro forma
balance sheet data reflects the net proceeds from the sale of 1,260,775 shares
of convertible preferred stock in a private offering after deducting related
offering expenses. The pro forma as adjusted column reflects the net proceeds
from the sale of 5,000,000 shares of common stock offered by us after deducting
the estimated underwriting discounts and related offering expenses, automatic
conversion of all outstanding shares of preferred stock into common stock and
repayment of the line of credit upon the closing of this offering. The number of
interactions line represents completed inbound and outbound telephone calls and
facsimiles, e-mails and internet chat sessions.
Our historical financial information may not necessarily reflect our results
of operations or financial position in the future. The shares used to compute
supplemental pro forma unaudited basic and diluted net income (loss) per share
includes 294,296 shares, representing the number of shares whose proceeds would
be necessary to cover the $2,886,556 for payment of accrued, unpaid dividends
and to cover the $645,000 payment of outstanding debt upon consummation of the
anticipated initial public offering at the assumed initial public offering price
of $12 per share. Interest expense incurred during 1999 related to this debt was
$56,584.
2
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<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $18,709 $19,733 $23,840
Income (loss) from operations............................... 448 (1,120) (2,274)
Net income (loss)........................................... 159 (1,550) (2,432)
Preferred stock dividend requirements....................... (788) (682) (1,349)
Net income (loss) applicable to common stockholders......... (629) (2,232) (3,781)
======= ======= =======
Basic and diluted net income (loss) per share applicable to
common stockholders....................................... $ (0.38) $ (1.32) $ (2.15)
======= ======= =======
Shares used to compute basic and diluted net income (loss)
per share applicable to common stockholders............... 1,652 1,685 1,758
======= ======= =======
Pro forma unaudited basic and diluted net income (loss) per
share..................................................... $ (0.23)
Shares used to compute pro forma unaudited basic and diluted
net income (loss) per share............................... 10,362
Supplemental pro forma unaudited basic and diluted net
income (loss) per share................................... $ (0.23)
Shares used to compute supplemental pro forma unaudited
basic and diluted net income (loss) per share............. 10,656
</TABLE>
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<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,612 $29,912 $80,875
Working capital............................................. 1,882 30,182 81,146
Total assets................................................ 14,646 42,946 93,909
Long-term obligations, net of current portion............... 586 586 586
Convertible redeemable preferred stock...................... 1,421 1,421 --
Stockholders' equity........................................ 6,917 35,217 80,669
</TABLE>
3
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY ANY OF THE FOLLOWING FACTORS,
IN WHICH EVENT THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD
LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR FUTURE
RESULTS.
Although we were formed in 1984, we introduced our integrated on-line
programs in September 1999 and recorded our first revenue from these services in
November 1999. To date, we have generated only limited amounts of revenue from
the sale of these services. Accordingly, you have limited information about our
company with which to evaluate our business and prospects. Before buying our
common stock, you should consider the risks and difficulties frequently
encountered by companies in new and rapidly evolving markets, particularly those
companies whose business depends on the internet.
WE ANTICIPATE INCURRING SIGNIFICANT EXPENSES IN THE FORESEEABLE FUTURE WHICH MAY
INCREASE OUR LOSSES.
In order to reach our business growth objectives, we expect to incur
significant operating and marketing expenses, as well as capital expenditures,
during the next several years. In order to offset these expenses, we will need
to generate significant additional revenue. If our revenue grows more slowly
than we anticipate or if our operating and marketing expenses exceed our
expectations, we may not generate sufficient revenue to be profitable or be able
to sustain or increase profitability on a quarterly or an annual basis in the
future.
OUR CLIENTS ARE CONCENTRATED IN A FEW INDUSTRIES; IF THESE INDUSTRIES EXPERIENCE
DOWNTURNS, WE MAY LOSE SIGNIFICANT REVENUE.
Many of our clients are in the automotive, health care and financial
services industries. In 1999, clients in the automotive industry represented
more than 50% of our revenue. A significant downturn in any of these industries
or a trend in any of these industries not to use or to reduce their use of
outsourced customer care services could result in lower revenue. In the future
we expect many of our clients will be technology and electronic commerce
companies and the failure of these markets to grow will reduce our revenues.
WE DEPEND ON REVENUE FROM OUR EXISTING CLIENTS AND IF WE LOSE THESE CLIENTS, OUR
RESULTS OF OPERATIONS WILL SUFFER.
Our failure to continue to sell services to our existing clients could
seriously harm our business. In 1999, we derived approximately 91% of our total
revenue from sales of services to clients that had made purchases from us before
1999. In 1999, our two largest clients accounted for 34% of revenues, our five
largest clients accounted for 56% of our revenue and our 10 largest clients
accounted for 77% of our revenue. The loss of one or more of these clients could
significantly decrease our revenue. We expect to continue to derive a
significant portion of our revenue from our existing clients. Our ability to
retain our clients will depend on a variety of factors, including the analytic
capabilities, scalability, openness, reliability and cost-effectiveness of our
services as well as our ability to effectively market our products and services.
IF WE ARE NOT ABLE TO SUCCESSFULLY DEVELOP BRAND AWARENESS OF OUR SERVICES, WE
MAY NOT BE ABLE TO ATTRACT NEW CLIENTS.
Developing and maintaining widespread awareness of the "iSKY" brand name is
an important element of our business strategy. If we do not successfully promote
and maintain widespread recognition of our brand name, our operating margins and
growth may decline. Successfully promoting
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our brand will depend largely on the effectiveness of our marketing efforts. In
addition, our brand reputation may depend upon the success or failure of our
clients. We plan to increase our marketing expenses to promote our brand name,
which may reduce our operating margins.
OUR REVENUE IS DIFFICULT TO PREDICT AND WE MAY NOT BE ABLE TO REDUCE EXPENSES IF
REVENUE DECLINES.
Our operating expenses are relatively fixed and we incur costs based on our
expectation of future revenues. We cannot completely reduce our expenses on
short notice to compensate for unanticipated variations in the number of clients
we are servicing. As a result, our failure to accurately predict our revenues
may result in unnecessary expenses and adversely affect our financial condition.
In addition, a number of factors unrelated to our performance, such as general
business conditions or the client's operations and financial state, could cause
cancellations or delays.
DELAYS IN OUR SALES CYCLES MAY CAUSE OUR REVENUES TO DECREASE.
The sales cycle for our services varies from one to six months from initial
contact with a potential client to the delivery of services. Occasionally sales
require more time. Delays in executing a client agreement or purchase order may
reduce our revenue for a period and may cause our operating results to vary. We
believe that a potential client's decision to purchase our services is
influenced by internal and external pricing comparisons as well as budgetary
constraints. We may also need to explain and demonstrate the benefits of our
services to our potential clients, which may require additional time and
resources. In addition, the time required to implement our services can range
from several weeks to several months and may depend on factors specific to each
client. Delays in delivering services to new clients may affect our revenue and
operating results.
IF WE ARE NOT ABLE TO INCREASE OUR CAPACITY QUICKLY, WE MAY NOT BE ABLE TO
ACCOMMODATE SIGNIFICANT GROWTH IN THE NUMBER OF OUR CLIENTS.
Our success depends on our ability to accommodate many different clients
with several different services. We expect that the volume of interactions will
increase significantly as we expand our operations. If this occurs, additional
stress will be placed upon the hardware and software that manage our operations.
In addition, we will need to increase the number of customer relationship
associates and the equipment required to support them. We cannot assure you of
our ability to efficiently manage a large number of customer interactions. If we
are not able to maintain an appropriate level of operating performance, we may
develop a negative reputation and our business would be materially adversely
affected.
UNDERUTILIZATION OF OUR EMPLOYEE RESOURCES MAY ADVERSELY AFFECT OUR OPERATING
REVENUES.
We generally establish our personnel levels based on our expectations of
client demand. If we hire more associates than our services to clients require,
or if we are unable to effectively redeploy our employees to new services that
are in demand, our operating margins may decline and we may continue to suffer
losses. We have hired a large number of administrative and support personnel to
support our anticipated growth. These personnel costs and expenses constitute a
majority of our operating expenses.
THE EXPANSION OF OUR BUSINESS HAS PLACED, AND CONTINUES TO PLACE, A SIGNIFICANT
STRAIN ON OUR MANAGEMENT, OPERATING INFRASTRUCTURE AND RESOURCES.
Our failure to properly manage the expansion of our business could seriously
harm us. We have recently experienced a period of significant and rapid
expansion of our business that has placed, and continues to place, a significant
strain on our management, operating infrastructure and resources. For example,
several members of our management team joined us in 1999. The number of our
corporate associates grew from 59 to 147 in 1999, and we plan to continue to
expand our business by hiring additional personnel. To the extent that our
business continues to grow rapidly, we must, among other measures, implement and
improve on a timely basis our operating infrastructure, including our
administrative, financial, customer service and operational systems, procedures
and controls. In the near
5
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future, we plan to implement new software systems for enterprise resource
planning and human resources management, including payroll and benefits. We
could be seriously harmed if our current and anticipated personnel, systems,
procedures and controls are inadequate to support our future operations, or if
we are unable to complete the necessary improvements to our systems, procedures
and controls on a timely basis.
IF WE ARE NOT ABLE TO ROLL OUT OUR SERVICE OFFERINGS QUICKLY AND EFFICIENTLY, WE
MAY LOSE REVENUE.
To be competitive we must be able to provide our full range of services to
clients quickly. If we experience delays in developing the infrastructure
necessary for delivering our services we may face customer dissatisfaction, loss
of revenues and slower market acceptance. In addition, our new technology
supporting these services is relatively untested and we may experience problems
or failures with our technical systems. We may incur additional expenses in
order to ensure that we can provide services to additional clients in a timely
manner. If we overestimate the facilities and resources we need, we may incur
expenses that exceed our revenue. In addition, we will need to continue to
develop new services as technology develops. Delays in offering new services or
enhancements could impair our ability to compete for clients.
WE INTEND TO EXPAND OUR INTERNATIONAL SALES EFFORTS BUT DO NOT HAVE SUBSTANTIAL
EXPERIENCE IN INTERNATIONAL MARKETS.
We intend to expand our international sales efforts in the future. We have
very limited experience in marketing, selling, and supporting our customer
loyalty management services abroad. Expansion of our international operations
will require a significant amount of attention from our management and
substantial financial resources. If we are unable to grow our international
operations successfully and in a timely manner, our business could suffer. Doing
business internationally involves additional risks, particularly:
- unexpected changes in regulatory requirements, taxes, trade laws, and
tariffs;
- restrictions on repatriation of earnings;
- differing intellectual property rights and protections;
- differing labor regulations;
- political and economic uncertainty or instability in some regions;
- greater difficulty in staffing and managing foreign operations; and
- fluctuating currency exchange rates.
IF THIRD-PARTY SOFTWARE THAT WE USE IN OUR PRODUCTS CEASES TO BE AVAILABLE, WE
MAY NOT BE ABLE TO CONTINUE TO OFFER OUR SERVICES WITHOUT SIGNIFICANT DELAYS AND
INCREASED EXPENSES.
We integrate third-party software to provide some of the functions of our
services. If we cannot maintain licenses to key third-party software, delivery
of our services could be delayed until we can develop or license equivalent
software and integrate it into our services, which could seriously harm our
business. Some of our license agreements with the vendors of this software have
a short term, and the vendors may choose not to renew our licenses. In addition,
if any of the vendors of our software cease to provide support for software we
use, we may need to find alternative software providers.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY FAILURE OF OUR OR OUR CLIENTS'
SYSTEMS OR EQUIPMENT.
Our operations are dependent upon our ability to protect our communications
and data centers, computer and telecommunications equipment and software systems
against damage and failures. Delivery of our services is also dependent on our
connections and interactions with our clients' systems. Damage or failures could
result from fire, power loss, equipment malfunctions, system failures, natural
disasters and other causes. If our business or the operations of our clients are
interrupted either from accidents or the intentional acts of others, we may lose
revenues and incur significant unanticipated
6
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expenses which our insurance may not cover. In addition, in the event of
widespread damage or failures at our facilities, our short-term disaster
recovery and contingency plans and insurance coverage may not be sufficient.
Our business is also significantly dependent on service provided by various
local and long distance telephone companies, as well as internet service
providers. A significant increase in the cost of telephone service that is not
recoverable through an increase in the price of our services, or any significant
interruption in telephone services, could negatively impact our earnings.
CONTROLLING AND MANAGING OUR CLIENTS' INFORMATION AND PROPERTY EXPOSES US TO
ADDITIONAL BUSINESS RISKS.
As part of our customer care services, we manage a broad range of our
clients' confidential customer and operational information. If our clients'
information or property is misused, damaged or lost, or perceived to be misused,
it could expose us to liability and could have a material impact on our ability
to continue to do business with those clients or attract new business.
ACQUISITIONS MAY DISRUPT OUR BUSINESS AND INCREASE OUR EXPENSES.
Our business strategy includes growth by acquisitions of businesses,
products, services or technologies that are complementary to the customer
loyalty management solution that we provide. To the extent we complete
acquisitions, we will be acquiring companies, or the assets of companies,
including customer contracts. If we acquire a company or the assets of a
company, we could have difficulty assimilating that company's personnel and
operations. In addition, the key personnel of the company may decide not to work
for us. Difficulties with acquisitions could disrupt our ongoing business,
distract our management and employees and increase our expenses. We may also
incur debt or issue equity securities to pay for any future acquisitions, the
issuance of which could be dilutive to our existing stockholders.
OUR STOCK PRICE AFTER THIS OFFERING MAY BE VOLATILE.
Prior to this offering, our common stock has not been sold in a public
market. You will pay a price that we negotiated with the representatives of the
underwriters based on a number of factors, which may be different from a price
established in a competitive market. After this offering, an active trading
market in our stock might not develop. If an active trading market does develop,
it may not continue. Also, if an active trading market does develop, the trading
price of our common stock may fluctuate widely as a result of a number of
factors, many of which are outside our control. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market prices of many technology companies and electronic commerce companies,
which have often been unrelated to the operating performance of these companies.
Our stock price could fluctuate as a result of these market fluctuations.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY NOT PROVE TO BE
ACCURATE OR COMPLETE.
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this document constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements are
only predictions.
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USE OF PROCEEDS
Assuming an initial public offering price of $12.00 per share, we will
receive net proceeds of approximately $54.5 million from the sale of 5,000,000
shares of common stock in this offering, or $61.2 million if the underwriters
exercise their over-allotment option in full. We intend to use the net proceeds
of this offering to fund general corporate purposes and working capital needs,
including capital expenditures to support information technology initiatives and
increase sales and marketing efforts. We currently estimate that we will use
$7.8 million to continue to expand and enhance our information technology
systems, $2.3 million to support additional employees, $5.4 million for sales
and marketing efforts and $35.5 million for working capital needs. We also
consider acquisitions from time to time and may use a portion of the net
proceeds of this offering to fund all or a portion of the purchase price of
acquisitions. We also expect to use a portion of these proceeds to pay
outstanding debt of $645,000 and accrued preferred stock dividends of
approximately $2.9 million. Our outstanding debt bears interest at 8.5% and
matures on October 13, 2000. Pending these uses, we intend to invest the net
proceeds of this offering in investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business, and we do not currently anticipate paying any cash
dividends in the foreseeable future.
8
<PAGE>
CAPITALIZATION
The following table shows the total capitalization of iSKY as of
December 31, 1999, on
- an actual basis,
- pro forma to show the sale of 1,260,775 shares of Series BB preferred
stock as if the sale had occurred on December 31, 1999, and
- pro forma as adjusted to give effect to the offering of common stock as
described in the "Use of Proceeds" section, repayment of line of credit,
payment of preferred stock dividends and the conversion of the shares of
preferred stock into common stock on the closing of this offering.
The number of shares of common stock excludes 2,361,120 shares of common stock
issuable upon the exercise of stock options granted under our stock option plan
and an additional 4,824,360 shares reserved for issuance under the plan. See
"Description of Securities."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 1,611,951 $29,911,951 $80,875,395
============ =========== ===========
Line of credit........................................ $ 645,000 $ 645,000 $ --
Total obligations under capital leases................ 1,530,886 1,530,886 1,530,886
============ =========== ===========
Convertible redeemable preferred stock................ 1,421,154 1,421,154 --
Stockholders' equity:
Series C convertible preferred stock, $0.01 par value,
127,000 shares authorized, 127,000 shares issued and
outstanding......................................... 1,270 1,270 --
Series D convertible preferred stock, $0.01 par value,
855,400 shares authorized, 855,400 shares issued and
outstanding......................................... 8,554 8,554 --
Series G convertible preferred stock (voting), $4.50
par value, 600,000 shares authorized, 523,809 shares
issued and outstanding.............................. 2,357,140 2,357,140 --
Series H convertible preferred stock (voting), $6.00
par value, 600,000 shares authorized, 523,809 shares
issued and outstanding.............................. 3,142,854 3,142,854 --
Series AA convertible preferred stock (voting), $0.01
par value, 1,100,000 shares authorized, 1,000,000
shares issued and outstanding....................... 10,000 10,000 --
Series BB convertible preferred stock (voting), $0.01
par value, 1,260,775 shares authorized, 1,260,775
shares issued and outstanding....................... -- 12,608 --
Common stock, $0.01 par value, 46,000,000 shares
authorized, 1,831,603 shares issued and outstanding
(actual and pro forma); 18,334,754 shares issued and
outstanding (pro forma as adjusted)................. 7,963 7,963 79,770
Additional paid in capital............................ 16,322,230 44,609,622 95,523,052
Deferred compensation................................. (7,239,736) (7,239,736) (7,239,736)
Accumulated deficit................................... (7,693,588) (7,693,588) (7,693,588)
------------ ----------- -----------
Total stockholders' equity............................ 6,916,687 35,216,687 80,669,498
------------ ----------- -----------
Total capitalization.................................. $ 8,337,841 $36,637,841 $80,669,498
============ =========== ===========
</TABLE>
9
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of
December 31, 1999 was $35,216,687, or $2.64 per share of common stock. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less our total liabilities, divided by the total number of shares of
common stock outstanding prior to this offering after giving effect to:
- Sale of 1,260,775 shares of Series BB preferred stock as if the sale had
occurred on December 31, 1999;
- Conversion of all outstanding shares of preferred stock into 11,503,151
shares of common stock as of December 31, 1999.
After giving effect to this offering and the receipt of $50,963,444 of net
proceeds from this offering, based on an assumed initial public offering price
of $12.00 per share, the pro forma as adjusted net tangible book value of the
common stock as of December 31, 1999 would have been approximately $80,669,498,
or $4.40 per share. This amount represents an immediate increase in pro forma
net tangible book value of $1.76 per share to our existing stockholders, and an
immediate dilution in net tangible book value of $7.60 per share to purchasers
of common stock in this offering. Dilution is determined by subtracting pro
forma as adjusted net tangible book value per share after this offering from the
amount of cash paid by a new investor for a share of common stock. The following
table illustrates the dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share at
December 31, 1999....................................... $ 2.64
Increase in pro forma net tangible book value per share
attributable to new investors........................... 1.76
------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 4.40
------
Dilution per share to new investors......................... $ 7.60
======
</TABLE>
The following table shows, as of December 31, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by the
existing stockholders and by new investors who purchase shares of common stock
in this offering, before deducting the estimated underwriting discounts and
commissions and offering expenses. The table does not reflect outstanding stock
options to purchase an aggregate of 2,361,120 shares of common stock at a
weighted average exercise price of $2.34 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................... 13,334,754 73% $ 45,977,048 43% $ 3.45
New Investors........................... 5,000,000 27% $ 60,000,000 57% $12.00
---------- --- ------------ ---
Total................................... 18,334,754 100% $105,977,048 100%
========== === ============ ===
</TABLE>
If the underwriters' over-allotment option is exercised in full, sales in
this offering will reduce the number of shares of common stock held by existing
stockholders to approximately 70% of the total shares of common stock
outstanding after the offering and will increase the number of shares held by
new investors to 5,750,000, or approximately 30% of the total shares of common
stock outstanding after the offering.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical statement of operations and balance sheet data for
each of the fiscal years ended December 31, 1995 through 1999, have been derived
from our audited financial statements. This data should be read in conjunction
with the financial statements and related notes included elsewhere in this
prospectus and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The financial information contained herein may not
necessarily reflect our results of operations, financial position and cash flows
in the future. The shares used to compute supplemental pro forma unaudited basic
and diluted net income (loss) per share includes 294,296 shares, representing
the number of shares whose proceeds would be necessary to cover the $2,886,556
for payment of accrued, unpaid dividends and to cover the $645,000 payment of
outstanding debt upon consummation of the anticipated initial public offering at
the assumed initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $11,542 $14,049 $18,710 $19,733 $23,840
Direct employee expenses.................... 3,113 4,147 4,882 6,838 8,176
Other direct expenses....................... 1,499 1,969 2,401 3,124 3,334
Indirect expenses:
Account services.......................... 1,999 2,053 2,491 1,951 2,283
Information services...................... 2,158 2,409 2,870 3,457 5,117
------- ------- ------- ------- -------
Total indirect expenses............... 4,157 4,462 5,361 5,408 7,400
------- ------- ------- ------- -------
Cost of revenues...................... 8,769 10,578 12,644 15,370 18,910
------- ------- ------- ------- -------
General and administrative.................. 2,206 3,736 3,484 3,945 3,805
Sales and marketing......................... 1,588 1,595 2,133 1,538 2,606
Stock compensation expense.................. -- -- -- -- 793
------- ------- ------- ------- -------
Income (loss) from operations............... (1,021) (1,860) 449 (1,120) (2,274)
Interest expense, net....................... (272) (195) (290) (430) (158)
------- ------- ------- ------- -------
Income (loss) before income taxes........... (1,293) (2,055) 159 (1,550) (2,432)
Provision (benefit) for income taxes........ -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss)........................... (1,293) (2,055) 159 (1,550) (2,432)
Preferred stock dividend requirements....... -- -- (788) (682) (1,349)
------- ------- ------- ------- -------
Net income (loss) applicable to common
stockholders.............................. $(1,293) $(2,055) $ (629) $(2,232) $(3,781)
======= ======= ======= ======= =======
Basic and diluted net income (loss) per
share applicable to common stockholders... $ (0.83) $ (1.30) $ (0.38) $ (1.32) $ (2.15)
======= ======= ======= ======= =======
Shares used to compute basic and diluted net
income (loss) per share applicable to
common stockholders....................... 1,549 1,586 1,652 1,685 1,758
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C>
Pro forma unaudited basic and diluted net income (loss) per
share..................................................... $ (0.23)
Shares used to compute pro forma unaudited basic and diluted
net income (loss) per share............................... 10,362
Supplemental pro forma unaudited basic and diluted net
income (loss) per share................................... $ (0.23)
Shares used to compute supplemental pro forma unaudited
basic and diluted net income (loss) per share............. 10,656
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 205 $1,864 $ 1,866 $ 4,926 $ 1,612
Working capital.................................. (692) 2,081 1,540 5,324 1,882
Total assets..................................... 5,301 8,814 11,025 15,186 14,646
Long-term obligations, net of current portion.... 938 1,542 1,111 1,054 586
Convertible redeemable preferred stock........... 1,441 1,443 1,445 1,421 1,421
Stockholders' equity (deficit)................... (894) 2,440 2,768 8,512 6,917
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH THE COMBINED FINANCIAL
STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
iSKY provides a range of customer loyalty services to companies seeking to
enhance their customers' on-line and off-line experience before, during and
after a purchase. We currently provide customer care services to over 40
businesses in a range of industries including automotive, health care,
electronic commerce, technology and financial services. We have a number of
long-term client relationships and from January 1, 1995 through December 31,
1999, we have retained 92% of the clients who have engaged us.
We derive our revenues from a broad range of services involving inbound and
outbound telephonic and internet-based communications which are customized
according to the client's needs. Revenues are generally recognized at
contractual rates as services are provided. Revenues are generated based on the
number and type of interactions with clients' customers through various
communication channels, including text conversation over the internet, e-mail,
telephone and facsimile. Typically for each contract we establish a rate for
inbound contacts, based on the number of minutes of interaction. We establish a
rate for outbound contacts based on the number of interactions. In addition, we
earn fees related to program set up costs and reporting and additional services.
Historically, we have seen our first quarter results remain at the same level or
slightly lower than our fourth quarter results of the prior year due to
beginning of the year new program ramp-ups and early year lows in client
transaction activity.
Our expenses are comprised of:
- direct employee expense, which consist of payroll, taxes and benefits for
our customer relationship associates and the associates responsible for
managing our data warehouse;
- other direct expenses, which consist of all expenses, excluding employee
expenses, for our communication centers and database warehouse operations
directly related to providing services under the terms of our contracts,
including certain occupancy and information technology costs and
depreciation and amortization expenses;
- indirect expenses consist of the following:
-- account services, which consist primarily of compensation and related
expenses for account services associates, the associates who are
responsible for day-to-day management of our programs, and other
overhead including program materials and supplies;
-- information services, which consist primarily of compensation and
related expenses for associates responsible for our information
services, and other overhead including computer equipment, hardware
and software maintenance and depreciation;
- general and administrative, consist primarily of compensation and related
expenses for executive, management and administrative personnel and other
overhead costs, including certain occupancy and depreciation and
amortization expenses; and
- sales and marketing, consist primarily of compensation and related
expenses for sales and marketing staff, marketing programs and materials
and advertising costs.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain historical financial information from
our audited statements of operations expressed as a percent of revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Direct employee expenses.................................... 26.1 34.7 34.2
Other direct expenses....................................... 12.8 15.8 14.0
Indirect expenses:
Account services........................................ 13.3 9.9 9.6
Information services.................................... 15.4 17.5 21.5
----- ----- -----
Total indirect expenses................................. 28.7 27.4 31.1
----- ----- -----
Cost of revenues........................................ 67.6 77.9 79.3
----- ----- -----
General and administrative.................................. 18.6 20.0 16.0
Sales and marketing......................................... 11.4 7.8 10.9
Stock compensation expense.................................. -- -- 3.3
----- ----- -----
Income (loss) from operations............................... 2.4 (5.7) (9.5)
Interest expense, net....................................... (1.6) (2.2) (0.7)
----- ----- -----
Income (loss) before income taxes........................... 0.8 (7.9) (10.2)
Provision for income taxes.................................. 0.0 0.0 0.0
----- ----- -----
Net income (loss)........................................... 0.8% (7.9)% (10.2)%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues were $23.8 million for the year ended December 31, 1999
as compared to $19.7 million for the year ended December 31, 1998, an increase
of $4.1 million or 20.8%. Revenues increased as a result of new business from
existing clients, as well as from new clients. Revenues for clients we provided
service for in both 1999 and 1998 were $21.7 million for the year ended
December 31, 1999 as compared to $18.0 million for the year ended December 31,
1998, an increase of $3.8 million or 20.5%.
DIRECT EMPLOYEE EXPENSES. Direct employee expenses were $8.2 million for
the year ended December 31, 1999 as compared to $6.8 million for the year ended
December 31, 1998, an increase of $1.3 million or 19.6%. The increase was
directly attributable to the additional staffing needed to service our clients
in 1999. Direct employee expenses as a percent of revenues was 34.2% in 1999,
down from 34.7% in 1998. This decrease resulted from higher customer
relationship associate productivity in 1999. The decrease as a percentage of
revenues was partially offset by the cost of hiring new customer relationship
associates.
OTHER DIRECT EXPENSES. Other direct expenses were $3.3 million for the year
ended December 31, 1999 as compared to $3.1 million for the year ended
December 31, 1998, an increase of $210,000 or 6.7%. The increase was primarily
due to the opening of a new communications center in Lafayette, Indiana in 1999
to accommodate increased volumes of business. Other direct expenses as a percent
of revenues was 14.0% in 1999, down from 15.8% in 1998. This decrease resulted
from our inability to leverage our communications center fixed costs.
ACCOUNT SERVICES. Account services expenses were $2.3 million for the year
ended December 31, 1999 as compared to $2.0 million for the year ended
December 31, 1998, an increase of $332,000 or
14
<PAGE>
17.0%. The increase was primarily the result of hiring additional account
service associates along with additional costs of providing specific account
reporting to customers.
INFORMATION SERVICES. Information services expenses were $5.1 million for
the year ended December 31, 1999 as compared to $3.5 million for the year ended
December 31, 1998, an increase of $1.7 million or 48.0%. Information services
expenses as a percentage of revenue were 21.5% in 1999 compared to 17.5% in
1998. The increase both in dollars and as a percentage of revenues was primarily
the result of expenses related to year 2000 compliance issues. In addition,
increases in information services expenses resulted from the hiring of
additional information service associates and related costs.
COST OF REVENUES. Cost of revenues were $18.9 million for the year ended
December 31, 1999 as compared to $15.4 million for the year ended December 31,
1998, an increase of $3.5 million or 23.0%.
The increase was a result of additional staffing and build out of our
communications center in Lafayette, Indiana in 1999 to accommodate increased
volume of business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$3.8 million for the year ended December 31, 1999 as compared to $3.9 million
for the year ended December 31, 1998, a decrease of $140,000 or 3.5%. General
and administrative expenses as a percent of revenue was 16.0% for 1999 as
compared 20.0% for 1998. This decrease was a result of our ability to leverage
our fixed overhead costs.
SALES AND MARKETING. Sales and marketing expenses were $2.6 million for the
year ended December 31, 1999 as compared to $1.5 million for the year ended
December 31, 1998, an increase of $1.1 million or 69.4%. Sales and marketing as
a percent of revenues was 10.9% in 1999 compared to 7.8% in 1998. The increase
both in dollars and as a percentage of revenues was primarily due to increased
staffing as well as advertising and marketing costs related to the promotion of
the iSKY brand.
STOCK COMPENSATION EXPENSE. We recorded a $793,279 expense associated with
certain options granted during 1999. No such expense was recorded in 1998.
INTEREST EXPENSE, NET. Interest expense, net was $158,000 for the year
ended December 31, 1999 as compared to $430,000 for the year ended December 31,
1998, a decrease of $272,000 or 63.3%. Interest expense incurred during 1999 and
1998 was primarily due to borrowings under our line-of-credit. Interest expense
was offset by interest income of $106,000 in the year ended December 31, 1999
and $72,000 for the year ended December 31, 1998.
PROVISION FOR INCOME TAXES. We incurred losses for the years ended
December 31, 1999 and 1998. Accordingly, there were no provisions for income
taxes in these periods. See also Note 13 to the "Financial Statements" included
elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues were $19.7 million for the year ended December 31, 1998
as compared to $18.7 million for the year ended December 31, 1997, an increase
of $1.0 million or 5.5%. The relatively low increase in revenue in 1998 as
compared to the prior year was mainly due to lower billable production relative
to 1997. Lower billable production resulted from the lack of sufficient capital
resources to develop the capacity and infrastructure necessary to expand
services to the existing client base. As a result, we had over $2.0 million of
backlog revenue at the end of 1998.
Revenues for clients we provided service for in both 1998 and 1997 were
$14.1 million for the year ended December 31, 1998 as compared to $9.9 million
for the year ended December 1997, an increase of $4.1 million or 40.2%. In
addition to the increase in revenue from existing clients, we generated $5.8
15
<PAGE>
million in revenues from new clients in 1998. These increases were offset by
$8.9 million of revenue associated with clients served in 1997 but not in 1998.
DIRECT EMPLOYEE EXPENSES. Direct employee expenses were $6.8 million for
the year ended December 31, 1998 as compared to $4.9 million for the year ended
December 31, 1997, an increase of $2.0 million or 40.1%. Direct employee
expenses as a percentage of revenues was 34.7% in 1998 compared to 26.1% in
1997. The increase both in dollars and as a percent of revenue was a result of
hiring additional customer relationship associates, who due to infrastructure
constraints, were not as productive as in the prior year.
OTHER DIRECT EXPENSES. Other direct expenses were $3.1 million for the year
ended December 31, 1998 as compared to $2.4 million for the year ended
December 31, 1997, an increase of $723,000 or 30.1%. Other direct expenses as a
percent of revenues was 15.8% for 1998 as compared to 12.8% for 1997. The
increase both in dollars and as a percentage of revenues was a result of
additional staffing and consulting costs to operate and expand our information
systems.
ACCOUNT SERVICES. Account services expenses were $2.0 million for the year
ended December 31, 1998 as compared to $2.5 million for the year ended
December 31, 1997, a decrease of $540,000 or 21.7%.
INFORMATION SERVICES. Information services expenses were $3.5 million for
the year ended December 31, 1998 as compared to $2.9 million for the year ended
December 31, 1997, an increase of $588,000 or 20.5%. Information services as a
percent of revenues was 17.5% in 1998 compared to 15.4% in 1997. The increase
both in dollars and as a percentage of revenues was the result of additional
staffing, depreciation of new computer equipment and the development of the
database warehouse department.
COST OF REVENUES. Cost of revenues was $15.4 million for the year ended
1998, as compared to $12.6 million for the year ended 1997, an increase of $2.7
million or 21.6%. The increase was a result of hiring additional customer
relationship associates, as well as additional information systems payroll and
consulting costs, needed to operate and expand our information systems.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$3.9 million for the year ended December 31, 1998 as compared to $3.5 million
for the year ended December 31, 1997, an increase of $461,000 or 13.2%. General
and administrative expenses as a percent of revenues was 20.0% in 1998 compared
to 18.6% in 1997. This increase was primarily due to an increase in the
provision for bad debt expense as well as increased staffing.
SALES AND MARKETING. Sales and marketing expenses were $1.5 million for the
year ended December 31, 1998 as compared to $2.1 million for the year ended
December 31, 1997, a decrease of $595,000 million or 27.9%. Sales and marketing
as a percentage of revenues was 7.8% in 1998 compared to 11.4% in 1997. The
decrease both in dollars and as a percentage of revenues was due to reduced
commissions paid to the sales force resulting from the relatively low revenue
growth as discussed above.
INTEREST EXPENSE, NET. Interest expense, net was $430,000 for the year
ended December 31, 1998 as compared to $290,000 for the year ended December 31,
1997, an increase of $140,000 or 48.3%. Interest expense was offset by interest
income of $72,000 for the year ended December 31, 1998 and $53,000 for the year
ended December 31, 1997.
PROVISION FOR INCOME TAXES. We incurred a loss for the year ended
December 31, 1998. We generated income for the year ended December 31, 1997 that
was offset by net operating loss carryforwards. Accordingly, there were no
provisions for income taxes in these periods. See also Note 13 to the "Financial
Statements" included elsewhere in this prospectus.
16
<PAGE>
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, we had net operating loss carryforwards of
approximately $7.6 million that will expire at various dates, through 2018, if
not utilized. We have recorded a valuation allowance of 100% of net deferred tax
assets as the future realization of tax benefit is not sufficiently assured.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we completed a private sale of convertible preferred
securities resulting in net proceeds of $28.3 million that will be used to
support information technology initiatives, working capital needs, strategic
acquisitions, continued expansion of our online business and general corporate
purposes.
Cash provided by operating activities was $360,000 and $478,000 for the
years ended December 31, 1999 and 1998, respectively. Working capital was
$1.9 million as of December 31, 1999 and $5.3 million as of December 31, 1998.
The decrease in working capital in 1999 was primarily due to the increase in
staffing and infrastructure necessary to provide additional services to existing
and new clients and the marketing costs associated with new services. We expect
that cash proceeds raised from the private sale of convertible perferred stock
in February 2000 and this offering will be sufficient to fund our operations for
the upcoming 12 months.
Cash used in investing activities was $2.7 million and $1.9 million for the
years ended December 31, 1999 and 1998, respectively. Capital expenditures have
consisted primarily of upgrades to our software and hardware at the
communication centers. We expect to incur significant capital expenditures in
order to support new contracts, business initiatives and anticipated future
growth opportunities. We anticipate that our total investment in new facilities,
and upgrades and additions to existing facilities and information technology
services for the year ended December 31, 2000 will be approximately
$10.5 million. The increase in capital expenditures over 1999 relates primarily
to the opening of our new communications center in Oregon and to equipping our
existing communication operations with our integrated customer loyalty
management solution.
Cash used in financing activities was $1.0 million for the year ended
December 31, 1999. Cash provided by financing activities was $4.5 million for
the year ended December 31, 1998. During October 1998, we completed a private
sale of convertible preferred securities resulting in net proceeds of
$7.3 million which was offset by repayment of borrowings under the line of
credit of $1.3 million and principal payments on obligations under capital
leases and notes payable of $1.5 million. The net proceeds were used to fund
working capital requirements and system upgrades.
We have a $5.0 million secured line of credit and a $2.0 million committed
equipment line with a commercial bank. The borrowings are collateralized by a
first priority security interest in all of the corporate assets of the company.
The line of credit is repayable in October 2000 and bears interest at the bank's
prime rate. The equipment line is repayable $1.0 million in February 2003 and
$1.0 million in August 2003 and bears interest at the bank's prime rate plus
three quarters of one percent per annum. At December 31, 1999, $645,000 was
outstanding under the line of credit and the interest rate on outstanding
borrowings under the line of credit was 8.5%. At December 31, 1999, no amount
was outstanding under the equipment line. Upon completion of this offering, and
in connection with the conversion of the Series AA preferred stock, we will
declare and pay accrued dividends of approximately $1.2 million.
We believe that international markets represent further opportunities for
growth. We may consider entering into forward exchange contracts in order to
hedge our net investment in international countries in which we establish a
presence, although no assurance can be given that we will be able to do so on
acceptable terms.
17
<PAGE>
INFLATION
Management believes that inflation has not had a material effect on our
operations.
YEAR 2000 COMPLIANCE
We estimate the Year 2000 expenses in 1999 to be $1.4 million, including
internal personnel costs. 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 instead of the year 2000.
In addition, programs may fail to recognize February 29, 2000 as a leap year
date as a result of an exception to the calculation of leap years that will
occur in the year 2000 and occurs only once every 400 years. This problem could
result in miscalculations, data corruption, system failures or disruptions of
operations. Because we integrate third-party software to provide some of the
functions of our services, residual Year 2000 problems affecting this software
could cause our systems to fail. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to provide our
services or operate our business, we could lose customers, suffer significant
disruptions in our business, lose revenues or incur substantial liabilities and
expenses. We could also become involved in costly litigation which would
materially affect our operating results and financial condition.
Although the transition from 1999 to 2000 has passed and we are not aware of
any Year 2000 problems with our internal systems or our vendors, it is possible
that Year 2000 problems could be discovered in the future.
QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK
We do not currently have any derivative financial instruments. We invest our
excess cash in short-term highly liquid cash equivalents. Our line of credit
will be repaid upon completion of this offering. As a result, we believe that
our exposure to interest rate risk is not material.
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BUSINESS
OVERVIEW
We provide complete outsourced services for companies seeking to enhance
their customers' on-line and off-line experience before, during and after a
purchase whether it is through communication over the internet, or on-line, or
through traditional communications media, or off-line. These services, which we
refer to as "customer loyalty management services," use interactive one-to-one
communications, enhanced by personalized data collection and management, to
find, win, keep and enhance profitable customer relationships.
We offer our clients a customized, fully-integrated solution which allows
for interaction with their customers through a variety of media including text
conversation over the internet or, text chat, e-mail, voice over the internet,
telephone and facsimile. Equipped with state-of-the-art Windows-based customer
interaction software and leading computer telephony technologies, our customer
relationship associates, who are responsible for direct contact with customers,
support inbound and outbound communications center applications involving
customer acquisition, retention and optimization. We are able to collect and
analyze data concerning our clients' customers based on our interactions and
provide immediate feedback to our clients.
Our clients include Fortune 1000 companies as well as both established and
early-stage electronic commerce companies. As of December 31, 1999, we had more
than 40 clients, including American Express, BMW, Concierge Club, General
Electric Capital Corporation, Hewlett Packard, Kohler, LensCrafters, Owens
Corning and Volkswagen.
INDUSTRY BACKGROUND
IMPORTANCE OF CUSTOMER LOYALTY
The emergence of the internet and the accelerating pace of technological
innovation pose new challenges for both traditional businesses and pure
electronic commerce businesses as they fight to find, win, keep and enhance
profitable customer relationships. A critical factor in meeting this challenge
is a business' ability to foster and cultivate loyalty from its customers.
Research demonstrates that it costs significantly less to retain new customers
than it does to acquire new ones. According to research presented in Harvard
Business Review, companies can increase their profits by almost 100% by
retaining 5% more of their customers. Providing high quality customer care and
establishing long-term relationships with customers is crucial to the ability of
on-line and off-line businesses to maintain their competitive positions.
The consequences can be severe for traditional and internet related
businesses that fail to provide the highest quality customer care and take
proactive steps to build long-term relationships with their customers. Some
potential negative implications of poor customer service include the loss of
existing customers, increased difficulty in attracting new customers, increased
difficulty in converting on-line and off-line visits to sales, and the inability
to maintain a competitive position. In addition, companies face the possibility
of losing incremental revenue opportunities by not collecting and analyzing the
information obtained from interactive, one-to-one communications to personalize
all interactions with customers.
GROWTH OF OUTSOURCING
International Data Corporation, or IDC, expects that worldwide spending on
outsourcing services will grow from nearly $100 billion in 1998 to more than
$151 billion in 2003. An important segment of this market will be outsourcing
customer care services. Both off-line and on-line businesses often lack the
expertise, resources, and infrastructure necessary to appropriately and
efficiently provide top quality customer support. Additionally, as companies
focus their resources on their core competencies, many
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businesses have elected to outsource their customer care services. Outsourcing
customer care and customer service functions provides access to skills,
expertise and technology that might be unavailable or expensive given the scale
of the business. In addition, outsourcing offers businesses the flexibility to
meet changing business conditions, the opportunity to improve operating
efficiencies and to implement customer care programs quickly.
GROWTH OF THE INTERNET
The internet has significantly changed the competitive environment for
businesses of all types and sizes. IDC estimates that the global electronic
commerce market will expand from $27 billion in 1998 to $733 billion in 1999.
Consumers now have a global medium for commerce, and companies must provide a
high quality customer support experience in order to effectively maintain,
leverage and grow their customer bases.
With the emergence of electronic commerce and communication over the
internet, managing customer relationships has become more complex. Customers
around the world expect to be able to access information and communicate with a
company about its products or services at any time of day through a variety of
internet-related communications tools. However, many companies are not able to
provide this range of service options to their customers. Jupiter Communications
reports that 42% of 125 major websites queried either never responded to the
inquiries, took more than five days to respond or simply did not have a system
in place to respond. In addition, according to Forrester Research, over
two-thirds of all on-line shopping carts are abandoned before check-out.
Traditional off-line businesses are under tremendous pressure to exploit the
efficiencies of the internet and to transition their businesses on-line. IDC's
US Global Information Technology survey estimates that 35% of U.S. businesses
have a home page on the internet. In order to succeed in such a highly
competitive market, traditional off-line businesses must overcome customer
loyalty challenges on two fronts. First, they must find a way to maintain or
increase the level of service provided to their existing customer base which may
be aggressively targeted by new electronic commerce businesses. Second, off-line
businesses must be able to meet the heightened expectations for customer service
held by their new on-line consumers. These consumers expect customer service
that is personalized, responsive and accessible 24 hours a day, seven days a
week.
On-line businesses have an even greater incentive to respond to consumers'
demands. They operate in an environment in which new businesses can, and do,
enter established markets overnight. Customers can quickly and easily "click" to
a competitor's site. Consumers' opportunity to choose between multiple
competitors and their ability to move effortlessly from one to another makes the
provision of real-time customer service increasingly important to retaining and
growing an on-line customer base.
CUSTOMER CARE NEEDS
Many businesses are finding themselves ill-equipped to support customer care
management. At the same time, increasing numbers of internet users are
attempting to use electronic commerce sites, and businesses need to provide
sites with accessible and responsive customer service. To address the
increasingly difficult challenge of acquiring, retaining, and building a loyal
customer base, businesses must be able to implement a cost-efficient, integrated
solution that allows customers to communicate with their vendors seamlessly
through any one of a number of modes. The solution should be flexible and
scalable to address growing consumer demand. The solution should also enhance
and personalize the customer's experience by enabling businesses to integrate
their existing communications infrastructure with database management technology
in order to gather, store and analyze customer information. Lastly, the solution
should provide businesses with a cost-effective alternative for delivering
customer care on an outsourced basis so that critical company resources can be
focused on improving core competencies.
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OUR SOLUTION
THE ONLY INTEGRATED REAL-TIME CUSTOMER LOYALTY MANAGEMENT SOLUTION.
iSKY provides a complete outsourced customer-focused solution to both
electronic businesses and traditional companies seeking to enhance their
customers' on-line and off-line experience before, during and after a purchase.
We believe that we offer the only integrated customer loyalty management
solution which allows us to capitalize on the opportunities arising from current
electronic commerce and outsourcing trends. We define customer loyalty
management as using interactive, one-to-one customer care communications,
enhanced by real-time, personalized data collection and management, to find,
win, keep and enhance profitable customer relationships.
We believe our solution offers the following unique elements:
- INTEGRATED COMMUNICATIONS CENTERS. Through our multi-channel
communications centers, we accommodate our clients' customers' preferred
communications medium by employing both on-line and off-line tactics. Our
communications centers can blend inbound and outbound communications
technologies at a customer relationship associate's desktop to provide
real-time customer care for large and small clients. A single iSKY trained
customer relationship associate can provide customer care services to a
customer visiting our client's website through:
- live internet chat,
- e-mail message exchanges,
- placing or receiving a telephone call,
- facsimile, or
- voice communication over an open internet connection.
Customer relationship associates desk top technology also permits the
customer relationship associates to simultaneously view the same website as
the customer to answer questions, make suggestions and assist the customer
in completing on-line forms. In addition, iSKY provides web self-service
functions such as frequently asked questions, pricing look-ups, order
status and inventory availability inquiries and automated e-mail.
- UNIQUE DATA MANAGEMENT AND WEB-BASED REPORTING CAPABILITIES. Our
multi-channel communications channels are directly linked with our
database and reporting systems. Web-based reporting, database query, and
analytic tools enable our clients to have virtually instant access to
customer information collected from the ongoing interactions between their
customers and iSKY customer relationship associates. Throughout our
16 years of operations, we have collected a significant amount of data
through our customer interactions and developed substantial data mining
capabilities. Data collected from interactions with iSKY can be analyzed
on a real-time or periodic basis. The analysis provides insights that
enable customer relationship associates to personalize interactions with
clients' customers as they are communicating with them.
- FLEXIBLE AND SCALABLE INFRASTRUCTURE. Our customer loyalty management
solutions have been designed for flexibility, and can easily and
cost-effectively be adapted for both small and large companies. Due to the
scalable and highly automated nature of our application design, a solution
created for a large client can often be replicated and leveraged for a
small client. As our client relationships develop, they can quickly and
easily implement additional iSKY support offerings and data mining
capabilities. We believe that our ability to service both small and large
companies easily and cost-efficiently provides us with a competitive
advantage. In addition, as our customer base grows, we have designed our
systems and infrastructure to be able to scale quickly and effectively to
handle additional demands.
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BENEFITS TO OUR CLIENTS.
Our outsourced customer loyalty management solution allows our clients to
focus critical resources on their core competencies and to accelerate their
business plan in a cost-effective manner. As a result of the quick
implementation and integrated nature of our solution, we provide our clients
with the ability to capitalize on the dynamic opportunities in the electronic
commerce market. Our customized database management capabilities give our
clients the opportunity to not only enhance their revenues, but also
dramatically improve customer loyalty. In addition, our customer care service
can easily be implemented and integrated into our clients' back-end systems, and
our clients benefit from reduced operating and technical costs.
GROWTH STRATEGY
Our goal is to become a recognized provider of real-time customer care
services. We offer what we believe is the only customer loyalty management
solution that combines a complete web-enabled customer service offering with
proven communications center operations and database management. The key
elements of our strategy are:
- RAPIDLY EXPAND AND ENHANCE EXISTING CLIENT RELATIONSHIPS. We have
developed strong relationships with our clients based on our expertise in
developing and providing outsourced customer loyalty management solutions.
We believe our clients want and need a fully-integrated, web-based
customer care solution, and that by offering this solution we will expand
and enhance our relationship with these clients. We intend to extend our
integrated service offering to our existing customers and to build out our
multi-channel technology platform. We also intend to continue our
commitment to invest in leading-edge technology, equipment and systems to
provide new, high-quality, innovative services to our existing clients.
- EXPAND CLIENT BASE IN KEY VERTICAL MARKETS. We have and will continue to
target the leading companies in the electronic commerce, automotive,
health care, financial services and technology markets. These markets are
characterized by customers with high lifetime value, products or services
that have renewal or upgrade events, and large customer bases. Our
expertise in these markets enables us to meet our clients' needs quickly
and effectively. We intend to aggressively pursue new clients in each of
these vertical markets, with an emphasis on the large and growing
opportunity to work with electronic commerce companies.
- PROMOTE THE ISKY BRAND. We plan to aggressively build and market the iSKY
brand through various marketing efforts including such traditional methods
as trade shows, print advertising and direct mail. In addition, we intend
to use the dynamic marketing capabilities of the internet to create
awareness and demand for our services through our website, web advertising
and electronic newsletters. We plan to build consumer recognition of the
iSKY help button, the "iSKY bell," with the goal of achieving universal
recognition of the iSKY bell by consumers as a symbol of quality customer
service. Our goal is that over time, the icon's presence on clients'
websites will serve to reassure consumers of businesses' ability to
deliver high quality customer service.
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- PURSUE ACQUISITIONS AND STRATEGIC PARTNERSHIPS. We will pursue
acquisitions of companies that have clients that fit our business model or
have complementary products or technologies. We also have and will
continue to develop a variety of strategic partnerships with marketing
services, electronic commerce and technology companies to enhance our
position as a leading, outsourced customer loyalty management provider. We
currently have strategic relationships with key distribution, technology
and investment partners, including:
- Lucent,
- Internet Capital Group,
- General Electric Capital Corporation,
- Ingram Book Company,
- The Interpublic Group of Companies, and
- OrderTrust.
- EXPAND OUR PRESENCE ABROAD. We currently serve the U.S. business
operations of international clients and we believe there is a large
opportunity to expand our operations to provide our services
internationally. We plan to pursue our international expansion objective
via direct means, strategic partnerships and potential acquisitions.
INTERACTIVE SERVICES
We offer a complete package of outsourced customer care services which we
can customize according to our clients' needs to help them increase customer
loyalty and profitability.
Using our interactive communications technology, we allow our clients to
interact with their customers through a variety of media including real-time
text chat, e-mail, voice conversations over the internet, telephone and
facsimile. In addition, our database management capabilities allow our customer
relationship associates to initiate personalized conversations with our clients'
customers. We can also utilize information from our databases to help our
clients improve the customer's on-line and off-line experience and provide
cross-selling opportunities to prospective and existing customers.
Our clients benefit from the following elements of our customer care
services:
- technology which permits communications through multiple channels, whether
originated by the customers or an iSKY customer relationship associate;
- database management and mining skills;
- ability to synchronize, customize and intelligently route multi-channel
interactions with customers;
- electronic "help" function design, consultation and hosting;
- informed, trained customer relationship associates; and
- extensive customer loyalty management experience and capabilities.
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We design and support a variety of internet-based services that are
customizable according to our clients' needs. The screens that a customer views
and responds to in order to reach an iSKY customer relationship associate are
tailored to channel requests as suited to each business. Our multi-channel
communications technology, as symbolized by the iSKY bell, enables the following
communications modes:
<TABLE>
<S> <C>
[graphic icon for Customers see a "click" button which they use to schedule a
Call-Me Buttons] call back from a customer relationship associate.
[graphic icon for Ability to have a real-time text chat session with a
Text Chat] customer relationship associate.
[graphic icon for
E-mail Management Intelligent routing of e-mail to enable prompt responses to
and Automatic browsers' inquiries, including automated replies and
Reply] suggested replies to live customer relationship associates.
[graphic icon for On-line knowledge-based access for customers to obtain
Web Self Service] answers to questions without live associate intervention.
Through web screen synchronization, our customer
relationship associates can:
- see the same web page the customer is viewing,
[graphic icon for - send additional pages to the customer,
Web Screen - assist the customer in filling out web forms by
Synchronization and simultaneously viewing the same web page and data fields as
Escorted Browsing] the customer, and
- respond in real time to the customer's questions as they
arise.
Using internet telephony, customers can speak to customer
[graphic icon for relationship associates through multi-media personal
Web Calls] computers while viewing a website.
</TABLE>
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CUSTOMER LOYALTY MANAGEMENT
Our customer loyalty management services use interactive, one-to-one
communications and sophisticated database management to find, win, keep and grow
profitable customer relationships. Last year we engaged in approximately 11.3
million interactions with our clients' customers. We define an interaction as
any time we interact with a customer through any one of our communications
channels. As shown below, customer loyalty management consists of three stages:
acquisition of new customers, retention of existing customers and optimization
of new and existing customers.
[A picture depicting a circle with the words "Acquisition," "Retention"
and "Optimization" around the circumference and "Central Customer Care
Database" in a smaller circle in the center. The Acquisition portion of
the circle has the words "Initiation/Welcome," "Order Entry,"
"Dealer/Outlet Locate" and "Lead Mgmt." The Retention portion of the
circle has the words "Customer Service," "Channel Mgmt.," "Employee
Incentive Mgmt.," "Case Relations," "Customer Satisfaction Mgmt.,"
"Churn Prevention/Relationship Mgmt.," "Consumer Affairs," "Win Back,"
"Service Admin.," and "Warranty Mgmt." The Optimization portion of the
circle has the words "Credit & Collections," "Marketing Research,"
"Cross/Up/Next Selling" and "Referral Mgmt."]
CUSTOMER ACQUISITION SERVICES. Customer acquisition services include lead
management, order entry, initiation or welcome contacts and dealer or outlet
locator services. We use our multi-channel communications technology with
integrated telephonic and internet communication, database management, data
mining, research and analysis to offer clients a complete set of services to
increase the acquisition rate of new, high value customers. Our lead management
techniques identify and prioritize sales leads based on analysis of key pieces
of information gathered from our clients' prospects to determine the likelihood
of their conversion to customers. We engage in one-to-one communication to build
customer profiles and route "hot" leads directly to the appropriate distribution
outlet, often within minutes. This rapid deployment system allows our clients to
answer inquiries quickly with a response tailored to the precise needs of an
individual prospect and provides our clients with data that facilitates later
follow-up with highly qualified prospects.
Our order entry programs can function with our lead management programs or
as separate programs. We can complete the recording of the specifics of the
order, and through partnerships, process payments and initiate fulfillment
quickly and accurately. All order information becomes part of the clients'
customer database. Initiation or welcome contacts provide a personal customer
loyalty tool to correct mistakes in the sales process, set customer
expectations, gather feedback and boost satisfaction. Dealer or outlet locator
services give information to prospects and facilitate appointments or sales
meetings. If appropriate, prospect requests are forwarded immediately to the
client's distribution channel member closest to the prospect with information on
their interest level, intent to purchase and time horizon for purchase.
One example of our acquisition services is our prospect follow-up system for
automotive dealerships to raise "walkout" close rates. Walkouts are prospects
who shop at the dealership but do not buy. We contact prospects by telephone and
facsimile to find out if they were satisfied with their recent shopping
experience, and to identify their purchase criteria including time horizon and
price. Our customer relationship associates engage prospects so that they "open
up" and describe preferences that they would not have directly told their
dealerships about. Hot prospect information is electronically transferred to the
dealership within hours of the contact to help them close the sales.
CUSTOMER RETENTION SERVICES. Our retention services are designed to prevent
customer turnover, maximize customer satisfaction, reinstate customers who have
defected and resolve customer service inquiries in a satisfactory and timely
fashion.
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Retention includes tracking and managing customer satisfaction using
parameters adapted to our clients' particular businesses. We notify clients of
customer feedback that requires immediate attention, whether it is a sales
opportunity or a complaint that requires rapid resolution. We also track and
analyze customer satisfaction trends and their root causes and consult with
clients on customer care best practices.
Through channel management, our clients receive feedback on the service
their customers are receiving from distribution channel partners. Using
computer-based case management software, our professional customer relationship
associates resolve critical customer issues and conduct investigations when
needed.
Our employee incentive management programs provide near real-time
measurement and reports of employee performance on customer sales and service
activities relative to incentive criteria. Also available is customer service
overflow or full capacity outsourcing that is often less expensive and more
efficient than many clients can provide in-house and with higher customer
satisfaction and loyalty results.
Win back services utilize proven customer dialogue techniques to help our
clients restore customer relationships and gather information about the reasons
for defection. Our methods of churn prevention and relationship building can
identify the client's most profitable customers, detect patterns and causes of
defection, target customers most likely to defect and alert the client to a
potential defection.
Through established national networks of providers tailored to our clients'
needs, we can dispatch service personnel or arrange service appointments quickly
and conveniently for customers. We are able to process warranty claims,
inquiries, investigations and validations in compliance warranty terms through a
single communication source.
Our consumer affairs program provides customers and prospects with
information about our clients, their products and services. Customers can ask
questions, share opinions and receive information. Customer feedback is compiled
for use in forecasting and product development.
An example of our retention services is when we were retained by a large
bank which was experiencing low overall customer satisfaction ratings and high
attrition. We implemented a bank-wide customer satisfaction management system,
whereby facsimile and telephonic interactions were conducted regularly with
high-value customers of each branch in the bank's network. The volume and nature
of customer concerns and needs among the bank's top 50 branches and bottom 50
branches were analyzed. We determined that what differentiated the two groups
was customer satisfaction with branch controllable issues, such as problem
handling by branch personnel, courtesy and line waits. Both groups had about the
same number of bank-controllable complaints such as ATM issues, minimum
balances, product offerings, hours and locations. Thus, the bank was able to
improve overall satisfaction by helping troubled branches attack specific
branch-controllable issues. The bank also enjoyed an additional benefit:
whenever we uncovered a customer complaint or sales opportunity, a faxed
bulletin was sent to the appropriate branch for immediate action, enabling the
bank to fix problems and close new sales. The bank attributed substantial
numbers of "saved" customers and new sales to the follow-up program.
CUSTOMER OPTIMIZATION SERVICES. Our customer optimization services allow
our clients to capitalize on the goodwill they have built and increase sales
from existing customers. Our customer optimization program includes marketing
research, promotion of additional sales of complementary or higher value
products to existing customers, credit and collections and referral management.
We also perform strategic and tactical research, as well as customer
tracking and monitoring studies. Many of our programs include control groups to
help us measure the effectiveness of our customer care programs. Our methodology
for promoting additional sales focuses on creating profiles of customers who
make multiple purchases then identifying and meeting as many needs as possible
for
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the existing customer base. This method has a lower overall cost per lead than
traditional mass marketing strategies. Referral management services use
electronic sales opportunity alerts to notify our clients and their channel
members immediately when a referral is made by an existing customer. The
notification process allows clients to contact prospects with the endorsement of
the customer who made the referral.
One example of our optimization services is represented by a luxury
automobile manufacturer that hired us to contact customers by e-mail, facsimile
and telephone during the last six months of their leases to inquire about their
satisfaction and their repurchase intentions, to communicate a lease loyalty
offer from the manufacturer and to encourage the customers to purchase again.
The success of the lease loyalty effort was measured by comparing the percentage
of people who repurchased the brand once their leases expired to the repurchase
percentage of customers in a control group that were not contacted.
DATA MANAGEMENT AND WEB-BASED REPORTING
Our integrated platform enables us to collect valuable marketing data which
provides insights into buying behaviors, responses to different sales channels,
the effectiveness of promotions and trends in customer service issues.
Throughout our 16 years of operations, we have collected a significant amount of
data through our customer interactions. In the past three years alone, we have
generated data through over 25 million individual interactions with customers.
We have also developed substantial database management and mining capabilities.
Data centers in Laurel, Maryland and Cedar Knolls, New Jersey use database
management and mining hardware and software tools to allow our customer
relationship associates real-time access to data obtained from customer
interactions and to facilitate gathering additional information that will help
our clients to either improve or provide additional products and services to
prospects and existing customers. For example, during a conversation with a
customer, our customer relationship associates can access information about a
customer's preferences from our database as well as map a history of where a
customer has been on the client's website and use this real-time information to
better understand the customer's interests and to suggest additional products
and services. In addition, we can compile clickstream histories and advise
clients on refinements to their web pages and web marketing campaigns. Web-based
reporting, database query and analytic tools enable our clients to have
virtually instant access to customer information generated by the ongoing
interactions between their customers and iSKY.
SALES
We sell our services primarily through our direct sales force. We focus our
sales efforts on five targeted vertical markets: automotive, electronic
commerce, health care, financial services, and technology. Within these markets,
we target Fortune 1000 prospects, existing clients and electronic commerce
companies of various sizes and stages. Our regional vice presidents are
responsible for complex strategic sales to Fortune 500 companies. We also have
national account managers who target complex multi-level sales at Fortune 1000
companies. Our account executives handle sales to electronic commerce businesses
and other businesses that we believe would benefit from our internet
capabilities. We expect to grow our sales force significantly over the next
year. In addition, our Vice President of Strategic Alliances develops marketing
and distribution relationships.
Our target companies value customer service and typically have several of
the following characteristics:
- customers with high margin/lifetime value
- products or services that have renewal or upgrade events
- large customer bases
- competitive differentiation based on service
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- not fully developed in-house customer service
- customer bases that are vulnerable.
MARKETING
We focus our marketing effort on positioning iSKY as a leading real-time,
interactive customer loyalty management solution that integrates interactive
communications and database management technologies to help our clients increase
customer loyalty. Our marketing program targets existing clients, Fortune 1000
prospects and established and early-stage electronic commerce companies
requiring a customer loyalty management solution. We market through our direct
sales force, our strategic partners, our website, print and on-line advertising
and newsletters, trade shows, interviews with media and industry analysts, and
direct mailings.
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CLIENTS
We have a number of long term client relationships. From 1995 through 1999,
we have retained 92% of the clients who have engaged us. In 1999, revenues from
our top 10 client relationships grew by approximately 25% on average from 1998.
The following is a representative list of our clients by key targeted market
with the percentage of revenue from each customer in the year ended December 31,
1999. Concierge Club, e-chemicals and General Electric Capital were new clients
in 2000 and so did not represent any revenue for us in 1999.
<TABLE>
<S> <C>
AUTOMOTIVE HEALTH CARE
- -------------------------------------------- --------------------------------------------
BMW (15.4%) Blue Cross/Blue Shield of Wisconsin (1.0%)
Porsche (4.7%) Compcare (5.5%)
Volkswagen (19.5%) LensCrafters (2.3%)
ELECTRONIC COMMERCE FINANCIAL SERVICES
- -------------------------------------------- --------------------------------------------
Concierge Club Advanta Corporation (0.9%)
e-chemicals General Electric Capital Corporation
TECHNOLOGY OTHER
- -------------------------------------------- --------------------------------------------
Hewlett Packard (2.2%) American Express Travel Services (3.0%)
Sharp (0.3%) Continental Airlines (0.3%)
Owens Corning (7.2%)
Kohler (1.6%)
</TABLE>
STRATEGIC PARTNERS
We have established three types of strategic relationships: distribution
partners, technology partners and investment partners. These relationships are
designed to leverage and enhance our customer loyalty management solution and
related business opportunities. We view these relationships as an important
component of our success.
DISTRIBUTION PARTNERS
We have distribution partners through our alliance partner program which is
a cooperative effort between electronic commerce infrastructure providers and
iSKY. The alliance partner program allows both organizations to expand their
marketing exposure and to complement each other's electronic commerce services.
Under the program, both parties refer leads to the other and work to ensure
proper interaction and assistance as needed. In exchange for this lead referral
and assistance, the partner receives a finder/referral fee once the account is
closed and generating revenues. The partner reciprocates when we refer a lead to
the partner's sales organization and this lead culminates in a contract for the
partner.
In addition to the mutual referral program, iSKY offers the following:
- training of partner's sales and marketing organization on iSKY products
and offerings
- collateral material for partner's sales personnel
- "Hot Link" URL between iSKY's website to the partner's site and from the
partner's site to iSKY
- joint customer presentations
- participation in partner's booth at trade shows
- co-sponsorship position at iSKY hosted seminars
- other joint efforts as individually developed.
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We have formed strategic partnerships with businesses whose services or
products support the key operations of electronic commerce companies and which
are in a strong position to promote our services to their clients or affiliates,
including the following companies:
<TABLE>
<S> <C>
Cirqit Cirqit's electronic commerce business provides digital and
hard copy printing services to complete electronic commerce
order fulfillment.
OneSoft OneSoft helps electronic commerce companies develop their
interactive websites. OneSoft's core solution, OneCommerce,
enables enterprises to interact with their customers and
trading partners over the internet to exchange information,
provide services, and complete business-to-business and
business-to-consumer transactions.
OrderTrust OrderTrust manages the entire lifecycle of an electronic
commerce order from when a shopper decides to buy until the
goods reach the shopper. The OrderTrust network enables the
execution of critical tasks such as payment processing,
order routing and auditing, status reporting, account
settlement and exception handling.
Peppers & Rogers Peppers & Rogers assist organizations in developing business
practices that result in stronger and more profitable
relationships with their customers by individualizing
customers' interactions.
</TABLE>
TECHNOLOGY PARTNERS
We have developed strategic partnerships with technology companies who are
developing internet-based applications to support electronic commerce.
<TABLE>
<S> <C>
IMA IMA is an industry leader in customer interaction software
for high-volume call centers. IMA's software solutions
enable businesses to create, manage and respond to demand in
a highly effective manner. We are working with IMA to
develop their software to support Internet-based customer
interactions.
Lucent Technologies Lucent Technologies designs, develops and manufacturers
communications systems, software and products for network
operators and other service providers. Lucent currently
provides the telephony backbone for our operations. We are
working with Lucent to integrate their inbound and outbound
platform with internet-based communications tools.
</TABLE>
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INVESTMENT PARTNERS
We have also developed strategic partnerships with businesses that have
invested in our company. These businesses promote our services to companies they
operate or work with.
<TABLE>
<S> <C>
Internet Capital Internet Capital Group is an Internet holding company
Group actively engaged in business-to-business electronic commerce
through a network of partner companies.
General Electric General Electric Capital Corporation is a global,
Capital Corporation diversified financial services company with 28 specialized
businesses.
Ingram Industries Ingram Industries Inc., the parent company of Ingram Book
Inc. Company, has made an investment in our company. We are
exploring strategic business opportunities with Ingram Book
Company which is a leading wholesale book distributor.
The Interpublic As one of the largest advertising and marketing services
Group of Companies, holding companies in the world, Interpublic would present
Inc. many opportunities to introduce our services to marketing
services companies in its portfolio whose clients require a
customer loyalty management solution. We and Interpublic are
exploring ways to develop these opportunities.
Advanta Partners Advanta Corporation, an affiliate of Advanta Partners,
provides credit card services to small companies and engages
us to provide their retention services. Advanta Partners
also promotes our services to companies in which it invests.
</TABLE>
COMMUNICATIONS CENTERS
iSKY maintains four communication centers which house customer relationship
associates who communicate with our clients' customers. Equipped with
state-of-the-art Windows-based customer interaction software and leading
computer telephony technologies, each center supports inbound and outbound
interactions by means of telephone, voice over internet protocol, web-based live
chat sessions, e-mail and facsimile. The following table lists our centers
currently operational along with one center currently under construction.
Interaction capacity is based on a seat utilization of 24 hours a day, 7 days a
week with an average of 14 customer interactions per hour.
<TABLE>
<CAPTION>
MAXIMUM CAPACITY
FOR CUSTOMER
RELATIONSHIP CURRENT INTERACTION
FACILITY SQUARE FOOTAGE ASSOCIATES CAPACITY PER MONTH
- -------- -------------- ---------------- -------------------
<S> <C> <C> <C>
Laurel, Maryland............................. 18,884 264 827,904
Milwaukee, Wisconsin......................... 11,241 255 799,680
Lafayette, Indiana........................... 12,000 270 846,720
Montreal, Canada............................. 826 24 75,264
Bend, Oregon*................................ 42,027 1,050 3,292,800
------ ----- ---------
Total.................................. 84,978 1,839 5,842,368
====== ===== =========
</TABLE>
- ------------------------
*Recently opened and scheduled to be fully operational in May 2000.
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We believe that our interaction capacity will increase as we develop our
Internet-based services and increase utilization of our communications centers
to 24 hours a day, seven days a week.
TECHNOLOGY
We have deployed state-of-the-art technology platforms to handle the various
communications and data base management services we offer clients. This
technology includes communications center telephony, network infrastructure,
internet connectivity and computing power.
Our technology is currently deployed in a hub and spoke configuration, in
which central computing is done at the data center in Laurel, Maryland. This
center contains our "host" database computers, HP9000K class servers running
Oracle, and central routing for data control. Host data is downloaded to our
data center in Cedar Knolls, New Jersey, where data mining and analytic
functions are performed on Microsoft SQL servers, applying SAS and SPSS data
management and query tools. Captured and analyzed data is reported to clients
via both printed hard copy as well as on-line, web-based media. iSKY's web-based
reporting systems include real-time data query and analysis functions.
At each of the communications centers in the United States and Canada, which
operate as remote sites, iSKY maintains a local area network, or LAN, and full
telephonic and internet communications equipment. Each communications center has
its own Lucent telecommunications switch, predictive dialer, automatic call
distributor, or ACD, and internet interface for automated inbound and outbound
interactive communications.
Our LAN/WAN is Ethernet utilizing Microsoft NT 4.0 as a network operating
system. Locations are linked together using a frame relay communications system
from MCI and connected via Cisco routers. Our customer relationship associates'
desktop personal computers are supported with IMA Edge-TM- customer interactions
software which provides call flow scripting, screen management and data capture.
The Edge-TM- software is served from HP9000K class systems located in our
Laurel, Maryland data center. Through frame relay communications, the servers
send and receive data to and from our communications centers.
ON-LINE COMMUNICATIONS MANAGEMENT SYSTEMS
Using various leading technologies, we are integrating on-line internet
communications capabilities with our off-line telephonic communications in our
centers. Our integrated interactive communications system links outbound
predictive dialing, inbound call routing, web chats, voice over internet
protocol, facsimile and e-mail with full dialogue management scripting and
database management. Our multi-channel communications system provides for
SmartCalls(SM) which enable our customer relationship associates to identify
customers whom we have been in contact with before and personalize subsequent
interactions. Our technology integrates the following technologies:
- EDGE-TM- CALL FLOW AND SCRIPTING SYSTEM FROM IMA: manages call flow with
screen presentations for customer relationship associates with interaction
scripting capabilities.
- LUCENT G3S AND G3I DEFINITY PBX/ACD: switching platform with skills based
routing, inbound/ outbound blending, intelligent announcements, built in
automated attendant and other features.
- MOSAIX OUTBOUND PREDICTIVE DIALERS: facilitates efficient automated
outbound communications.
- ORACLE DATABASES: relational database software to manage and mine large
volumes of complex data.
- LUCENT CENTREVU INTERNET SOLUTIONS: facilitates electronic interactions
through the internet as well as management and control of web content.
- MARKETSWITCH REAL TIME OPTIMIZER: selects offers to be presented during
customer interactions based on customer demographics, business rules and
responses to questions.
- ONESOFT CLICK STREAM TECHNOLOGY: when installed on a client website
through iSKY, provides our customer relationship associate with
information as to the recent internet sites a customer requesting
assistance has been viewing.
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- COLDFUSION: cross-platform web application which enables web developers to
develop large volume, transaction intensive web applications for
electronic commerce and business automation.
Our multi-channel technology provides our clients' customers with the
ability to communicate with us using the communications medium of their choice.
They can contact us using traditional 800 numbers, facsimiles, e-mail, or
interactively while browsing on our clients' websites. While on the web,
customers can communicate with us by clicking on the "Customer Service" button
or the iSKY bell displayed on the site. Clicking on the button will create
either a web text chat, or facilitate an automated telephone callback, depending
on the customer's preference. The iSKY customer relationship associates will be
able to view the same web page as the customer and answer questions or guide
them through a check-out process or other web procedure.
If the customer has a multi-media enabled computer, the customer will be
able to use a Java-enabled browser to access the web. While browsing a website,
the customer may click on a button on the web page to talk to a customer
representative without ending the browsing session and waiting for a callback.
Our software facilitates navigating calls over the internet through difficult
protocols often found in corporate firewalls, while maintaining security. The
communications center internet telephony gateway, or ITG, downloads a
mini-application to the customer's computer. The application provides the
customer with call status messages as well as the interface through which the
customer drops the call, conducts text chat or types in data to collaborate with
the customer relationship agent.
Our current platform is best described as a hub and spoke design. Our
central processors, constitute the hub and control the processing at all
communications centers as well as the Oracle data stores for all clients. They
are backed up on a nightly, weekly, and monthly rotation using a five tape
strategy (two days rolling, two weeks rolling and monthly). Each server is
protected by Hewlett Packard's most comprehensive level of customer support. We
utilize a RAID5 strategy, the highest level of disc drive redundancy. This
strategy uses a redundant array of disk drives to write data and algorithms that
provided for the automatic recovery of a failed disk drive. We also have
multiple central processing units, or CPUs, for each server to protect against
CPU failure.
We plan to move our server processing to our communications centers and
utilize the hub and spoke design as a backup to decentralized CPU processing. We
also plan to utilize the internet as a backup to our frame relay network. We are
currently implementing redundancy for our e-mail, facsimile, and internet
services. Our backup and disaster recovery plan will be updated as each new
network component is layered into our infrastructure.
EMPLOYEES
As of December 30, 1999 we had 1,137 associates. We have 1,022 associates in
our communications centers, including customer relationship associates and
supervisors, of which 701 were permanent associates and 321 were contract
associates. Our corporate organization includes 147 associates including 20
executives, financial and administrative personnel, 33 account services
associates who are responsible for day-to-day management of our programs, 38
associates in our information technology organization, and 20 associates in our
sales organization. We also have six associates in our on-line product
development team. We plan to continue to expand our associate base as we expand
our business.
HIRING
The hiring, training and retention of customer relationship associates in
our communications centers is critical to our business. We have located our
customer communications centers in suburban areas of Maryland, Indiana,
Wisconsin, and Quebec where the labor demographics are best suited to our
recruiting needs. These communities offer a large, mature, college-educated
labor pool, primarily made up of middle to upper income families. We carefully
screen applicants for relevant skills and professional behavior and introduce
them to the requirements of the position.
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TRAINING
Thorough training of customer relationship associates is the key to the
success of iSKY programs. Our customer relationship associates must be
internet-savvy customer service experts who are knowledgeable about the client's
website, the client's products and services, and the client's policies and
processes. The new iSKY customer relationship associate is taught the essential
elements of high quality customer interactions, effective listening skills, how
to handle different customer profiles in a myriad of situations, and also how to
utilize iSKY's Windows-based desktop customer interaction technology. The "basic
training" program lasts approximately two weeks. Subsequently, the associate is
introduced to and trained in the particulars of the client program on which he
or she will work.
RETENTION
We offer competitive compensation packages with attractive benefits as well
as scheduling flexibility and an array of career path opportunities. In
addition, to maintain the quality of our associates, we have ongoing reviews of
each customer relationship associate and provide structured feedback and
reinforcement.
COMPETITION
The outsourced customer care market is competitive and evolving. We expect
competition to persist and intensify in the future. Our competitors include new
on-line interaction solutions providers and traditional customer interaction and
call center outsourcers. We also compete against the in-house customer service
departments of companies. New on-line interaction and electronic service
solutions providers include Brigade Solutions, LivePerson and PeopleSupport.
Established large call center outsourcers that have announced on-line
capabilities include APAC, ICT Group, Precision Response Corp. and TeleSpectrum.
We expect that more call center outsourcers will develop and announce on-line
capabilities in the next year.
Some of our current competitors have longer operating histories than us.
Some of our competitors have larger client bases, larger professional staffs,
greater brand recognition and greater financial, technical, marketing and other
resources than us. Many of our competitors also have well-established
relationships with our current and potential clients and vendors and may be able
to respond more quickly to changes in customer requirements. Each of these
factors may place us at a disadvantage in responding to our competitors' pricing
strategies, technological advances, marketing campaigns, strategic partnerships
and other initiatives.
FACILITIES
We lease properties in California, Illinois, Indiana, Maryland, New Jersey
and Wisconsin. In Columbia, Maryland, we lease 7,703 square feet of office space
for our headquarters. In Laurel, Maryland, Lafayette, Indiana, Cedar Knolls, New
Jersey, Montreal, Canada and Milwaukee, Wisconsin we lease an aggregate of
44,452 square feet of office space for our communications centers and data
centers. In addition, we have leased 42,027 square feet in Bend, Oregon and are
equipping and staffing this planned communications center.
PENDING LITIGATION
From time to time, we are involved in litigation incidental to our business.
In our opinion, no litigation to which we are currently a party is likely to
have a materially adverse effect on our results of operations or financial
condition.
iSKY has agreed in principal on a settlement with another company which
claims to have rights to the service mark iSKY.NET, the corporate name iSKY,
Inc. and the domain name iSKY.NET. By virtue of our prior use of the mark and
name iSKY and our prior United States Service Mark application for iSKY, we
believe we have superior rights to the use of the "iSKY" mark, name and domain
name. We do not feel that our failure to finalize this agreement at this time
will have a material impact on our operations. We expect to sign a settlement
agreement under which the other company will agree not to use the "iSKY" name in
any format by the end of the first quarter of 2000.
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MANAGEMENT
The following table sets forth information with respect to our executive
officers and key associates.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Richard T. Hebert................... 41 President, Chief Executive Officer and Director
Raymond J. Zukowski................. 39 Chief Operating Officer, Secretary
Mark F. Yanson...................... 41 Chief Financial Officer, Treasurer
Mark E. Malnati..................... 40 Chief Information Officer
Steven G. Krumenaker................ 45 Chief Technology Officer
Bradley H. Steer.................... 38 Senior Vice President of Sales
Richard D. Taylor................... 36 Senior Vice President of Client Relations
Patrick Drimmer..................... 31 Vice President, Operations
Wendy E. Jones...................... 33 Vice President, Account Services
Lorraine M. Miano-Fike.............. 35 Vice President, Human Resources
Ruthanne Kurtas..................... 35 Vice President of Marketing
Michael S. Fisher................... 39 Director
Stephen J. Getsy.................... 54 Director
Steven J. Gilbert................... 52 Director
Walter G. Lohr, Jr.................. 55 Director, Chairman of the Board
Walter P. Maner, IV................. 32 Director
Gary H. Neems....................... 46 Director
Stanley Rapp........................ 74 Director
Charles W. Stryker.................. 52 Director
</TABLE>
RICHARD T. HEBERT. Mr. Hebert joined iSKY in 1992 as Senior Vice President.
He was Chief Operating Officer in 1993 and President, Chief Executive Officer
and a Director in 1995. Prior to joining iSKY, Mr. Hebert held various
management positions at Danbury Mint, a direct marketing company, serving most
recently as its head of operations. Mr. Hebert holds a B.A. from Kenyon College
in Gambier, Ohio.
RAYMOND J. ZUKOWSKI. Mr. Zukowski joined iSKY as Chief Operating Officer in
August 1999 and became Secretary in January 2000. Prior to joining iSKY, since
July 1996, Mr. Zukowski held several positions at APAC, a publicly traded,
teleservices outsourcing company, most recently as Senior Vice President of
Customer Solutions and Process Development. Between July 1995 and July 1996 he
served as a re-engineering specialist for Oxford Health. From September 1993 to
January 1994 he served as Director of Operations / Customer Services for
Montgomery Ward and served as their Vice President, Customer Service and
Operations from January 1994 to July 1995. Mr. Zukowski holds a B.A. in business
administration and marketing from Sacred Heart University.
MARK F. YANSON. Mr. Yanson joined iSKY as Chief Financial Officer and
Treasurer in January 2000. Prior to joining iSKY, from May 1997 to
December 1999, Mr. Yanson was Chief Financial Officer, Treasurer and Senior Vice
President of Panurgy Corporation, a consolidation company. From August 1995
through May 1997, Mr. Yanson served as Chief Financial Officer, Treasurer and
Senior Vice President of Greenspring Health Services, a national behavioral
healthcare company. From August 1990 to August 1995, Mr. Yanson served as
Greenspring Health Services' Corporate Controller. Mr. Yanson holds a B.A. from
Towson University and an M.B.A. from Loyola College. Mr. Yanson is a Certified
Public Accountant.
MARK E. MALNATI. Mr. Malnati joined iSKY as Chief Information Officer in
October 1999. Prior to joining iSKY, Mr. Malnati served as principal consultant,
director, and unit delivery manager at Cap Gemini America, a management
consulting and information technology services provider. From
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<PAGE>
November 1992 to May 1996, Mr. Malnati was director and senior systems manager
of the Montgomery Ward Product Service Division. Mr. Malnati holds a B.A. in
business administration from the University of Washington and an M.B.A. from
Seattle University.
STEVEN G. KRUMENAKER. Mr. Krumenaker joined iSKY as Chief Technology
Officer in March 1998. Prior to joining iSKY, from March 1991 to March 1998,
Mr. Krumenaker was employed by LCS Industries, a publicly owned service bureau
to the direct marketing industry, most recently as Vice President of Operations.
Prior to his position as Vice President of Operations, Mr. Krumenaker served as
the Vice President of Technical Services for LCS, from June 1993 to June 1996.
Before working at LCS, Mr. Krumenaker served in several positions including Vice
President of Operations, Director of Telemarketing, and Director of MIS and
Consulting Services with Trinet, Inc., a national direct marketing information
services company and business list compiler. Mr. Krumenaker holds both a Master
of Engineering in Operations Research and a B.S. in Industrial Engineering with
a specialization in Computer Science from Cornell University, in addition to an
M.B.A. from Rutgers University.
BRADLEY H. STEER. Mr. Steer joined iSKY as Senior Vice President of Sales
in March 1999. Prior to joining iSKY, Mr. Steer was Vice President of Sales for
Conxus, a privately-held wireless company since October 1996. Mr. Steer held
several positions at Skytel from October 1993 to October 1996, most recently
serving as general manager of strategic accounts. Mr. Steer served in a variety
of senior sales positions at Sprint Communications from January 1987 to
October 1993, including three years as Director of Sales operations at Sprint's
Corporate headquarters. Mr. Steer holds a B.A. in business administration and
economics from the University of New Hampshire.
RICHARD D. TAYLOR. Mr. Taylor joined iSKY in January 2000 as Senior Vice
President of Client Relations. Prior to joining iSKY, Mr. Taylor had been Vice
President of Sales and Account Services for Accoudent Health Services since
October, 1998. From June 1996 to October 1998, Mr. Taylor was a business unit
leader at Oxford Specialty Management. From August, 1994 to May 1996 Mr. Taylor
served as Director of Real Estate for Oxford Health Plans. Mr. Taylor holds a
B.S. from Massey University and a Masters of Science from New York University.
PATRICK DRIMMER. Mr. Drimmer joined iSKY as Vice President of Operations in
October 1999. Prior to joining iSKY, from March 1999 to October 1999,
Mr. Drimmer was Director of Commercial Sales and Customer Service for Office
Depot's Corporate Call Center. From November 1997 to March 1999, Mr Drimmer
served as Regional Director of Operations for APAC. From May 1996 to November
1997, Mr. Drimmer served as Project Operations Manager for Precision Response
Corp. From February 1992 to May 1996, Mr. Drimmer served as Operations Manager
for Budget-Rent-A-Car. Mr. Drimmer holds a Bachelor's degree in Business
Administration and Computer Information Systems from the University of Munich,
Germany.
WENDY E. JONES. Ms. Jones joined iSKY in October 1991. From 1994 until
1996, Ms. Jones directed all of iSKY's Communications Center Operations, and
most recently is responsible for heading up its Account Services group.
Ms. Jones holds a BA from the University of Connecticut and an M.B.A. from
Loyola College.
LORRAINE M. MIANO-FIKE. Ms. Miano-Fike joined iSKY in October 1999 as Vice
President of Human Resources. Prior to joining iSKY, from January 1995 to
October 1999, she headed up the Human Resources function on the East Coast for
Jones Communications/Comcast, a telecommunications provider. Ms. Miano-Fike held
positions with CIGNA Corporation's Insurance Services from June 1986 to
December 1994. Ms. Miano-Fike holds a B.A. from Cornell University's school of
Industrial and Labor Relations and an M.A. in Organization Development from
American University.
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<PAGE>
RUTHANNE KURTAS. Ms. Kurtas joined iSKY as Vice President of Marketing in
January 2000. Prior to joining iSKY, from April 1998 to November 1999, Ms.
Kurtas served as Senior Marketing Manager for Columbia Energy Group, a start up
energy utility. From February 1997 to April 1998, Ms. Kurtas served as Customer
Marketing Manager for MCI. From May 1994 to February 1997, Ms. Kurtas served as
a managing associate and senior associate for PricewaterhouseCoopers. Ms. Kurtas
holds an M.B.A. from the Darden School of Business of the University of Virginia
and a B.B.A. from the Wharton School of the University of Pennsylvania.
MICHAEL S. FISHER. Mr. Fisher has served on our board of directors since
October 1998. Since 1995, Mr. Fisher has been with GE Equity, a subsidiary of
General Electric Corporation, which invests in growth companies, and is
currently serving as Managing Director and Co-Head of the Financial Services
Group for GE Equity. Mr. Fisher joined General Electric Capital Corporation in
1989 as a member of the Corporate Finance Group. From 1991 to 1995, Mr. Fisher
was involved in General Electric Capital Corporation's merger and acquisition
activities focused on building General Electric Capital Corporation's life and
consumer insurance business. Mr. Fisher holds a B.A. from Hamilton College and
an M.B.A. from Columbia Business School.
STEPHEN J. GETSY. Mr. Getsy has served on our board of directors since
February 1996. Mr. Getsy is the co-founder and chief executive officer of
On-Line Ventures-Registered Trademark-, a position he has held since
November 1993. Mr. Getsy holds a B.S. in Mathematics/Education from Indiana
University of Pennsylvania, an M.S. in Computer Science from New York University
and is a graduate of the Executive Program in Business Administration at
Columbia University. Mr. Getsy is also a director of Daleen Technologies, Inc.
STEVEN J. GILBERT. Mr. Gilbert joined our board of directors in February
2000. Mr. Gilbert serves as Managing Director of Gilbert Global Equity Partners,
which he founded in 1997. Prior to forming Gilbert Global Equity, Mr. Gilbert
was a founder and Managing Partner of Soros Capital. Mr. Gilbert holds degrees
from the Wharton School of the University of Pennsylvania, Harvard Law School
and Harvard Graduate School of Business Administration.
WALTER G. LOHR, JR. Mr. Lohr has served on our board of directors since
October 1995. Mr. Lohr has been a partner in the law firm of Hogan & Hartson LLP
for more than five years. Mr. Lohr is also on the board of directors of Danaher
Corporation. Mr. Lohr holds a B.A. from Princeton University and a L.L.B. from
Yale University.
WALTER P. MANER, IV. Mr. Maner joined our board of directors in
January 2000. Mr. Maner is Vice President of Acquisitions for Internet Capital
Group, which he joined in April 1999. Prior to Internet Capital Group, from
February 1997 to March 1999, Mr. Maner served as Vice President at TL Ventures,
where he lead the firm's investments in WebLogic, Naviant, Conduit Software and
Celarix. Before TL Ventures, from August 1995 to February 1997, Mr. Maner served
as a Senior Associate at Safeguard Scientifics. Prior to Safeguard, from
January 1992 to August 1995, Mr. Maner was a founder and chief executive officer
of Urban Alternatives in Baltimore, Maryland. Mr. Maner holds a B.A. from the
University of Richmond and an M.B.A. from the Wharton School.
GARY H. NEEMS. Mr. Neems has served on our board since February 1996. Since
May 1995, Mr. Neems has been a Managing Director of Advanta Partners LP, a
venture fund. Prior to joining Advanta Partners, from August 1993 to May 1995,
Mr. Neems was a Managing Director and Partner of Clipper Capital Partners, an
investment affiliate of CS First Boston. Mr. Neems holds an M.B.A. in Finance
and a B.A. in Chemistry from the University of Rochester. Mr. Neems also serves
on the board of directors of RMH Teleservices, Inc.
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<PAGE>
STANLEY RAPP. Mr. Rapp joined our board of directors in March 2000. Mr.
Rapp is the Chairman and Chief Executive Officer of MRM worldwide, a position he
has held since December 1996. Mr. Rapp served as the President of CrossWorld
Network from January 1994 to December 1996.
CHARLES W. STRYKER, PH.D. Mr. Stryker has served on our board since
November 1998. Mr. Stryker is the Chairman and Chief Executive Officer of
Naviant. Mr. Stryker served as the president of Intelliquest Information Group
from February 1998 to September 1999. Mr. Stryker was the president of the
Information Technology Forum, Inc. from May 1992 to June 1999. Mr. Stryker is
also on the board of 24/7 Media Corporation (TFSM). Mr. Stryker holds a B.S and
M.B.A. from the School of Science and Engineering of New York University, as
well as a Ph.D. in operations research.
BOARD STRUCTURE AND COMMITTEES
Our articles of incorporation and bylaws provide for a board of directors
that will be elected for three-year terms until their successors have been duly
elected, or until such director's earlier death, resignation or removal. Our
board of directors is currently classified into three classes with the term of
office of one class expiring in each year. Messrs. Getsy, Hebert and Stryker
have a three-year term expiring in 2003. Messrs. Gilbert, Lohr and Rapp have
two-year terms expiring in 2002. Messrs. Fisher, Maner and Neems have one-year
terms which expire at the annual stockholders meeting.
Our bylaws provide that our board of directors may designate one or more
board committees. We currently have an audit committee, compensation committee
and finance committee.
Our audit committee, currently comprised of Messrs. Gilbert, Maner and
Neems:
- recommends to our board of directors the independent auditors to conduct
the annual audit of our books and records;
- reviews the proposed scope and results of the audit;
- approves the audit fees to be paid;
- reviews accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
- reviews and approves transactions between us and our directors, officers
and affiliates.
Our compensation committee, currently comprised of Messrs. Getsy, Lohr and
Rapp:
- reviews and recommends the compensation arrangements for management,
including the compensation for our president and chief executive officer;
- establishes and reviews general compensation policies with the objective
to attract and retain superior talent, to reward individual performance
and to achieve our financial goals; and
- administers our stock option plans.
Our finance committee, comprised of Messrs. Fisher, Hebert and Stryker
reviews and recommends financing transactions including sales of stock and
incurrences of debt.
EMPLOYMENT AGREEMENTS
We have employment agreements with Richard Hebert, Steven Krumenaker,
Bradley Steer and Raymond Zukowski. The following is a brief description of each
of these agreements.
Our agreement with Mr. Hebert became effective as of January 17, 1995. The
agreement automatically renews for one-year periods until terminated. The
agreement terminates immediately upon the death or disability of Mr. Hebert,
upon written notice by us of termination for cause or upon 60 days written
notice by us of termination without cause. Cause is defined generally as fraud
or
38
<PAGE>
embezzlement, conviction of a felony or willful misconduct or gross negligence.
For a period of two years after the last payment of salary Mr. Hebert is
entitled to receive under the agreement, the employee may not, without prior
written consent of iSKY, engage directly or indirectly in any business activity
which is competitive with us business within the geographic area in which our
business is being conducted. Mr. Hebert agreed to keep strictly confidential any
confidential or secret aspect our business.
Our agreement with Mr. Krumenaker became effective as of March 16, 1998. The
agreement automatically renews for one-year periods until terminated. The
agreement terminates immediately upon the death or disability of Mr. Krumenaker,
upon written notice by us of termination for cause or termination by us without
cause. Cause is defined generally as fraud or embezzlement, conviction of a
felony or willful misconduct or gross negligence. Upon termination for cause,
Mr. Krumenaker will receive one week's severance for each month of employment up
to 24 weeks. On termination without cause, the Mr. Krumenaker will receive one
week's severance for each month of employment up to 24 weeks, and with a minimum
of 12 weeks, unless the termination without cause is due to our shutting down
either the Database Unit or our New Jersey office, in which case, the severance
shall be set at 24 weeks regardless of the number of weeks accrued. During the
period from the last day of employment and for the entire time Mr. Krumenaker is
receiving salary or severance compensation (except if severance is a result of
our shutting down either the Database Unit or our New Jersey office), Mr.
Krumenaker may not, without our prior written consent, engage directly or
indirectly in any business activity which is competitive with our business
within the geographic area in which our business is being conducted. Mr.
Krumenaker agreed to keep strictly confidential any confidential or secret
aspect our business.
Our agreement with Mr. Steer became effective as of March 15, 1999. The
initial term of the agreement was for one year commencing as of the effective
date. The term of employment automatically renews for additional one-year
periods until terminated. The agreement terminates immediately upon the death or
disability of Mr. Steer, upon written notice by us of termination for cause or
termination by us without cause. Cause is defined generally as fraud or
embezzlement, conviction of a felony or willful misconduct or gross negligence.
Upon termination for cause, Mr. Steer will receive one week's severance for each
month of employment up to 24 weeks. Upon termination without cause, Mr. Steer
will receive one week's severance for each month of employment up to 24 weeks,
and with a minimum of 12 weeks. During the period from the last day of
employment and for the entire time Mr. Steer is receiving salary or severance
compensation, Mr. Steer may not, without our prior written consent, engage
directly or indirectly in any business activity which is competitive with our
business within the geographic area in which our business is being conducted.
Mr. Steer agreed to keep strictly confidential any confidential or secret aspect
of our business.
Our agreement with Mr. Zukowski became effective as of August 16, 1999. The
initial term of the agreement was for one year commencing as of the effective
date. The agreement automatically renews for one-year periods until terminated.
The agreement terminates immediately upon the death or disability of Mr.
Zukowski, upon written notice by us of termination for cause or termination by
us without cause. Cause is defined generally as fraud or embezzlement,
conviction of a felony or willful misconduct or gross negligence. Upon
termination for cause, Mr. Zukowski will receive one week's severance for each
month of employment up to 24 weeks. Upon termination without cause, Mr. Zukowski
will receive one week's severance for each month of employment up to 24 weeks,
and with a minimum of 12 weeks. During the period from the last day of
employment and for the entire time Mr. Zukowski is receiving salary or severance
compensation, Mr. Zukowski may not, without our prior written consent, engage
directly or indirectly in any business activity which is competitive with our
business within the geographic area in which our business is being conducted.
Mr. Zukowski agreed to keep strictly confidential any confidential or secret
aspect of our business.
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<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to our chief executive
officer and the other most highly paid executive officers whose total salary and
bonus exceed $100,000, whom we refer to as our named executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
------------------- OTHER ANNUAL SECURITIES UNDERLYING
YEAR SALARY BONUS COMPENSATION OPTIONS/SAR'S
-------- -------- -------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
Richard T. Hebert,
President and Chief Executive
Officer......................... 1999 $197,365 $30,000(1) $ 4,430 92,000
1998 $175,000 -- $ 4,430 --
1997 $173,846 -- $ 2,545 46,230
Raymond J. Zukowski,
Chief Operating Officer......... 1999(2) $ 68,654 $25,000 $10,237 310,500
1998 -- -- -- --
1997 -- -- -- --
Steven G. Krumenaker,
Chief Technology Officer........ 1999 $173,713 $ 9,731 $ -- --
1998(3) $112,500 -- -- 92,000
1997 -- -- -- --
Bradley H. Steer
Senior Vice President of
Sales........................... 1999(4) $112,499 $45,000 $52,200 128,800
1998 -- -- -- --
1997 -- -- $ -- --
</TABLE>
- ------------------------
(1) Mr. Hebert received a $30,000 bonus in 1999 that was earned in 1998. The
bonus was immediately converted into 8,625 shares of common stock.
(2) Mr. Zukowski began employment with iSKY on August 16, 1999 at which time he
received a signing bonus of $25,000 and iSKY paid his relocation expenses of
$10,237.
(3) Mr. Krumenaker began employment with iSKY on March 16, 1998.
(4) Mr. Steer began employment with iSKY on March 15, 1999. iSKY paid Mr.
Steer's relocation expenses of $50,000.
GRANT OF STOCK OPTIONS IN FISCAL 1999
The following table shows information regarding options granted to the named
executive officers during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE
POTENTIAL AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF REALIZABLE OF
SECURITIES TOTAL OPTIONS EXERCISE VALUE AT STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE ASSUMED FOR OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION INITIAL PUBLIC ---------------------------
NAME GRANTED IN 1999 ($/SHARE) DATE OFFERING PRICE 5% 10%
- ---------------------- ---------- ------------- --------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard T. Hebert..... 92,000 7.3% $3.48 12-16-09(1) $120,000 $ 396,650 $ 821,250
Raymond J. Zukowski... 253,000 20.1% $3.48 10-14-09(2) $330,000 $1,090,788 $2,258,438
57,500 4.6% $3.48 12-16-09(2) $ 75,000 $ 247,906 $ 513,281
Steven G. Krumenaker.. -- -- -- -- -- -- --
Bradley H. Steer...... 128,800 10.2% $3.48 3-15-09(3) $168,000 $ 555,310 $1,149,750
</TABLE>
- ------------------------
(1) Options are subject to a one-year vesting schedule.
(2) Options are subject to a four-year vesting schedule, with the exception of
20% of the options granted vesting immediately.
(3) Options are subject to a four-year vesting schedule.
40
<PAGE>
YEAR-END OPTIONS VALUES
The following table shows the number of unexercised options at December 31,
1999. None of the executive officers had exercised any options to purchase
common stock as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Richard T. Hebert............................. 547,630 73,600 $1,132,562 --
Raymond J. Zukowski........................... 62,100 248,400 -- --
Mark E. Malnati............................... 18,400 73,600 -- --
Steven G. Krumenaker.......................... 23,000 69,000 19,994 $59,982
Bradley H. Steer.............................. -- 128,800 -- --
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan, which will become effective upon the
closing of this offering, provides for the issuance of up to 206,959 shares of
common stock. This plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, provides our employees with an opportunity to purchase
shares of our common stock through payroll deductions.
All of our employees, including directors who are employees, are eligible to
participate in the purchase plan. Options to purchase our common stock will
initially be granted to each eligible employee on the first trading day on or
after the date of the initial public offering. Thereafter, options will be
granted on the first trading day on or after January 1 of each year, or such
other date as determined by the administrator. Each option will terminate on the
last trading day of a period specified by the administrator and no option period
will be longer than 27 months in duration. Subsequent option periods of equal
duration will consecutively follow, unless the administrator determines
otherwise.
Each option represents a right to purchase shares of our common stock. The
administrator determines the purchase price of each share of common stock,
provided that the purchase price will never be less than the lesser of 85% of
the fair market value of the common stock at the beginning or end of the option
period.
Any employee who immediately after a grant owns 5% or more of the total
combined voting power or value of our capital stock may not be granted an option
to purchase common stock under the purchase plan. Participation may also be
limited where rights to purchase stock under all other purchase plans accrue at
a rate which exceeds $25,000 of the fair market value of our common stock for
each calendar year.
STOCK INCENTIVE PLAN
In February 2000, we amended our stock incentive plan to promote our
long-term growth and profitability by providing our people with incentives to
improve stockholder value and contribute to our growth and financial success. We
believe the plan will assist us in attracting, retaining and rewarding the best
available people.
The compensation committee of our board of directors has been given broad
authority to administer our stock incentive plan. The compensation committee may
grant the following types of awards under our stock incentive plan to our
employees, officers, directors and consultants:
- incentive and nonstatutory stock options
- stock appreciation rights
- restricted and unrestricted stock awards
- phantom stock awards
41
<PAGE>
- performance awards
- other stock-based awards.
The compensation committee determines the size and terms of all awards under
the plan. However, no more than an aggregate of 6,498,494 shares of our common
stock, plus the number of any shares surrendered to us in connection with any
award, may be issued under stock incentive plan awards. This limitation on the
aggregate number of shares issued under the plan may be adjusted for future
stock dividends, spin-offs, split-ups, recapitalizations, mergers,
consolidations, business combinations, exchanges of shares and the like.
As of December 31, 1999, a total of 149 employees, officers, directors and
key consultants hold options to purchase 2,361,120 shares of our common stock.
Of this number, 1,512,975 options are vested.
The stock incentive plan terminates automatically in 2010, but our board of
directors may amend or terminate it at any time.
The following is a summary of the types of awards that we may grant under
our stock incentive plan.
STOCK OPTIONS. The compensation committee may grant options to purchase
shares of our common stock intended to qualify as incentive stock options under
the Internal Revenue Code and options that do not qualify as incentive stock
options. The exercise price of each option will be determined by the
compensation committee, but the exercise price of any incentive stock option may
not be less than the fair market value of our common stock on the date of grant.
The term of each option will be fixed by the compensation committee, but the
term of any incentive stock option may not exceed 10 years from the date of
grant. The compensation committee will determine the vesting of each option and
the period of time, if any, after retirement, death, disability or termination
of employment during which options may be exercised. Options may vest in
installments. The vesting of options may be accelerated by the Compensation
Committee.
To exercise an option, the optionee must pay the exercise price in full
either in cash or cash equivalents or by delivery of shares of common stock
already owned by the optionee. The exercise price may also be delivered by a
broker under irrevocable instructions to the broker from the optionee.
STOCK APPRECIATION RIGHTS. The compensation committee may grant a right to
receive a number of shares, an amount in cash or a combination of shares and
cash, based on the increase in the fair market value of the shares of our common
stock underlying the right during a period specified by the compensation
committee. The compensation committee may grant these stock appreciation rights
alone or in connection with stock options. Upon exercise of a stock appreciation
right that is related to a stock option, the holder will surrender the option
for the number of shares as to which the stock appreciation right is exercised
and will receive payment of an amount computed as described in the stock
appreciation right award. A stock appreciation right granted in connection with
a stock option will usually be exercisable at the time or times, and only to the
extent that, the related stock option is exercisable and will not be
transferable except to the extent the related option is transferable.
RESTRICTED AND UNRESTRICTED STOCK. The compensation committee may also
award shares of our common stock to participants. These stock awards may be
conditioned on the achievement of performance goals and/or continued employment
with us through a specified restriction period. If the performance goals and any
other restrictions are not attained, the holder will forfeit his or her
restricted shares. The compensation committee may also grant shares of common
stock that are free from any restrictions under the stock incentive plan.
Unrestricted shares of common stock may be issued to participants in recognition
of past services or in lieu of cash compensation. The purchase price, if any,
for shares of our common stock under stock awards will be determined by the
compensation committee.
42
<PAGE>
PHANTOM STOCK AWARDS. The compensation committee may also grant phantom
stock awards to participants. These awards are contractual rights that are
equivalent in value to, but not actual shares of, our common stock. Phantom
stock awards may be conditioned on the achievement of performance goals and/or
continued employment with us through a specified date. The compensation
committee will determine the time or times when a participant will be paid the
value of the phantom stock award, and the payment may be in cash, in shares of
our common stock or in a combination of cash and common stock. Because phantom
stock awards are not actual shares of our common stock, they do not have any
voting rights.
PERFORMANCE STOCK AWARDS. The compensation committee may also grant
performance stock awards to receive shares of our common stock upon achievement
of performance goals and other conditions determined by the compensation
committee.
OTHER STOCK-BASED AWARDS. The compensation committee is authorized to grant
to participants other awards that may be based on or related to our common stock
or other securities. These could include:
- convertible or exchangeable debt securities;
- other rights convertible or exchangeable into shares;
- purchase rights for shares or other securities; and
- incentive awards with value and payment contingent upon performance.
The compensation committee will determine whether other stock-based awards
will be paid in our common stock, other securities, cash or a combination of
these mediums.
43
<PAGE>
CERTAIN TRANSACTIONS
Richard M. Berkeley, a former director and current stockholder of iSKY, is a
Managing Director of Deutsche Bank Securities Inc., which has been retained as
one of our managing underwriters in connection with this offering and as a
placement agent in connection with our recently completed private placement of
Series BB preferred stock.
In October 1998, we issued 1,000,000 shares of Series AA preferred stock to
General Electric Capital Corporation for an aggregate purchase price of
$8,000,000.
In February 2000, we issued 1,260,775 shares of Series BB preferred stock to
Gilbert Global Equity Partners, L.P., Gilbert Global Equity Partners (Bermuda),
L.P. FG-Sky, L.L.C., Ingram Industries Inc., The Interpublic Group of
Companies, Inc., General Electric Capital Corporation and 1999 Internet
Capital L.P. for an aggregate price of $30,000,000.
We provided services to General Electrical Capital Corporation for $26,734
in 1999 and to Advanta Partners for $215,766 in 1999. In addition, in 1999
Charles Stryker performed consulting services in exchange for $35,236 and Steven
Getsy performed consulting services for $22,500. Mr. Stryker and Mr. Getsy are
members of our board of directors.
General Electric Capital Corporation, also provided consulting services to
us for $16,339 in 1999. General Electrical Capital Corporation is a shareholder.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 4, 2000 the number of shares of
iSKY capital stock and the percentage of the outstanding shares of iSKY capital
stock that are beneficially owned by:
- each person that is the beneficial owner of more than 5% of the
outstanding shares of capital stock;
- each director; and
- the executive officers.
Shares beneficially owned includes shares of common stock held by a person
plus the number of shares of common stock issuable to that person on conversion
of preferred stock or exercise of options held by the person exercisable within
60 days. Except as noted, each stockholder possesses sole voting and investment
power with respect to the shares listed. Unless otherwise noted, the address of
each of the stockholders below is c/o iSKY, Inc., 6740 Alexander Bell Drive,
Suite 300, Columbia, Maryland 21046.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING THE OFFERING
---------------------- ----------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
- ---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Richard T. Hebert.................................. 537,855 4.0% 537,855 2.9%
Raymond J. Zukowski................................ 62,100 * 62,100 *
Mark F. Yanson..................................... 25,300 * 25,300 *
Mark E. Malnati.................................... 18,400 * 18,400 *
Steven G. Krumenaker............................... 46,000 * 46,000 *
Michael S. Fisher (1).............................. 2,493,320 18.7% 2,493,320 13.6%
General Electric Capital Corporation
120 Long Ridge Road
Stamford, CT 06927
Stephen J. Getsy................................... 48,144 * 48,144 *
Steven J. Gilbert (2)..............................
Walter G. Lohr, Jr................................. 228,563 1.4% 228,563 1.2%
Walter P. Maner, IV (3)............................ 2,495,532 18.7% 2,495,532 18.7%
Internet Capital Group, L.L.C.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Gary H. Neems (4).................................. 2,190,474 16.4% 2,190,474 11.9%
Advanta Partners, L.P.
712 Fifth Avenue, 28(th) Floor
New York, NY 10019-4102
Stanley Rapp....................................... 0 * 0 *
Charles W. Stryker................................. 36,800 * 36,800 *
Internet Capital Group, L.L.C. (5)................. 3,075,489 23.1% 3,075,489 16.8%
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING THE OFFERING
---------------------- ----------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
- ---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
General Electric Capital Corporation............... 2,493,320 18.7% 2,493,320 13.6%
120 Long Ridge Road
Stamford, CT 06927
Advanta Partners L.P............................... 2,190,474 16.4% 2,190,474 11.9%
712 Fifth Avenue, 28(th) Floor
New York, NY 10019-4102
Gilbert Global Equity Partners, L.P................ 519,992 3.9% 519,992 2.8%
c/o GGEP Investments, L.L.C.
785 Smith Ridge Road
New Canaan, Connecticut 06840
Gilbert Global Equity Partners (Bermuda), L.P...... 157,421 1.2% 157,421 0.9%
c/o GGEP Investments, L.L.C.
785 Smith Ridge Road
New Canaan, Connecticut 06840
Directors and officers as a group.................. 4,192,295 23.9% 4,192,295 21.9%
</TABLE>
- ------------------------
(1) Represents shares held by General Electric Capital Corporation. Mr. Fisher
disclaims beneficial ownership of these shares.
(2) Represents shares held by Gilbert Global Equity Partners, L.P. and Gilbert
Global Equity Partners (Bermuda), L.P. Mr. Gilbert disclaims beneficial
ownership of these shares.
(3) Represents shares held by Internet Capital Group, L.L.C., as to which
Mr. Maner shares voting power. Mr. Maner disclaims beneficial ownership of
these shares
(4) Represents shares held by Advanta Partners, L.P., as to which Mr. Neems
shares voting power. Mr. Neems disclaims beneficial ownership of these
shares.
(5) Includes 579,957 shares held by 1999 Internet Capital L.P., an affiliate of
Internet Capital Group, L.L.C.
Advanta has granted the underwriters an option to purchase up to 150,000
shares of common stock at the public offering price, less the underwriting
discount within 30 days of the date of this prospectus to cover over allotments.
In addition, iSky has granted the underwriters an option to purchase 600,000
shares of common stock to cover over allotments. If the underwriters'
over-allotment option is exercised in full, Advanta will beneficially own
2,040,474 shares of common stock after the exercise of the over-allotment option
which will represent 10.8% of the total number of shares outstanding after the
over-allotment option is exercised in full.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering our authorized capital stock
will consist of 46,000,000 shares of preferred stock and 184,000,000 shares of
common stock.
The following description of our securities is not complete and is subject
to, and qualified in its entirety by, the provisions of our charter and the
other agreements described below, where the rights are established, and the
provisions of applicable law.
COMMON STOCK
As of February 4, 2000, of the 184,000,000 shares of common stock
authorized, 1,831,603 shares of common stock are outstanding.
The holders of the common stock are entitled to one vote for each share held
of record upon the matters and in the manner as may be provided by law. Subject
to the rights of the holders of any preferred stock to receive preferential
dividends and to participate in any payment of dividends on an as-converted
basis, the holders of shares of common stock are entitled to receive ratably
dividends when, as and if, declared by the board of directors out of legally
available funds. In the event of a liquidation, dissolution or winding up of
iSKY, the holders of shares of common stock are entitled to share ratably with
one another in all assets remaining after payment of liabilities and liquidation
preferences to the holders of any preferred stock. The holders of shares of
common stock have no rights to convert their shares of common stock into any
other securities of iSKY. Other than as described herein, the holders of common
stock have no preemptive rights, subscription, redemption, sinking fund or
conversion rights.
REGISTRATION RIGHTS.
The holders of 7,609,304 shares of our common stock have the right to
request that we file a registration statement covering sales of their shares of
common stock or to request that we include their shares in registration
statements we file. These rights are subject to conditions and limitations
including the right of underwriters of an offering to limit the number of shares
included in the registration statement.
PREFERRED STOCK
As of February 4, 2000, there were 5,293,175 shares of preferred stock
authorized of which 5,001,370 were outstanding, including:
- 127,000 shares of Series C Preferred Stock;
- 855,400 shares of Series D Preferred Stock;
- 710,577 shares of Series F Preferred Stock;
- 523,809 shares of Series G Preferred Stock;
- 523,809 shares of Series H Preferred Stock;
- 1,000,000 shares of Series AA Preferred Stock; and
- 1,260,775 shares of Series BB Preferred Stock.
All of the outstanding preferred stock is fully paid and nonassessable.
Concurrently with the closing of this offering, all of the outstanding shares of
preferred stock will be converted into shares of our common stock.
Our charter authorizes the board of directors to establish one or more
classes or series of preferred stock and to determine, with respect to any class
or series of preferred stock, preferences, rights, qualifications, limitations
and restrictions thereof.
47
<PAGE>
BUSINESS COMBINATIONS
The Maryland General Corporation Law prohibits specified "business
combinations" between a Maryland corporation and an "interested stockholder."
These business combinations include a merger, consolidation, share exchange, an
asset transfer or issuance or reclassification of equity securities. An
interested stockholder is either:
- anyone who beneficially owns 10% or more of the voting power of the
corporation's shares; and
- an affiliate or associate of the corporation who was an interested
stockholder, or an affiliate or an associate of the interested stockholder
at any time within the two-year period prior to the date in question.
Business combinations with interested stockholders are prohibited for five
years after the most recent date on which the stockholder became an interested
stockholder. Thereafter, any of these business combinations must be recommended
by the board of directors of the corporation and approved by the vote of:
- at least 80% of the votes entitled to be cast by all holders of the
corporation's voting shares; and
- at least 66 2/3% of the votes entitled to be cast by all holders of the
corporation's voting shares other than voting shares held by the
interested stockholder or an affiliate or associate of the interested
stockholder.
However, these special voting requirements do not apply if the corporation's
stockholders receive the minimum price for their shares specified in the statute
and the consideration is received in cash or in the same form previously paid by
the interested stockholder for its shares.
This business combination statute does not apply to business combinations
that are approved or exempted by the corporation's board of directors prior to
the time that the interested stockholder becomes an interested stockholder. A
Maryland corporation may adopt an amendment to its charter electing not to be
subject to these special voting requirements. Any amendment would have to be
approved by at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast
by holders of outstanding shares of voting stock who are not interested
stockholders. We have elected to be generally subject to this statute.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights unless approved by a vote of two-thirds of the votes entitled to be cast
on the matter, excluding shares owned by the acquiror or by the corporation's
officers or directors who are employees of the corporation. Control shares are
shares of voting stock which, if aggregated with all other shares of stock
previously acquired, would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power:
- 20% or more but less than 33 1/3%;
- 33 1/3% or more but less than a majority; or
- a majority of all voting power.
Control shares do not include shares of stock an acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A control share acquisition generally means the acquisition of, ownership of or
the power to direct the exercise of voting power with respect to, control
shares.
48
<PAGE>
A person who has made or proposes to make a "control share acquisition,"
under specified conditions, including an undertaking to pay expenses, may
require the board of directors to call a special stockholders' meeting to
consider the voting rights of the shares. If no request for a meeting is made,
the corporation may itself present the question at any stockholders' meeting. If
voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as permitted by the statute, the
corporation generally may redeem any or all of the control shares, except those
for which voting rights have previously been approved. This redemption of shares
must be for fair value, determined without regard to voting rights as of the
date of the last control share acquisition or of any stockholders' meeting at
which the voting rights of the shares are considered and not approved. If voting
rights for "control shares" are approved at a stockholders' meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the stock
determined for purposes of appraisal rights may not be less than the highest
price per share paid in the control share acquisition. The limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a "control share acquisition."
The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the charter or bylaws of the corporation. We have elected to be generally
subject to this statute.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 2-418 of the Maryland General Corporation Law permits
indemnification of directors, officers, employees and agents of a corporation
under certain conditions and subject to limitations. Our bylaws include
provisions to require us to indemnify our directors and officers to the fullest
extent permitted by Section 2-418, including circumstances in which
indemnification is otherwise discretionary. Section 2-418 also empowers us to
purchase and maintain insurance that protects our officers, directors, employees
and agents against any liabilities incurred in connection with their service in
such positions.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 18,334,754 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 18,934,754 shares of common stock outstanding. All of the shares we
sell in this offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by our
affiliates, as that term is defined in Rule 144, may generally only be sold in
compliance with the limitations of Rule 144, which is summarized below. The
remaining 13,334,754 shares of common stock outstanding after this offering,
will be restricted shares under the terms of the Securities Act, of which
9,641,520 shares are subject to lock-up agreements as described below.
Restricted shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, and subject to the lock-up requirements
which rules are
49
<PAGE>
summarized below. Giving effect to the lock-up agreements described below, these
restricted shares will be available for resale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF FIRST AVAILABILITY FOR RESALE
- --------------------- -------------------------------------
<C> <S>
3,693,234 Immediately after the date of this prospectus
9,641,520 After 180 days from the date of the prospectus subject, in
some cases, to volume limitations
</TABLE>
Before this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time. Sales
of substantial amounts of our common stock in the public market could adversely
affect prevailing market prices and could impair our future ability to raise
capital through the sale of our equity securities.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to post-sale notice requirements and
the availability of current public information about iSKY.
In the event that any person who is deemed to be an affiliate purchases
shares of our common stock pursuant to this offering or acquires shares of our
common stock pursuant to an employee benefit plan of iSKY, the shares held by
that person are required under Rule 144 to be sold in brokers' transactions,
subject to the volume limitations described above. Shares properly sold in
reliance upon Rule 144 to persons who are not affiliates will then be freely
tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of shares for sale, could adversely affect the price of our common
stock.
Each of iSKY and its directors and executive officers and other holders of
our common stock have agreed that, without the prior written consent of Chase
Securities Inc. and Deutsche Bank Securities Inc. on behalf of the underwriters,
they will not, during the period ending 180 days after the date of this
prospectus, sell or otherwise dispose of any shares of our common stock.
REGISTRATION RIGHTS
We have entered into an investor rights agreement with some of our
stockholders, who will own an aggregate of 7,609,304 shares of our common stock
following this offering. These stockholders have registration rights which, upon
exercise, requires us to file registration statements covering the sale of their
shares of common stock and to include the sale of their shares in registration
statements covering our sale of shares to the public. See "Description of our
Capital Stock--Registration Rights."
TRANSFER AGENT
Equiserve is the registrar and transfer agent for our common stock. Its
address is 150 Royall Street, Canton, Massachusetts 02021 and its telephone
number is (781) 575-2294.
50
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Chase Securities Inc., Deutsche Bank Securities Inc. and William Blair &
Company LLC are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Chase Securities Inc........................................
Deutsche Bank Securities Inc................................
William Blair & Company LLC.................................
---------
Total....................................................... 5,000,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances. We have agreed to indemnify the underwriters against certain
civil liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of such liabilities.
The representatives have advised iSKY that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $ per share. The underwriters may also allow to dealers, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
iSKY and Advanta Partners, L.P. have granted the underwriters an
over-allotment option. This option, which is exercisable for up to 30 days after
the date of this prospectus, permits the underwriters to purchase a maximum of
600,000 additional shares from iSKY and up to 150,000 shares from Advanta
Partners, L.P. to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the total price
to public will be $ million and the net proceeds to iSKY will be
approximately $ million. The underwriters have severally agreed that, to
the extent the over-allotment option is exercised, they will each purchase a
number of additional shares proportionate to the underwriter's initial amount
reflected in the above table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by iSKY. Such amount is shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares.
51
<PAGE>
DISCOUNT PAID BY ISKY
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share.............................................. $ $
Total.................................................. $ $
</TABLE>
iSKY estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $1,305,000 million.
We have agreed to indemnify each underwriter against all liabilities to
which they may become subject under the federal securities laws or other law,
including reimbursement of expenses, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement, including the prospectus, or the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements not misleading, except that there is no indemnification for specific
information furnished by the underwriters. This includes contribution to any
payments which may be made by the underwriters in the event that indemnification
is not available.
iSKY, its executive officers and directors and several other holders of our
common stock have agreed to a 180-day lock up with respect to shares of
common stock that they beneficially own, including securities that are
convertible into shares of common stock and securities that are exchangeable or
exercisable for shares of common stock. This means that, subject to certain
exceptions, for a period of 180 days following the date of this prospectus, iSKY
and those persons may not offer, sell, pledge or otherwise dispose of iSKY
securities without the prior written consent of Chase Securities Inc. and
Deutsche Bank Securities Inc.
The underwriters have reserved for sale up to 250,000 shares for employees,
directors and certain other persons associated with iSKY. These reserved shares
will be sold at the public offering price that appears on the cover of this
prospectus. The number of shares available for sale to the general public in the
offering will be reduced to the extent reserved shares are purchased by these
persons. The underwriters will offer to the general public, on the same terms as
other shares offered by this prospectus, any reserved shares that are not
purchased by these persons.
Up to 12% of the shares available for sale in this offering will be
allocated to existing stockholders of iSKY who have the preemptive right to
purchase shares in this offering at the price per share set forth on the cover
of this prospectus. The underwriters will offer to the public any of these
shares not purchased by existing stockholders on the same terms as other shares
offered by this prospectus.
Prior to this offering, there has been no public market for the common
stock. Consequently, the offering price for the common stock has been determined
by negotiations between iSKY and the underwriters and is not necessarily related
to iSKY's asset value, net worth or other established criteria of value. The
factors considered in these negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which iSKY
competes, an assessment of iSKY's management, iSKY's prospects, its capital
structure, prevailing market conditions, its results of operations in recent
periods and other factors as we deemed relevant.
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However, the
underwriters may engage in the following activities in accordance with the
rules:
- Stabilizing transactions. The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
52
<PAGE>
- Penalty bids. If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may reclaim a
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of those transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither iSKY nor the underwriters makes any representation or prediction as
to the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
One or more members of the underwriting selling group may make copies of the
preliminary prospectus available over the internet to certain customers through
its or their websites. The representatives expect to allocate a limited number
of shares to that member or members of the selling group for sale to brokerage
account holders.
53
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for iSKY
by Piper Marbury Rudnick & Wolfe LLP, Washington, D.C. Certain legal matters
relating to this offering will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Washington, D.C.
EXPERTS
The financial statements of iSKY, Inc. as of December 31, 1999 and 1998, and
for each of the years in the three-year period ended December 31, 1999 have been
included herein and in the registration statement in reliance upon the reports
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the common stock we are offering. This prospectus does
not contain all of the information contained in the registration statement and
the exhibits and schedules. Items are omitted in accordance with the rules and
regulations of the Commission. For further information about iSKY and our common
stock, please see the registration statement and the exhibits and schedules
filed with it. Statements in this prospectus as to the contents of any contract
or any other document referred to are not necessarily complete, and, in each
instance, if the contract or document is filed as an exhibit, reference is made
to the copy of the contract or document filed as an exhibit to the registration
statement. Each description of a document filed as an exhibit to the
registration statement is qualified in all respects by reference to the exhibit.
The registration statement, including the exhibits and schedules, 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 Commission's regional offices located at the North Western Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, NY 10048, and copies of all or any part of
the registration statement may be obtained from such office after payment of
fees prescribed by the Commission. You may obtain information about the
operation of the Commission's public reference facilities by calling the
Commission at 1-800-732-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to these requirements by filing
periodic reports and other information with the Commission. We intend to furnish
our shareholders with annual reports containing consolidated financial
statements certified by an independent public accounting firm. We also maintain
an internet site at http://www.isky.com. Our website and the information
contained in it or connected to it should not be considered incorporated into
this prospectus or the registration statement of which this prospectus is a
part.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
iSky, Inc.:
We have audited the accompanying consolidated balance sheets of iSky, Inc.
and subsidiary as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 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 iSky, Inc.
and subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
McLean, VA
February 4, 2000
F-2
<PAGE>
ISKY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,926,447 $ 1,611,951
Accounts receivable, net.................................. 4,275,286 5,427,350
Other receivables......................................... 3,318 6,392
Prepaid expenses.......................................... 173,939 344,007
Deferred costs............................................ 67,428 164,050
----------- -----------
Total current assets.................................. 9,446,418 7,553,750
Property and equipment, net................................. 5,187,433 6,600,640
Goodwill, net............................................... 429,739 357,098
Deposits.................................................... 122,492 134,219
----------- -----------
Total assets.......................................... $15,186,082 $14,645,707
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 645,000 $ 645,000
Accounts payable.......................................... 1,753,047 2,808,897
Accrued liabilities....................................... 662,582 965,439
Deferred revenue.......................................... 150,835 307,250
Current maturies of obligations under capital leases...... 903,751 944,907
Notes payable............................................. 7,464 --
----------- -----------
Total current liabilities............................. 4,122,678 5,671,493
Obligations under capital leases, net of current
maturities................................................ 1,054,042 585,979
Other liabilities........................................... 75,985 50,394
----------- -----------
Total liabilities..................................... 5,252,706 6,307,866
----------- -----------
Convertible redeemable preferred stock...................... 1,421,154 1,421,154
----------- -----------
Commitments and contingencies
Stockholders' equity:
Series C convertible preferred stock (nonvoting), $.01 par
value, 127,000 shares authorized, issued and outstanding
at December 31, 1998 and 1999 (liquidation
preference--$96,975).................................... 1,270 1,270
Series D convertible preferred stock (voting), $.01 par
value, 855,400 shares authorized, issued and outstanding
at December 31, 1998 and 1999 (liquidation
preference--$653,025)................................... 8,554 8,554
Series G convertible preferred stock (voting), $4.50 par
value, 600,000 shares authorized, 523,809 shares issued
and outstanding at December 31, 1998 and 1999
(liquidation preference--$3,177,171).................... 2,357,140 2,357,140
Series H convertible preferred stock (voting), $6.00 par
value, 600,000 shares authorized, 523,809 shares issued
and outstanding at December 31, 1998 and 1999
(liquidation preference--$4,236,228).................... 3,142,854 3,142,854
Series AA convertible preferred stock (voting), $.01 par
value, 1,100,000 shares authorized, 1,000,000 shares
issued and outstanding at December 31, 1998 and 1999
(liquidation preference--$8,973,151).................... 10,000 10,000
Common stock, $.01 par value, 46,000,000 shares
authorized, 1,685,113 and 1,831,603 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 7,327 7,963
Additional paid-in capital................................ 8,247,272 16,322,230
Deferred Compensation..................................... -- (7,239,736)
Accumulated deficit....................................... (5,262,195) (7,693,588)
----------- -----------
Total stockholders' equity............................ 8,512,222 6,916,687
----------- -----------
$15,186,082 $14,645,707
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ISKY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................................. $18,709,418 $19,732,626 $23,840,038
Direct employee expenses.............................. 4,882,010 6,837,826 8,176,549
Other direct expenses................................. 2,401,123 3,123,832 3,334,491
Indirect expenses:
Account services.................................... 2,490,650 1,950,649 2,282,563
Information services................................ 2,869,725 3,457,354 5,116,581
----------- ----------- -----------
Total indirect expenses........................... 5,360,375 5,408,003 7,399,144
----------- ----------- -----------
Cost of revenues.................................. 12,643,508 15,369,661 18,910,184
----------- ----------- -----------
General and administrative............................ 3,484,697 3,945,346 3,804,270
Sales and marketing................................... 2,132,733 1,537,721 2,606,205
Stock compensation expense............................ -- -- 793,279
----------- ----------- -----------
Income (loss) from operations......................... 448,480 (1,120,102) (2,273,900)
Interest expense, net................................. (289,613) (430,021) (157,493)
----------- ----------- -----------
Income (loss) before income taxes..................... 158,867 (1,550,123) (2,431,393)
Provision (benefit) for income taxes.................. -- -- --
----------- ----------- -----------
Net income (loss)..................................... 158,867 (1,550,123) (2,431,393)
Preferred stock dividend requirements................. (787,805) (681,615) (1,349,141)
----------- ----------- -----------
Net income (loss) applicable to common stockholders... $ (628,938) $(2,231,738) $(3,780,534)
=========== =========== ===========
Basic and diluted net income (loss) per share
applicable to common stockholders................... $ (0.38) $ (1.32) $ (2.15)
=========== =========== ===========
Shares used to compute basic and diluted net income
(loss) per share applicable to common
stockholders........................................ 1,652,223 1,685,097 1,758,359
=========== =========== ===========
Unaudited pro forma basic and diluted net income
(loss) per share.................................... $ (0.23)
===========
Shares used to compute unaudited pro forma basic and
diluted net income (loss) per share................. 10,361,728
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ISKY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES G SERIES H
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 127,000 $1,270 855,400 $8,554 523,809 $2,357,140 523,809 $3,142,854
Issuance of common
stock.................. -- -- -- -- -- -- -- --
Net income............... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ---------- ------- ----------
Balance, December 31,
1997................... 127,000 1,270 855,400 8,554 523,809 2,357,140 523,809 3,142,854
Issuance of common
stock.................. -- -- -- -- -- -- -- --
Issuance of common stock
for options
exercised.............. -- -- -- -- -- -- -- --
Issuance of Series AA
preferred stock,
net of issuance
costs.................. -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ---------- ------- ----------
Balance, December 31,
1998................... 127,000 1,270 855,400 8,554 523,809 2,357,140 523,809 3,142,854
Deferred compensation for
stock options
granted................ -- -- -- -- -- -- -- --
Issuance of common
stock.................. -- -- -- -- -- -- -- --
Issuance of common stock
for options
exercised.............. -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ---------- ------- ----------
Balance, December 31,
1999................... 127,000 $1,270 855,400 $8,554 523,809 $2,357,140 523,809 $3,142,854
======= ====== ======= ====== ======= ========== ======= ==========
<CAPTION>
SERIES AA
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------- -------------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
--------- -------- --------- -------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... -- $ -- 1,619,366 $7,041 $ 815,030 $(3,870,939) -- $ 2,460,950
Issuance of common
stock.................. -- -- 65,713 285 171,140 -- -- 171,425
Net income............... -- -- -- -- -- 158,867 -- 158,867
--------- ------- --------- ------ ----------- ------------ ----------- -----------
Balance, December 31,
1997................... -- -- 1,685,079 7,326 986,170 (3,712,072) -- 2,791,242
Issuance of common
stock.................. -- -- 23 1 -- -- -- 1
Issuance of common stock
for options
exercised.............. -- -- 12 -- -- -- -- --
Issuance of Series AA
preferred stock,
net of issuance
costs.................. 1,000,000 10,000 -- -- 7,261,102 -- -- 7,271,102
Net loss................. -- -- -- -- -- (1,550,123) -- (1,550,123)
--------- ------- --------- ------ ----------- ------------ ----------- -----------
Balance, December 31,
1998................... 1,000,000 10,000 1,685,114 7,327 8,247,272 (5,262,195) -- 8,512,222
Deferred compensation for
stock options
granted................ -- -- -- -- 8,033,015 -- (7,239,736) 793,279
Issuance of common
stock.................. -- -- 8,625 37 29,963 -- -- 30,000
Issuance of common stock
for options
exercised.............. -- -- 137,864 599 11,980 -- -- 12,579
Net loss................. -- -- -- -- -- (2,431,393) -- (2,431,393)
--------- ------- --------- ------ ----------- ------------ ----------- -----------
Balance, December 31,
1999................... 1,000,000 $10,000 1,831,603 $7,963 $16,322,230 $(7,693,588) $(7,239,736) $ 6,916,687
========= ======= ========= ====== =========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ISKY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 158,867 $(1,550,123) $(2,431,393)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 959,886 1,427,725 1,927,057
Change in allowance for doubtful accounts............... 21,140 (36,153) 116,671
Loss on disposal of fixed assets........................ -- 50,401 14,921
Stock compensation expense.............................. -- -- 793,279
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............ (1,637,110) 482,038 (1,268,734)
(Increase) decrease in other receivables.............. (131,200) 139,522 (3,074)
(Increase) decrease in prepaid expenses............... (150,030) 74,140 (170,068)
(Increase) decrease in deferred costs................. (105,860) 38,432 (96,622)
(Increase) decrease in deposits....................... 10,484 (2,840) (11,727)
Increase in accounts payable.......................... 443,986 200,575 1,055,850
Increase (decrease) in accrued liabilities............ 117,025 (95,727) 302,857
Increase (decrease) in deferred revenue............... (96,051) (233,758) 156,415
Increase (decrease) in other liabilities.............. (9,084) (16,676) (25,591)
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ (417,947) 477,556 359,841
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (978,296) (1,970,870) (2,669,705)
Proceeds from sale of property and equipment.............. 162,680 -- --
Purchase of short-term investments........................ (65,000) -- --
Proceeds from sale of short-term investments.............. 290,341 65,000 --
----------- ----------- -----------
Net cash used in investing activities............... (590,275) (1,905,870) (2,669,705)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from stock issuance.............................. -- 7,297,575 --
Proceeds from exercise of stock options................... -- 44 12,579
Redemption of preferred stock............................. -- (26,608) --
(Repayments) borrowings on line of credit................. 1,875,000 (1,330,000) --
Proceeds from long-term debt.............................. 334,136 -- --
Principal payments on obligations under capital leases and
notes payable........................................... (1,198,873) (1,451,927) (1,017,211)
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 1,010,263 4,489,084 (1,004,632)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 2,041 3,060,770 (3,314,496)
Cash and cash equivalents, beginning of year................ 1,863,636 1,865,677 4,926,447
----------- ----------- -----------
Cash and cash equivalents, end of year...................... $ 1,865,677 $ 4,926,447 $ 1,611,951
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 343,344 $ 448,512 $ 248,675
=========== =========== ===========
Supplemental disclosure of noncash investing activities:
Property and equipment acquired under capital lease
obligations............................................. $ 353,267 $ 1,367,913 $ 575,297
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
iSky, Inc. ("iSky" or the "Company"), formerly known as Sky Alland
Research, Inc. and doing business as Sky Alland Marketing, was incorporated in
the State of Maryland in May 1984 and provides a complete outsourced customer
loyalty management solution to both electronic businesses and traditional
companies seeking to enhance their customers' on-line and off-line experience
before, during and after a purchase. The Company offers its services as an
integrated solution, which enables its clients to outsource their complete
customer loyalty management needs. The Company currently provides customer care
services to businesses in a range of industries including automotive, health
care, electronic commerce, technology and financial services.
The Company has not generated sufficient cash flows from operations to
support its current operating and capital requirements and is dependent on
financing to fund their requirements. In February 2000, the Company issued
convertible preferred stock (see Note 15).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of iSky and its
wholly-owned subsidiary, Data Group II, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
(B) CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of
December 31, 1998 and 1999, cash equivalents consisted of certificates of
deposit. Cash equivalents are carried at cost which approximates market.
(C) GOODWILL
The excess of the cost over the fair value of net tangible assets acquired
has been assigned to goodwill and is being amortized using the straight-line
method over ten years. Accumulated amortization of goodwill at December 31, 1998
and 1999 was $133,754 and $206,395, respectively.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, or fair value if acquired in a
purchase business combination. Equipment under capital leases is stated at the
lesser of the present value of future minimum lease payments at the inception of
the lease or estimated fair market value. Depreciation and amortization of
property and equipment are determined on the straight-line method, using the
lesser of the estimated useful lives or lease term as follows:
<TABLE>
<S> <C>
Computer equipment.............................. 3--5 years
Furniture and equipment......................... 5--7 years
Leasehold improvements.......................... 5--7 years
</TABLE>
The Company has adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
This Statement requires that long-lived assets and certain identifiable
intangibles, including goodwill, be reviewed for impairment whenever
F-7
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(E) COMPUTER SOFTWARE
In 1999 the Company adopted the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. In accordance with
the provisions of SOP 98-1, the Company capitalizes costs associated with the
software developed or obtained for internal use when both the preliminary
project stage is completed and the Company's management has authorized further
funding for the project which it deems probable will be completed and used to
perform the function intended. Capitalized costs include only external direct
costs of materials and services consumed in developing or obtaining internal-use
software and payroll and related costs for employees directly associated with
and who devote time to the internal-use software project. Capitalization of such
costs ceases no later than the point at which the project is substantially
complete and ready for its intended purpose. Capitalized software development
costs are amortized over a period of not more than three years and are subject
to impairment evaluation in accordance with SFAS 121. ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF.
Research and development costs and other computer software maintenance costs
related to software development are expensed as incurred.
Prior to adoption of SOP 98-1, the Company's policy for capitalizing
software development costs related to internal-use software was substantially
the same as the policy prescribed within SOP 98-1.
(F) REVENUES
Revenues are derived from a broad range of services involving inbound and
outbound telephonic and internet-based communications which are customized
according to the client's needs. The Company enters into agreements with clients
to perform services at fixed contractual rates. These services are billed
monthly and payment is due within 30 to 60 days. Revenues are recognized at the
contractual rates as services are provided. Revenues are generated based on the
number and type of interactions with clients' customers through various
communication channels, including text chat, e-mail, telephone and facsimile.
Typically, a rate for inbound contacts for each contract is established based on
the number of minutes of interaction. The rate for outbound contacts is
established based on the number of interactions. Revenues are derived from a
broad range of services involving inbound and outbound telephonic and
internet-based communications which are customized according to the client's
needs. The Company enters into agreements with clients to perform services at
fixed contractual rates. These services are billed monthly and payment is due
within 30 to 60 days. Revenues are recognized at the contractual rates as
services are provided. Revenues are generated based on the number and type of
interactions with clients' customers through various communication channels,
including text chat, e-mail, telephone and facsimile. Typically, a rate for
inbound contacts for each contract is established based on
F-8
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the number of minutes of interaction. The rate for outbound contacts is
established based on the number of interactions.
Program set up revenues are deferred and recognized straight line over the
term of the contract. The related incremental direct costs are deferred and
charged to expense in proportion to the revenue recognized.
Revenues related to additional services are recognized as services are
performed and costs are incurred.
In 1997 and 1998 the Company performed market research under long term
contracts. For these contracts, the Company utilizes the
percentage-of-completion method measured by labor hours incurred to total
estimated hours required. Estimates of costs to complete are reviewed
periodically and revised as required. Provisions are made for the full amount of
anticipated losses, if any, on all contracts in the period in which the losses
are first determinable. Changes in estimates are also reflected in the period
they become known.
(G) DEFERRED REVENUE
Deferred revenue represents billings or collections on contracts in advance
of performance of services.
(H) INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
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. Deferred tax assets and liabilities are measured
using enacted statutory tax rates applicable to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(I) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations. As
such, compensation expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
F-9
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share applicable to common
stockholders in accordance with SFAS No. 128, "Earnings Per Share" and SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and
SAB 98, basic net income (loss) applicable to common stockholders is computed by
dividing the net income (loss) per share applicable to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share applicable to common
stockholders is computed by dividing the net income (loss) for the period by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. The Company has presented historical basic and
diluted net income (loss) applicable to common stockholders in accordance with
SFAS No. 128. As the Company had a net loss in each of the periods presented,
basic and diluted net income (loss) per share is the same. The convertible
preferred stock converts into common stock upon the occurance of a qualifying
initial public offering, as defined. Pro forma basic and diluted net income
(loss) per share has been calculated assuming the conversion of all shares of
preferred stock outstanding at December 31, 1999 into common stock as if the
shares had converted immediately upon their issuance.
(K) USE OF ESTIMATES
The preparation of consolidated 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
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(L) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in the
consolidated financial statements. The Company has no components of other
comprehensive income for the years ended December 31, 1997, 1998 and 1999.
(M) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist of accounts receivable.
(N) STOCK SPLIT
On March 15, 2000, the Board of Directors of the Company approved a
2.3-for-one stock split of the Company's common stock. All share, per share and
conversion amounts relating to common stock, stock options and stock purchase
warrants included within the accompanying financial statements have been
retroactively adjusted to reflect the stock split.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The new
standard establishes accounting and reporting
F-10
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards for derivative instruments embedded in other contracts and for hedging
activities. This statement, as amended, is effective for all fiscal quarters for
years beginning after June 15, 2000. The Company does not expect SFAS 133 to
have a material impact on its financial position or results of operations.
(P) SEGMENT INFORMATION
The Company operates under one business segment providing outsourced
customer loyalty management solutions.
(3) ACQUISITION
On April 1, 1996, the Company purchased all of the assets and assumed all of
the liabilities of Marcom, Inc. The purchase price was $310,000 in cash and was
financed with the Company's working capital. The transaction was accounted for
using the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the tangible and identifiable intangible assets
acquired is being amortized over a period of ten years using the straight-line
method. Under the terms of the purchase agreement, the purchase price was
subject to an additional payout in common stock upon the achievement of certain
revenue and profit performance objectives. The revenue objective was met for
1996, and in connection therewith, the Company issued 65,713 shares of common
stock during 1997 to the former owners of Marcom, Inc. The additional
consideration of $171,426 was added to goodwill during 1997.
(4) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Billed............................................... $4,342,282 $5,574,703
Unbilled............................................. 36,898 73,212
---------- ----------
4,379,180 5,647,915
Less--allowance for doubtful accounts................ (103,894) (220,565)
---------- ----------
$4,275,286 $5,427,350
========== ==========
</TABLE>
F-11
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Computer equipment.................................. $3,838,904 $ 4,877,658
Computer software................................... 4,212,684 5,850,866
Furniture and equipment............................. 813,445 838,090
Automobiles......................................... 24,107 24,107
Leasehold improvements.............................. 327,341 361,634
---------- -----------
9,216,481 11,952,355
Less--accumulated depreciation and amortization..... (4,029,048) (5,351,715)
---------- -----------
$5,187,433 $ 6,600,640
========== ===========
</TABLE>
(6) NOTES PAYABLE AND LINE OF CREDIT
Notes payable consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Note payable to former owner of subsidiary, interest at
8.25%. Payable in quarterly installments of $4,091
through April 1, 1999................................... $ 7,464 $ --
------- -------
7,464 --
Less current maturities................................... (7,464) --
------- -------
Notes payable, net of current maturities............ $ -- $ --
======= =======
</TABLE>
The Company has a $5.0 million secured line of credit and a $2.0 million
committed equipment line with a commercial bank. The borrowings are
collateralized by a first priority security interest in all of the corporate
assets of the company. The line of credit is repayable in October 2000 and bears
interest at the bank's prime rate. The equipment line is repayable $1.0 million
in February 2003 and $1.0 million in August 2003 and bears interest at the
bank's prime rate plus three quarters of one percent (.75%) per annum. At
December 31, 1999, $645,000 was outstanding under the line of credit and the
interest rate on outstanding borrowings under the line of credit was 8.5%. As of
December 31, 1999, the Company had not drawn funds related to the equipment
line.
(7) COMMITMENTS AND CONTINGENCIES
(A) CAPITAL AND OPERATING LEASES
The Company leases computer equipment, software, office facilities, and
furniture and fixtures under operating and capital lease arrangements, some of
which contain renewal options and escalation clauses for operating expenses and
inflation.
F-12
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule of future minimum lease payments for capital and
operating leases at December 31, 1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- ----------
<S> <C> <C>
2000................................................. $1,182,000 $1,005,205
2001................................................. 620,000 435,146
2002................................................. 384,000 315,966
2003................................................. 57,000 --
---------- ----------
Total future minimum lease payments............ $2,243,000 $1,756,317
==========
Less amount representing interest.................... (225,431)
----------
Present value of future minimum lease
payments..................................... 1,530,886
Less current maturities of obligations under capital
leases............................................. (944,907)
----------
Obligations under capital leases, net of
current maturities........................... $ 585,979
==========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1997,
1998 and 1999 was approximately $1,303,000, $1,141,000 and $1,347,000,
respectively. Cost and accumulated amortization for assets under capital leases
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
FURNITURE
COMPUTER COMPUTER AND
SOFTWARE EQUIPMENT EQUIPMENT
----------- ----------- -----------
<S> <C> <C> <C>
Cost................................... $ 2,779,912 $ 563,808 $ 1,024,078
Accumulated amortization............... (1,668,095) (261,861) (214,464)
----------- ----------- -----------
Net book value................... $ 1,111,817 $ 301,947 $ 809,614
=========== =========== ===========
</TABLE>
In accordance with the provisions of the certain leasing arrangements, the
Company is required to maintain a minimum cash balance of $565,000 in connection
with its capital leases.
(B) CONTINGENCIES
The Company is a defendant in certain employment claims arising in the
ordinary course of business. In the opinion of management after consultation
with legal counsel, the utimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial position or results
of operations of the Company.
(8) STOCKHOLDERS' EQUITY
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 46,000,000 shares of common stock.
F-13
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1999, the Company had reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Conversion of Series C Convertible Preferred Stock.......... 127,000
Conversion of Series D Convertible Preferred Stock.......... 855,400
Conversion of Series F Convertible Redeemable Preferred
Stock..................................................... 710,577
Conversion of Series G Convertible Preferred Stock.......... 523,809
Conversion of Series H Convertible Preferred Stock.......... 523,809
Conversion of Series AA Convertible Preferred Stock......... 1,000,000
Exercise of stock options under stock option plans.......... 2,361,120
---------
6,101,715
=========
</TABLE>
(9) CONVERTIBLE PREFERRED STOCK
The holders of the Series C Convertible Preferred Stock (which is nonvoting)
are entitled to receive dividends on an equivalent basis with the holders of the
shares of common stock. Additionally, they are entitled, on an equivalent basis
with the holders of the shares of common stock, to share in amounts
distributable to the holders of common stock upon liquidation of the Company
after payment of any liquidation preference of any other class or series of
stock of the Company. Each share of the Series C Convertible Preferred Stock is
convertible at the option of the holder at any time into 2.3 fully paid and
nonassessable share of common stock. The holders of the Series C Convertible
Preferred Stock have agreed to convert their shares automatically on the closing
of the Company's initial public offering.
The holders of Series D Convertible Preferred Stock have essentially the
same rights with respect to dividends and preference in liquidation as holders
of the Series C Convertible Preferred Stock. Additionally, they are entitled to
cast a number of votes in the aggregate which, when added to the number of votes
that may be cast on such matters by all holders of the Series D Convertible
Preferred Stock, shall not exceed 49 percent of all votes that may be cast on
such matters by the holders of all classes and series of capital stock of the
Company. Each share of Series D Convertible Preferred Stock is convertible at
the option of the holder at any time into 2.3 fully paid and nonassessable share
of common stock. The holders of the Series D Convertible Preferred Stock have
agreed to convert their shares automatically on the closing of the Company's
initial public offering.
The shares of Series G and H Convertible Preferred Stock are convertible at
the option of the holder at any time into common stock on a 2.3-for-one basis.
These shares are also convertible automatically upon an initial public offering
of at least $10 million and at a shares price equal to or exceeding $15.00. The
Series G and H Convertible Preferred Stock accrues dividends at the annual rate
of 8 percent, whether or not declared. In liquidation, the holders of Series G
and H Convertible Preferred Stock are entitled to receive $4.50 and $6.00 per
share, respectively, plus all accrued, but unpaid dividends, prior to any
preference or distribution of any assets of the Company to the holders of any
other shares of capital stock. To date, no dividends have been declared on the
Series G and H Convertible Preferred Stock. The accumulated unpaid dividends are
$1,364,264 and $1,913,405 at December 31, 1998 and 1999, respectively.
F-14
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) CONVERTIBLE PREFERRED STOCK (CONTINUED)
During October 1998, the Company issued 1,000,000 shares of Series AA
Convertible Preferred Stock for $8,000,000. Each share of Series AA Convertible
Preferred Stock is convertible at the option of the holder at any time into
common stock on a 2.3-for-one basis, subject to certain adjustments. These
shares are also convertible automatically upon an initial public offering. The
Series AA Convertible Preferred Stock accrues dividends at the annual rate of
10 percent, whether or not declared. In liquidation, the holders of Series AA
Convertible Preferred Stock are entitled to receive $8.00 per share plus all
accrued, unpaid dividends, prior to any preference or distribution of any assets
of the Company to the holders of any other shares of capital stock. To date no
dividends have been declared on Series AA Convertible Preferred Stock. The
accumulated unpaid dividends are $173,151 and $973,151 at December 31, 1998 and
1999, respectively.
In addition, the holders of the Series AA Convertible Preferred Stock are
entitled to an adjustment to the conversion price of the Series AA Convertible
Preferred Stock, based upon the valuation of the Company's common stock at the
time of an initial public offering of the Company's common stock or a
liquidation of the Company if such event has occurred prior to March 31, 2001.
Until March 31, 2001, this adjustment takes effect if the value of a share of
the Company's common stock is less than $11.86 at the time of an initial public
offering or liquidation. This threshold is increased to $13.52 on March 31, 2000
and $15.42 on September 30, 2000. If an initial public offering or liquidation
of the Company has not occurred by March 31, 2001, then the conversion price of
the Series AA Convertible Preferred Stock is subject to adjustment based upon
the performance of the Company during the 2000 fiscal year. As a result of the
provisions outlined above, the conversion price of the Series AA Convertible
Preferred Stock, which currently is $8.00 per share, can be reduced on a
proportional basis to a minimum price of $7.00 per share.
(10) CONVERTIBLE REDEEMABLE PREFERRED STOCK
The holders of Series E Mandatorily Redeemable Convertible Preferred Stock
are entitled to receive dividends at the annual rate of 10 percent. The
conversion rate of the Series E prior to the 2.3-for-one stock split was one
share of common stock for each share of Series E outstanding. These shares were
redeemed by the Company in April, 1998 at $2.00 per share plus accrued and
unpaid dividends of $8,130, in accordance with the redemption provisions of the
Series E.
The holders of Series F Mandatorily Redeemable Convertible Preferred Stock
will share ratably in all dividends declared and paid on common stock; and any
Series F shares which have not been converted to common stock by April 30, 2003
must be redeemed by the Company for $2.00 per share. In liquidation, the holders
of the Series F are entitled to receive $2.00 per share, prior to any preference
or distribution of any assets of the Company to the holders of any other shares
of capital stock. Additionally, Series F holders are entitled to vote on an
equivalent basis with holders of common stock. Each share of the Series F is
convertible at the option of the holder into 2.3 fully paid and nonassessable
share of common stock at any time. Also, each share of Series F shall
automatically be converted into common stock, at the then applicable conversion
price, upon the consummation by the Company of a firmly underwritten public
offering of shares of common stock of the Company at a per share price not less
than $4.00 per share and for a total offering of not less than $5 million
(before deduction of underwriting discounts, commissions and fees).
F-15
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK COMPENSATION
(A) STOCKHOLDERS' AND DIRECTORS' STOCK OPTIONS
The Company has reserved 2,300,000 shares of common stock for issuance
pursuant to outstanding options held by current stockholders and directors. The
following is a summary of activity related to these stock options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1997........................ 492,465 $1.03
Options granted............................................. 11,500 2.61
--------
Options outstanding, December 31, 1997...................... 503,965 1.06
Options granted............................................. 48,300 2.61
Options expired............................................. (23) 1.30
--------
Options outstanding, December 31, 1998...................... 552,242 1.20
Options granted............................................. -- --
Options exercised........................................... (133,264) 0.00
Options expired............................................. (91,976) 1.30
--------
Options outstanding, December 31, 1999...................... 327,000 1.65
========
</TABLE>
(B) STOCK INCENTIVE PLAN
The Company has reserved 900,000 shares of common stock pursuant to the 1989
Stock Incentive Plan (the "Plan") as amended and restated in 1998. Options under
this plan vest over a period of four years and have a term of ten years. Options
are granted at a price not less than the fair market value of the stock as
estimated by the Board of Directors at the grant date. The following is a
summary of activity of the Stock Incentive Plan in 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1997........................ 1,060,300 $1.19
Options granted............................................. 1,011,080 2.61
Options exercised........................................... (408,250) 2.40
---------
Options outstanding, December 31, 1997...................... 1,663,130 1.72
Options granted............................................. 382,720 2.61
Options expired............................................. (759,678) 2.28
Options exercised........................................... (12) 1.20
---------
Options outstanding, December 31, 1998...................... 1,286,160 1.65
Options granted............................................. 1,115,040 3.48
Options expired............................................. (367,080) 2.78
---------
Options outstanding, December 31, 1999...................... 2,034,120 2.45
=========
</TABLE>
F-16
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) STOCK COMPENSATION (CONTINUED)
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options rather than the alternative fair value
accounting method allowed by SFAS No. 123. APB No. 25 provides that compensation
expense relative to the Company's employee stock options is measured based upon
the intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123.
Under APB No. 25, because the exercise price of the Company's employee stock
options equaled the fair value of the underlying stock on the date of grant, no
compensation expense has been recognized in 1997 or 1998. The Company recorded
deferred compensation expense of $8,033,015 relating to options to purchase
1,115,040 shares granted in 1999 equal to the difference between the estimated
fair value of the Company's common stock on the grant date and the exercise
price of the options. The expense will be recognized ratably over the vesting
period of the options, which is generally four years. The Company recorded a
$793,279 expense associated with the options granted during 1999 which is
included as compensation expense in the accompanying consolidated statements of
operations.
SFAS No. 123 requires pro forma net increase (loss) disclosures as if the
Company had accounted for its stock options granted under the fair value method
prescribed by that statement. Had the Company used the fair value methodology
for determining compensation expense, the following table presents the pro forma
net income (loss) that would have been recorded by the Company for the options
granted during 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss) applicable to common stockholders:
As reported............................................ $(628,938) $(2,231,738) $(3,780,534)
Pro forma.............................................. (698,635) (2,355,627) (4,170,219)
Basic and diluted net income (loss) per share applicable
to common stockholders:
As reported............................................ $ (0.38) $ (1.32) $ (2.15)
Pro forma.............................................. (0.42) (1.40) (2.37)
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model on the date of grant using the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rates.................................... 5.7% 4.6% 6.4%
Expected lives (in years)................................... 5.0 5.0 5.0
Dividend yield.............................................. -- -- --
Expected volatility......................................... -- -- --
--- --- ---
</TABLE>
The weighted average fair value of stock options granted during 1997, 1998,
and 1999 was $0.63, $0.52 and $12.44, respectively.
F-17
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK COMPENSATION (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.87 - $1.20 614,100 1.9 years $0.97 614,100 $0.97
$1.30 - $2.28 471,900 5.2 years $1.48 461,090 $1.48
$2.61 - $3.48 1,275,120 9.6 years $3.32 437,784 $3.32
--------- ---------
2,361,120 6.7 years $2.34 1,512,974 $2.34
========= =========
</TABLE>
(12) RETIREMENT PLANS
The Company has two qualified defined contribution retirement plans,
established under the provisions of Internal Revenue Code Section 401(k). The
Company contributes amounts to the Plans on a discretionary basis. The
participants may contribute any whole percentage of salary each pay period,
subject to federal limitations. The Company's expense under the Plans was
$5,512, $11,744 and $9,944 for the years ended December 31, 1997, 1998 and 1999,
respectively.
(13) INCOME TAXES
No provision or benefit for federal or state income taxes has been recorded
in 1997 as the Company utilized its net operating loss carryforwards to
eliminate any tax on 1997 income. No provision or benefit for federal or state
income taxes has been recorded in 1998 and 1999 as the Company is incurring a
net operating loss in those periods.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1997, 1998 and 1999 are
presented below:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ $ 54,600 $ 40,500 $ 86,000
Deferred rent.......................................... 36,100 29,600 31,700
Net operating loss carryforward........................ 1,831,000 2,495,000 2,956,500
AMT credit carryforward................................ 64,000 134,000 134,000
Cumulative book depreciation in excess of tax
depreciation......................................... 55,000 100,000 163,600
Other.................................................. 49,900 23,400 20,000
---------- ---------- ----------
Gross deferred tax assets............................ 2,090,600 2,822,500 3,391,800
Less--valuation allowance................................ 2,090,600 2,822,500 3,391,800
Net deferred tax assets.............................. -- -- --
Gross deferred tax liabilities........................... -- -- --
---------- ---------- ----------
Net deferred tax assets.............................. $ -- $ -- $ --
========== ========== ==========
</TABLE>
F-18
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards available for income tax
purposes of approximately $7,580,810 at December 31, 1999, respectively,
expiring at various dates through 2018. As a result of certain capital
transactions, there is an annual limitation on the future utilization of the net
operation loss carryforwards. 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 tax asset will not be realized. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which the net operating loss carryforwards are available to
reduce income taxes payable, management has established a valuation allowance
such that the net deferred tax asset is $-0- at December 31, 1998 and 1999,
respectively. The net change in the valuation allowance during the year ended
December 31, 1999, was an increase of $569,300.
(14) BASIC AND DILUTED NET LOSS PER SHARE
The Company computes net income (loss) per share in accordance SFAS
No. 128, "Earnings Per Share", which requires certain disclosures relating to
the calculation of earnings per common stock share. The following as a
reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations for net income (loss).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)....................................... $ 158,867 $(1,550,123) $(2,431,393)
Preferred stock dividend requirements................... (787,805) (681,615) (1,349,141)
---------- ----------- -----------
Net income (loss) applicable to common stockholders..... $ (628,938) $(2,231,738) $(3,780,534)
========== =========== ===========
Weighted average shares of common stock outstanding..... 1,652,223 1,685,097 1,758,359
========== =========== ===========
Basic and diluted net income (loss) per share applicable
to common stockholders................................ $ (0.38) $ (1.32) $ (2.15)
========== =========== ===========
</TABLE>
(15) SUBSEQUENT EVENT
On February 4, 2000, the Company issued 1,260,775 shares of newly authorized
Series BB Convertible Preferred Stock to new and existing investors for
approximately $28,300,000. The Series BB is convertible at the option of the
holder at any time into such number of fully paid nonassessable shares of common
stock as is obtained by (a) multiplying the number of shares of Series BB to be
converted by $23.795 and (b) dividing the product thereof by $23.795, or the
conversion price then in effect, which will be adjusted in the case of stock
splits and several other events. The Series BB is automatically converted into
common stock at the then effective conversion price in the event of an initial
public offering of shares of common stock yielding gross proceeds of at least
$30,000,000 at an offering price per share equal to at least (a) 130 percent of
the then applicable conversion price if such offering closes on or before
May 31, 2000 or (b) 150 percent of the then applicable conversion price if such
offering closes after May 31, 2000. The Series BB accrues dividends at the
annual rate of 8 percent, whether or not declared. In liquidation, the holders
of Series BB are entitled to receive $23.795 per share plus all accrued, unpaid
dividends, prior to any preference or distribution of any assets of the Company
to the holders of any other shares of capital stock. In connection with the
issuance of Series BB, the Company amended its Articles of Incorporation to
increase authorized shares of common stock to 34,496,849.
F-19
<PAGE>
ISKY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUBSEQUENT EVENT (CONTINUED)
In connection with the issuance of the Series BB, the Company will record a
non-cash charge of approximately $4,803,000 during the first quarter of 2000 to
accrete the value of the preferred stock to its fair value. This non-cash charge
will be recorded as an increase in accumulated deficit with a corresponding
credit to additional paid-in capital and is being recognized at the date of
issuance which was the period in which the shares became eligible for
conversion. This amount will be deducted from net income (loss) applicable to
common stockholders as of the date of issuance of the Series BB in order to
calculate basic and diluted net income (loss) per share applicable to common
stockholders.
During January 2000, the Company issued to new employees options to purchase
95,000 shares of common stock of the Company at an exercise price of $8.00 per
share. These options vest over a period of four years and have a term of ten
years.
(16) RELATED PARTY TRANSACTIONS
A stockholder and certain members of the Board of Directors provided
management services to the Company for which management fees of $126,500 and
$61,277 were expensed in 1998 and 1999, respectively.
Additionally, the company conducts business with two stockholders whose
representatives are members of the Board of Directors. Revenues from these
stockholders were approximately $264,000, $127,000 and $243,000 in 1997, 1998
and 1999, respectively. At December 31, 1998 and 1999, accounts receivable from
these stockholders were approximately $11,000 and $59,000, respectively.
(17) SIGNIFICANT CUSTOMERS
The Company provides a substantial amount of services to customers in the
automotive industry, from which approximately 51, 57 and 55 percent of total
revenues were derived from certain customers in 1997, 1998 and 1999,
respectively. At December 31, 1998 and 1999, accounts receivable from these
automotive industry customers were approximately $2,222,000 and $2,774,000,
respectively. Additionally, the Company derived revenues in 1997, 1998 and 1999
from two customers who represent approximately $8,227,000, $6,445,000 and
$5,681,000 of total revenue, respectively.
F-20
<PAGE>
[Inside Back Cover]
[graphic of iSKY advertisement showing faces and the sentence "in cyberspace no
one can hear your customer scream."]
<PAGE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CHASE H&Q DEUTSCHE BANC ALEX. BROWN
WILLIAM BLAIR & COMPANY
------------------------
, 2000
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
INCLUDED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY
SHARES OF ISKY, INC. COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS OR 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 THE SALE OF THE ISKY, INC. COMMON STOCK.
THROUGH AND INCLUDING , 2000 (THE 25(TH) DAY AFTER COMMENCEMENT
OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OF
ISKY, INC., WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the various expenses payable by us in connection
with the sale and distribution of the securities we are offering, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the National
Association Securities Dealers, Inc. filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 18,216
National Association of Securities Dealers, Inc. filing
fee....................................................... 7,100
Nasdaq National Market listing fee.......................... 95,000
Transfer agent's and registrar's fees....................... 18,000
Printing expenses........................................... 350,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 250,000
Blue Sky filing fees and expenses........................... 500
Miscellaneous expenses...................................... 2,284
----------
Total..................................................... 1,305,000
==========
</TABLE>
- ------------------------
* To be filed by amendment.
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 2-418 of the Maryland General Corporation Law permits
indemnification of directors, officers, employees and agents of a corporation
under certain conditions and subject to limitations. Our bylaws include
provisions to require us to indemnify our directors and officers to the fullest
extent permitted by Section 2-418, including circumstances in which
indemnification is otherwise discretionary. Section 2-418 also empowers us to
purchase and maintain insurance that protects our officers, directors, employees
and agents against any liabilities incurred in connection with their service in
such positions.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification of our directors and officers by the
Underwriters, for liabilities arising under the Securities Act.
15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, we have issued unregistered securities in the
transactions described below. These securities were offered and sold by us in
reliance upon the exemptions provided for in Section 4(2) of the Securities Act,
relating to sales not involving any public offering, Rule 506 of the Securities
Act relating to sales to accredited investors and Rule 701 of the Securities Act
relating to a compensatory benefit plan. The sales were made without the use of
an underwriter and the certificates representing the securities sold contain a
restrictive legend that prohibits transfer without registration or an applicable
exemption.
II-1
<PAGE>
(1) In October 1998, we issued 1,000,000 shares of Series AA preferred stock to
a group of accredited investors at a purchase price of $8.00 per share for
an aggregate of $8,000,000.
(2) In February 2000, we issued 1,260,775 shares of Series BB preferred stock to
a group of accredited investors at a purchase price of $23.79 per share for
an aggregate of $30,000,000.
(3) Issuance of 2,361,120 shares on exercise of options at a range of
$0.87-$3.48 per share.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Articles of Amendment and Restatement, dated December 5,
1986
3.1.1+ Articles Supplementary, dated March 20, 1989
3.1.2+ Certificate of Corporate Secretary Concerning Change of
Principal Office, dated March 27, 1989
3.1.3+ Articles of Amendment, dated May 5, 1989
3.1.4+ Articles Supplementary, dated December 4, 1990
3.1.5+ Articles Supplementary, dated December 4, 1990
3.1.6+ Articles Supplementary, dated December 4, 1990
3.1.7+ Articles Supplementary, dated May 23, 1991
3.1.8+ Amended & Restated Articles Supplementary, dated July 25,
1991
3.1.9+ Certificate Changing Name and Address of Resident Agent and
Principal Office, dated November 26, 1991
3.1.10+ Articles Supplementary, dated September 25, 1995
3.1.11+ Articles Supplementary, dated February 13, 1996
3.1.12+ Articles Supplementary, dated October 14, 1998
3.1.13+ Articles of Amendment, dated October 14, 1998
3.1.14+ Articles of Amendment, dated December 18, 1998
3.1.15+ Articles Supplementary, dated February 3, 2000
3.1.16+ Articles of Amendment, dated February 4, 2000
3.2+ Amended and Restated Bylaws, dated February 4, 2000
4.1* Specimen stock certificate for shares of common stock of
iSky Inc.
5.1* Form of Opinion of Piper Marbury Rudnick & Wolfe LLP,
regarding legality of securities being registered
10.1+ Richard T. Hebert Employment Agreement
10.2+ Raymond J. Zukowski Employment Agreement
10.3+ Bradley Steer Employment Agreement
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.4+ Steven G. Krumenaker Employment Agreement
10.5+ Amended and Restated Stock Incentive Plan, dated February 4,
2000
10.6+ Employee Stock Purchase Plan, dated February 4, 2000
10.7+ Loan and Security Agreement by and among Sky Alland
Research, Inc., The Data Group, II, Inc. and Silicon Valley
Bank, dated February 14, 1997
10.7.1+ First Amendment to Loan and Security Agreement by and among
Sky Alland Research, Inc., Marcom Holdings, Inc., The Data
Group, II, Inc. and Silicon Valley Bank, dated September 1,
1997
10.7.2+ Second Amendment to Loan and Security Agreement by and among
Sky Alland Research, Inc., The Data Group, II, Inc. and
Silicon Valley Bank, dated December 22, 1997
10.7.3+ Third Amendment to Loan and Security Agreement by and among
Sky Alland Research, Inc., The Data Group, II, Inc. and
Silicon Valley Bank, dated March 19, 1998
10.7.4+ Fourth Amendment to Loan and Security Agreement by and among
Sky Alland Research, Inc., The Data Group, II, Inc. and
Silicon Valley Bank, dated June 13, 1999
10.7.5+ Fifth Amendment to Loan and Security Agreement by and among
Sky Alland Research, Inc., The Data Group, II, Inc. and
Silicon Valley Bank, dated September 13, 1999
10.7.6+ Sixth Amendment to Loan and Security Agreement by and among
Sky Alland Research, Inc., The Data Group, II, Inc. and
Silicon Valley Bank, dated November 5, 1999
10.8+ Fifth Amended and Restated Revolving Promissory Note by and
among Sky Alland Research, Inc., The Data Group, II, Inc.
and Silicon Valley Bank, dated November 5, 1999
10.9+ Second Amended and Restated Equipment Term Note No.1 of 2 by
and among Sky Alland Research, Inc., The Data Group, II,
Inc. and Silicon Valley Bank, dated November 5, 1999
10.10+ Second Amended and Restated Equipment Term Note No. 2 of 2
by and among Sky Alland Research, Inc., The Data Group, II,
Inc. and Silicon Valley Bank, dated November 5, 1999
10.11+ Second Amended & Restated Registration Rights Agreement,
dated February 3, 2000
23.1 Consent of KPMG LLP
23.2* Consent of Piper Marbury Rudnick & Wolfe LLP (included as
part of Exhibit 5.1 hereto)
23.3+ Opinion of KPMG LLP, regarding financial statement schedule
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
+ Previously Filed
(B) FINANCIAL STATEMENT SCHEDULES:
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been ommitted.
II-3
<PAGE>
17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Charter or Bylaws or the Maryland
General Corporation Law 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, employee or agent of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, employee or agent in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Columbia, Maryland, on
the 3rd day of April, 2000.
<TABLE>
<S> <C> <C>
iSKY, Inc.
By: /s/ RICHARD T. HEBERT
-----------------------------------------
Richard T. Hebert
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
President and Chief
/s/ RICHARD T. HEBERT Executive Officer
------------------------------------------- (Principal Executive April 3, 2000
Richard T. Hebert Officer)
/s/ RAYMOND J. ZUKOWSKI Chief Operating Officer
------------------------------------------- April 3, 2000
Raymond J. Zukowski
/s/ MARK F. YANSON Chief Financial Officer
------------------------------------------- (Principal Accounting and April 3, 2000
Mark F. Yanson Financial Officer)
* Director
------------------------------------------- April 3, 2000
Michael S. Fisher
* Director
------------------------------------------- April 3, 2000
Stephen J. Getsy
Director
-------------------------------------------
Steven Gilbert
* Director
------------------------------------------- April 3, 2000
Walter G. Lohr, Jr.
* Director
------------------------------------------- April 3, 2000
Walter Maner
* Director
------------------------------------------- April 3, 2000
Gary Neems
* Director
------------------------------------------- April 3, 2000
Charles Stryker
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By /s/ Mark Yanson
-------------------------------------
AS ATTORNEY IN FACT
</TABLE>
II-5
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
OF PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) OF PERIOD
DESCRIPTION ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1/1/97-12/31/97
Allowance for doubtful accounts......... $118,907 67,227 -- (46,087) 140,047
1/1/98-12/31/98
Allowance for doubtful accounts......... $140,047 205,000 -- (241,153) 103,894
1/1/99-12/31/99
Allowance for doubtful accounts......... $103,894 190,000 -- (73,329) 220,565
</TABLE>
S-1
<PAGE>
Exhibit 1.1
ISKY, INC.
[5,000,000]SHARES1
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
April ___, 2000
CHASE SECURITIES INC.
DEUTSCHE BANK SECURITIES INC.
WILLIAM BLAIR & COMPANY LLC
As Representatives of the Several Underwriters
c/o Chase Securities Inc.
One Bush Street
San Francisco, California 94104
c/o Deutsche Bank Securities, Inc.
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
iSKY, Inc., a Maryland Corporation (the "Company"), proposes to issue
and sell [5,000,000] shares of its authorized but unissued Common Stock, $0.01
par value (the "Firm Shares"). In addition, the Company and Advanta Partners,
L.P., a stockholder of the Company (the "Selling Securityholder") propose to
grant to the Underwriters (as hereinafter defined) an option to purchase and
aggregate of up to [750,000] additional shares of Common Stock (the "Option
Shares"). The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively referred to herein as the "Shares." The
Common Stock is more fully described in the Registration Statement and the
Prospectus hereinafter mentioned.
The Company and the Selling Securityholder hereby confirm their
agreements made with respect to the purchase of the Shares by the several
underwriters, for whom you are acting, named in Schedule I hereto (collectively,
the "Underwriters," which term shall also include any underwriter purchasing
Shares pursuant to Section 3(b) hereof). You represent and warrant that you have
been authorized by each of the other Underwriters to enter into this Agreement
on its behalf and to act for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form S-1 (No. 333-96263), including the related preliminary prospectus, for
the registration of the Shares under the Securities Act of 1933, as amended (the
"Securities Act"). Copies of such registration statement and of each amendment
thereto, if any, including the related preliminary prospectus (meeting the
requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
- --------
1 Plus an option to purchase up to [600,000] additional shares from the
Company and [150,000] shares from the Selling Securityholder to cover
over-allotments.
<PAGE>
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus relating to
the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A
(or if no such filing is made, as included in the Registration Statement) and,
in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended and, if applicable, shall also mean an electronic
Prospectus as defined in Section 9(k) hereof. The term Preliminary Prospectus as
used in this Agreement shall mean each preliminary prospectus included in such
registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDER.
(a) The Company hereby represents and warrants to each of the
Underwriters as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS.
The Registration Statement and the Prospectus, when filed, complied in all
material respect with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representative expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
-2-
<PAGE>
(ii) DISTRIBUTION OF OFFERING MATERIAL BY THE
COMPANY. The Company has not distributed and will not distribute, prior to the
latest Closing Date (as defined in Section 5 below) and the completion of the
Underwriters' distribution of the Shares, any offering material in connection
with the offering and sale of the Shares other than a Preliminary Prospectus,
the Prospectus or the Registration Statement.
(iii) THE UNDERWRITING AGREEMENT. This Agreement
has been duly authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(iv) AUTHORIZATION OF THE SHARES TO BE SOLD BY
THE COMPANY. The Shares to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale pursuant to this Agreement and,
when issued and delivered by the Company pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and the Underwriters will receive
good and marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
(v) NO APPLICABLE REGISTRATION OR OTHER SIMILAR
RIGHTS. There are no persons with registration or other similar rights to have
any equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement, except for
such rights as have been duly waived.
(vi) NO MATERIAL ADVERSE CHANGE. Subsequent to
the respective dates as of which information is given in the Prospectus: (i)
there has been no material adverse change, or any development that could
reasonably be expected to result in a material adverse change, in the condition,
financial or otherwise, or in the earnings, business, operations or prospects,
whether or not arising from transactions in the ordinary course of business of
the Company (any such change or effect, where the context so requires, is called
a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company
has not incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any material
transaction or agreement not in the ordinary course of business; and (iii) there
has been no dividend or distribution of any kind declared, paid or made by the
Company on any class of capital stock or repurchase or redemption by the Company
of any class of capital stock.
(vii) INDEPENDENT ACCOUNTANTS. KPMG LLP, who have
expressed their opinion with respect to the financial statements of the Company,
including the related notes thereto, filed with the Commission as a part of the
Registration Statement and included in the Prospectus (the "Financial
Statements") is an independent public or certified public accountant as required
by the Securities Act.
(viii) PREPARATION OF THE FINANCIAL STATEMENTS. The
Financial Statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the financial position
of the Company as of and at the dates indicated and the results of their
operations and cash flows for the periods specified. Such Financial Statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial statements are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions
-3-
<PAGE>
"Prospectus Summary--Summary Financial Information", "Selected Historical
Financial Data" and "Capitalization" fairly present the information set forth
therein on a basis consistent with that of the audited financial statements
contained in the Registration Statement. The pro forma financial information of
the Company included in the Prospectus and in the Registration Statement present
fairly the information contained therein, have been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements and have been properly presented on the bases describes therein, and
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions and
circumstances referred to therein. No other pro forma financial information is
required to be included in the Registration Statement Pursuant to Regulation
S-X.
(ix) COMPANY'S ACCOUNTING SYSTEM. The Company
maintains a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(x) SUBSIDIARIES OF THE COMPANY. The Company
does not own or control, directly or indirectly, any corporation, association or
other entity.
(xi) INCORPORATION AND GOOD STANDING OF THE
COMPANY. The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland with full
corporate power and authority to own its properties and conduct its business as
described in the prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction which
requires such qualification, except where the failure to qualify would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
(xii) CAPITALIZATION AND OTHER CAPITAL STOCK
MATTERS. The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" (other than
for subsequent issuances, if any, pursuant to employee benefit plans described
in the Prospectus or upon exercise of outstanding options or warrants described
in the Prospectus). The Common Stock (including the Shares) conform in all
material respects to the description thereof contained in the Prospectus. All of
the issued and outstanding Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Stock were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There are
no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company other than those accurately described in the Prospectus. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(xiii) STOCK EXCHANGE LISTING. The Shares have been
approved for listing on the Nasdaq National Market, subject only to official
notice of issuance.
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(xiv) NO CONSENTS, APPROVALS OR AUTHORIZATIONS
REQUIRED. No consent, approval, authorization, filing with or order of any court
or governmental agency or regulatory body is required in connection with the
transactions contemplated herein, except such as have been obtained or made
under the Securities Act and such as may be required (i) under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of the
Shares by the Underwriters in the manner contemplated here and in the
Prospectus, (ii) by the National Association of Securities Dealers, Inc. and
(iii) by the federal and provincial laws of Canada.
(xv) NON-CONTRAVENTION OF EXISTING INSTRUMENTS
AGREEMENTS. Neither the issue and sale of the Shares nor the consummation of any
other of the transactions herein contemplated nor the fulfillment of the terms
hereof will conflict with, result in a breach or violation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company pursuant
to, (i) the charter or by-laws of the Company, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument to which the
Company is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over the
Company or any of its properties.
(xvi) NO DEFAULTS OR VIOLATIONS. The Company is
not in violation or default of (i) any provision of its charter or by-laws, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(xvii) NO ACTIONS, SUITS OR PROCEEDINGS. No action,
suit or proceeding by or before any court or governmental agency, authority or
body or any arbitrator involving the Company or its property is pending or, to
the best knowledge of the Company, threatened that (i) could reasonably be
expected to have a Material Adverse Effect on the performance of this Agreement
or the consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to result in a Material Adverse Effect.
(xviii) ALL NECESSARY PERMITS, ETC. The Company
possesses such valid and current certificates, authorizations or permits issued
by the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses, and has not received any
notice of proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, could result in a Material Adverse Change.
(xix) TITLE TO PROPERTIES. The Company has good
and marketable title to all the properties and assets reflected as owned in the
Financial Statements referred to above, in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims and other
defects, except such as (i) do not materially and adversely affect the value of
such property; (ii) do not materially interfere with the use made or proposed to
be made of such property by the Company; and (iii) are reflected in the
Financial Statements. The real property, improvements, equipment and personal
property held under lease by the Company are held
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under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company.
(xx) TAX LAW COMPLIANCE. The Company has filed
all necessary federal, state and foreign income and franchise tax returns and
has paid all taxes required to be paid by it and, if due and payable, any
related or similar assessment, fine or penalty levied against it. The Company
has made adequate charges, accruals and reserves in the applicable Financial
Statements referred to above in respect of all federal, state and foreign income
and franchise taxes for all periods as to which the tax liability of the Company
has not been finally determined. The Company is not aware of any tax deficiency
that has been or might be asserted or threatened against the Company that could
result in a Material Adverse Change.
(xxi) INTELLECTUAL PROPERTY RIGHTS. The Company
owns or possesses adequate rights to use all patents, patent rights or licenses,
inventions, collaborative research agreements, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim currently pending, or, to the Company's knowledge, threatened against the
Company regarding patents, patent rights or licenses, inventions, collaborative
research, trade secrets, know-how, trademarks, service marks, trade names or
copyrights. The Company's business as now or proposed to be conducted as
described in the Prospectus does not infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company, which such infringement or conflict is reasonably likely to result in a
Material Adverse Change.
(xxii) YEAR 2000 PREPAREDNESS. There are no issues
related to the Company's preparedness for the Year 2000 that (i) are of a
character required to be described or referred to in the Registration Statement
or by the Securities Act which have not been accurately described in the
Registration Statement or Prospectus or (ii) might reasonably be expected to
result in any Material Adverse Change or that might materially affect their
properties, assets or rights. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company fully comply with Year 2000 Qualification Requirements. "Year 2000
Qualifications Requirements" means that the internal computer systems and each
Constituent Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined below) of
those products of the Company (i) have been reviewed to confirm that they store,
process (including sorting and performing mathematical operations, calculations
and computations), input and output data containing date and information
correctly regardless of whether the date contains dates and times before, on or
after January 1, 2000, (ii) have been designated to ensure date and time entry
recognition and calculations, and date data interface values that reflect the
century, (iii) accurately manage and manipulate data involving dates and times,
including single century formulas and multi-century
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formulas, and will not cause an abnormal ending scenario within the application
or generate incorrect values or invalid results involving such dates, (iv)
accurately process any date rollover, and (v) accept and respond to two-digit
year date input in a manner that resolves any ambiguities as to the century.
"Constituent Component" means all software (including operating systems,
programs, packages and utilities), firmware, hardware, networking components,
and peripherals provided as part of the configuration. The Company has inquired
of material vendors as to their preparedness for the Year 2000 and has disclosed
in the Registration Statement or Prospectus any issues that might reasonably be
expected to result in any Material Adverse Change.
(xxiii) NO TRANSFER TAXES OR OTHER FEES. There are
no transfer taxes or other similar fees or charges under Federal law or the laws
of any state, or any political subdivision thereof, required to be paid in
connection with the execution and delivery of this Agreement or the issuance and
sale by the Company of the Shares.
(xxiv) COMPANY NOT AN "INVESTMENT COMPANY". The
Company has been advised of the rules and requirements under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Company is
not, and after receipt of payment for the Shares will not be, an "investment
company" or an entity "controlled" by an "investment company" within the meaning
of the Investment Company Act and will conduct its business in a manner so that
it will not become subject to the Investment Company Act.
(xxv) INSURANCE. The Company is insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and earthquakes, general
liability and Directors and Officers liability. The Company has no reason to
believe that it will not be able (i) to renew its existing insurance coverage as
and when such policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted and at a cost that would not result in a Material Adverse Change. The
Company has not been denied any insurance coverage which it has sought or for
which it has applied.
(xxvi) LABOR MATTERS. To the best of the Company's
knowledge, no labor disturbance by the employees of the Company exists or is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, that might be
expected to result in a Material Adverse Change.
(xxvii) NO PRICE STABILIZATION OR MANIPULATION. The
Company has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(xxviii) LOCK-UP AGREEMENTS. Each officer and
director of the Company and certain beneficial owners of the outstanding issued
share capital of the Company has signed an agreement substantially in the form
attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or
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other stockholders from any Lock-up Agreements currently existing or hereafter
effected without the prior written consent of both Chase Securities Inc. and
Duetsche Bank Securities Inc.
(xxix) RELATED PARTY TRANSACTIONS. There are no
business relationships or related-party transactions involving the Company or
any other person required to be described in the Prospectus which have not been
described as required.
(xxx) CERTIFICATES. Any certificate signed by an
officer of the Company and delivered to the Representatives or to counsel for
the Underwriters shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters set forth therein.
(b) The Selling Securityholder hereby represents and warrants to
each of the Underwriters as follows:
(i) The Selling Securityholder has good and
marketable title to all the Option Shares to be sold by the Selling
Securityholder hereunder, free and clear of all liens, encumbrances, equities,
security interests and claims whatsoever, with full right and authority to
deliver the same hereunder, subject to the rights of _____________________, as
custodian (herein called the "Custodian"), and that upon the delivery of and
payment for such Option Shares hereunder, the several Underwriters will receive
good and marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the
Option Shares to be sold by the Selling Securityholder have been placed in
custody under a Custody Agreement for delivery under this Agreement with the
Custodian; the Selling Securityholder specifically agrees that the Option Shares
represented by the certificates so held in custody for the Selling
Securityholder are subject to the interests of the several Underwriters and the
Company, that the arrangements made by the Selling Securityholder for such
custody, including the Power of Attorney provided for in such Custody Agreement,
are to that extent irrevocable, and that the obligations of the Selling
Securityholder shall not be terminated by any act of the Selling Securityholder
or by operation of law, whether by the dissolution or liquidation of the Selling
Securityholder or the occurrence of any other event; if any such dissolution,
liquidation or other such event should occur before the delivery of such Option
Shares hereunder, certificates for such Option Shares shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such dissolution, liquidation or other event had not occurred, regardless of
whether the Custodian shall have received notice of such dissolution,
liquidation or other event.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell the Firm Shares to the several Underwriters and each of the Underwriters
agrees to purchase from the Company the respective aggregate number of shares of
Firm Shares set forth opposite its name in Schedule I. The price at which such
shares of Firm Shares shall be sold by the Company and purchased by the several
Underwriters shall be $_____ per share. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Firm Shares specified in
Schedule I.
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(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Shares which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Shares exceeds 10% of the total number of shares of the Shares which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Shares which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Shares which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Securityholder grant an option to the several
Underwriters to purchase up to [750,000] shares in the aggregate of the Option
Shares from the Company and the Selling Securityholder at the same price per
share as the Underwriters shall pay for the Firm Shares. Said option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the thirtieth day after the date of this Agreement upon
written or telegraphic notice by you to the Company and the Selling
Securityholder setting forth the aggregate number of shares of the Option Shares
as to which the several Underwriters are exercising the option. Delivery of
certificates for the shares of Option Shares, and payment therefor, shall be
made as provided in Section 5 hereof. The number of shares of the Option Shares
to be purchased by each Underwriter shall be the same percentage of the total
number of shares of the Option Shares to be purchased by the several
Underwriters as such Underwriter is purchasing of the Firm Shares, as adjusted
by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
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(a) The terms of the initial public offering by the Underwriters
of the Shares to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth under "Underwriting" in the
Registration Statement, any Preliminary Prospectus and the Prospectus relating
to the Shares filed by the Company (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the Underwriters to
the Company for inclusion in the Registration Statement, any Preliminary
Prospectus, and the Prospectus, and you on behalf of the respective Underwriters
represent and warrant to the Company that the statements made therein are
correct.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of the Firm Shares and the Option Shares (if the
option granted by Section 3(c) hereof shall have been exercised not later than
10:00 a.m., Washington, D.C. time, on the date two business days preceding the
Closing Date), and payment therefor, shall be made at the office of Brobeck,
Phleger & Harrison, LLP, 701 Pennsylvania Avenue, N.W., Suite 220, Washington,
D.C. 20004, at 10:00 a.m., Washington, D.C. time, on the fourth business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such fourth business day, as shall be agreed
upon in writing by the Company and you. The date and hour of such delivery and
payment (which may be postponed as provided in Section 3(b) hereof) are herein
called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 10:00 a.m., Washington, D.C. time, on the date two business days
preceding the Closing Date, delivery of the Option Shares, and payment therefor,
shall be made at the office of Brobeck, Phleger & Harrison, LLP, 701
Pennsylvania Avenue, N.W., Suite 220, Washington, D.C. 20004, at 10:00 a.m.,
Washington, D.C. time, on the third business day after the exercise of such
option.
(c) Payment for the Shares purchased from the Company shall be
made to the Company or its order and payment for the Option Shares purchased
from the Selling Securityholder shall be made to the Custodian, for the account
of the Selling Securityholder, in each case by wire transfer in same day funds.
Such payment shall be made upon delivery of the Shares to you for the respective
accounts of the several Underwriters against receipt therefor signed by you. The
Shares to be delivered to you shall be registered in such name or names and
shall be in such denominations as you may request at least one business day
before the Closing Date, in the case of Firm Shares, and at least one business
day prior to the purchase thereof, in the case of the Option Shares. Such Shares
will be made available to the Underwriters for inspection, checking and
packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York,
New York 10004 on the business day prior to the Closing Date or, in the case of
the Option Shares, by 3:00 p.m., New York time, on the business day preceding
the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose wire transfer shall not have
been received by you on the Closing Date or any later date on which Option
Shares are purchased for the account of such Underwriter. Any such payment by
you shall not relieve such Underwriter from any of its obligations hereunder.
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6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Shares, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Shares by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either
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of counsel for the Company or of counsel for the Underwriters such proposed
variation requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the Shares may be
sold by the several Underwriters to use the Prospectus, as from time to time
amended or supplemented, in connection with the sale of the Shares in accordance
with the applicable provisions of the Securities Act and the applicable rules
and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Shares for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities or
blue sky laws; PROVIDED, HOWEVER, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Shares.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. (the "NASD")
of the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus
and of the several documents required by paragraph (c) of this Section 6 to be
so furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Securityholder will pay any transfer taxes incident to the
transfer to the Underwriters of the Option Shares being sold by the Selling
Securityholder.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account
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of the Underwriters or their counsel in qualifying the Shares under state
securities or blue sky laws and in the review of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written
consent of Chase Securities Inc. and Deutsche Bank Securities Inc. on behalf of
the Underwriters, the Company will not, for a period of 180 days following the
commencement of the public offering of the Shares by the Underwriters, directly
or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Shares to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by
the Company upon the exercise of options granted under the stock option plans of
the Company (the "Plans") or upon the exercise of options or warrants
outstanding as of the date hereof, all as described under the caption
"Capitalization" in the Preliminary Prospectus, and (C) stock or options to
purchase Common Stock granted under the Plans.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
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7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Selling Securityholder, individually and
jointly, agree to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act, against any
losses, claims, damages or liabilities to which such Underwriter or any such
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made;
and will reimburse each Underwriter and each such controlling person upon demand
for any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage or liability, action or proceeding or in responding to a subpoena
or governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or proceeding;
provided, however, that neither the Company nor the Selling Securityholder will
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof. In no event, however, shall the liability of the Selling
Securityholder for indemnification under this Section 7(a) exceed the proceeds
received by the Selling Securityholder from the underwriters in this offering.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Securityholder and each person,
if any, who controls the Company or the Selling Securityholder within the
meaning of the Act, against any losses, claims, damages or liabilities to which
the Company or any such director, officer, Selling Securityholder or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse upon demand any legal or other expenses reasonably incurred by
the Company or any such director, officer, Selling Securityholder, or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not the
Company or any such director, officer, Selling Securityholder, or controlling
person is a party to any action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
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(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 7, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 7(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 7(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 7(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 7(a) and by the Company and the Selling Securityholder in the case of
parties indemnified pursuant to Section 7(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Securityholder on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative
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fault of the Company and the Selling Securityholder on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Securityholder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Securityholder,
respectively, bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Selling Securityholder on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Securityholder, and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 7(d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 7(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 7(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation and (iii) the
Selling Securityholder shall not be required to contribute any amount in excess
of the proceeds received by the Selling Securityholder from the Underwriters in
the offering. The Underwriters' obligations in this Section 7(d) to contribute
are several in proportion to their respective underwriting obligations and not
joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 7 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company or the Selling Securityholder, (ii) acceptance of any
Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company or the Selling Securityholder,
shall
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be entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 7.
8. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company and the
Selling Securityholder if after the date of this Agreement trading in the Common
Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Shares
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholder to the Underwriters and no liability of the Underwriters to the
Company; PROVIDED, HOWEVER, that in the event of any such termination the
Company and the Selling Securityholder agree to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholder under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Shares shall be subject to
the performance by the Company and the Selling Securityholder of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Shares are to be purchased, as the case may
be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Shares
hereunder and the validity and form of the certificates representing the Shares,
all corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters.
(c) You shall have received from Piper Marbury Rudnick & Wolfe
LLP, counsel for the Company, an opinion, addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A hereto, and if
Option Shares are purchased
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from the Company at any date after the Closing Date, additional opinions from
each such counsel, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such opinions
remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
(iv) the Company does not have any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus, (v) there are not
any pending or known threatened legal proceedings to which the Company is a
party or of which property of the Company is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Shares are to be purchased, as the case may be,
and (viii) there has not been any material change in the market for securities
in general or in political, financial or economic conditions from those
reasonably foreseeable as to render it impracticable in your reasonable judgment
to make a public offering of the Shares, or a material adverse change in market
levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are purchased a certificate, dated the Closing Date
or such later date, as the case may be, and signed by the President and Chief
Executive Officer and the Chief Financial Officer of the Company, stating that
the respective signatories of said certificate have carefully examined the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein and any supplements or amendments thereto, and
that the statements included in clauses (i) through (vii) of paragraph (d) of
this Section 9 are true and correct.
(f) You shall have received from KPMG LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Option Shares are purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (the "Original Letter"), but carried out to a date
not more than three business days prior to the Closing Date or such later date
on which Option Shares are purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are accurate as
of the Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and
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conclusions set forth in the Original Letter which are necessary to reflect any
changes in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change, or
any development involving a prospective change, in or affecting the business or
properties of the Company which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Shares or the purchase of
the Option Shares as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Shares to be issued and sold by
the Company shall have been duly authorized for quotation on the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from
all directors, officers, and beneficial holders of the outstanding Common Stock
agreements, in form reasonably satisfactory to Chase Securities Inc. and
Deutsche Bank Securities Inc., stating that without the prior written consent of
Chase Securities Inc. and Deutsche Bank Securities Inc. on behalf of the
Underwriters, such person or entity will not, for a period of 180 days following
the commencement of the public offering of the Shares by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
(k) The Company shall cause to be prepared and delivered, at its
expense, within one business day from the effective date of this Agreement, to
the Representatives an "electronic Prospectus" to be used by the Underwriters in
connection with the offering and sale of the Shares. As used herein, the term
"electronic Prospectus" means a form of Prospectus, and any amendment or
supplement thereto, that meets each of the following conditions: (i) it shall be
encoded in an electronic format, satisfactory to the Representatives, that may
be transmitted electronically by the Representatives to offerees and purchasers
of the Shares for at least the Prospectus delivery period; (ii) it shall
disclose the same information as the paper Prospectus and Prospectus filed
pursuant to EDGAR, except to the extent that graphic and image material cannot
be disseminated electronically, in which case such graphic and image material
shall be replaced in the electronic Prospectus with a fair and accurate
narrative description or tabular representation of such material, as
appropriate; and (iii) it shall be in or convertible into a paper format or an
electronic format, satisfactory to the Representatives, that will allow
investors to store and have continuously ready access to the Prospectus at any
future time, without charge to investors (other than any fee charged for
subscription to the system as a whole and for on-line time). Such electronic
Prospectus may consist of a Rule 434 preliminary prospectus, together with the
applicable term sheet, provided that it otherwise satisfies the format and
conditions described in the immediately preceding sentence. The Company hereby
confirms that it has included or will include in the Prospectus filed pursuant
to EDGAR or otherwise with the Commission and in the Registration Statement at
the time it was declared effective an undertaking that, upon receipt of a
request by an investor or his or her
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representative within the Prospectus delivery period, the Company shall transmit
or cause to be transmitted promptly, without charge, a paper copy of the
Prospectus.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions of this Section 9 only if Brobeck, Phleger & Harrison LLP, counsel
for the Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company and the
Selling Securityholder to the Underwriters and without liability of the
Underwriters to the Company or the Selling Securityholder; PROVIDED, HOWEVER,
that (i) in the event of such termination, the Company and the Selling
Securityholder agree to indemnify and hold harmless the Underwriters from all
costs or expenses incident to the performance of the obligations of the Company
and the Selling Securityholder under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if
this Agreement is terminated by you because of any refusal, inability or failure
on the part of the Company or the Selling Securityholder to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDER. The obligation of the Company and the Selling Securityholder to
deliver the Shares shall be subject to the conditions that (a) the Registration
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholder by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholder to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholder; PROVIDED, HOWEVER, that in the event of any such termination the
Company and the Selling Securityholder jointly and severally agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholder
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
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12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholder and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholder and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Shares from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Chase Securities
Inc., One Bush Street, San Francisco, California 94104 and Deutsche Bank
Securities Inc., One South Street, Baltimore, Maryland 21202; and if to the
Company, shall be mailed, telegraphed or delivered to it at its office, 6740
Alexander Bell Drive, Suite 300, Columbia, Maryland 21046, Attention: Richard T.
Hebert, President and Chief Executive Officer; and if to the Selling
Securityholder, shall be mailed, telegraphed or delivered to the Selling
Securityholder in care of iSKY, Inc., 6740 Alexander Bell Drive, Suite 300,
Columbia, Maryland 21046, Attention: Richard T. Hebert, President and Chief
Executive Officer. All notices given by telegraph shall be promptly confirmed by
letter.
14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or the Selling Securityholder or their respective
directors or officers, and (c) delivery and payment for the Shares under this
Agreement; PROVIDED, HOWEVER, that if this Agreement is terminated prior to the
Closing Date, the provisions of paragraphs (k) and (l) of Section 6 hereof shall
be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
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<PAGE>
Please sign and return to the Company and to the Selling Securityholder
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement between the Company, the Selling
Securityholder and the several Underwriters in accordance with its terms.
Very truly yours,
ISKY, INC.
By __________________________________________
Richard T. Hebert
President and Chief Executive Officer
Selling Securityholder
By:_________________________________________
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<PAGE>
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CHASE SECURITIES INC.
DEUTCHE BANK SECURITIES INC.
WILLIAM BLAIR & COMPANY LLC
By: Chase Securities Inc.
By ________________________________
Managing Director
By: Deutche Bank Securities Inc.
By ________________________________
Managing Director
Acting on behalf of the several Underwriters, including themselves, named in
Schedule I hereto.
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<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ----------------
<S> <C>
Chase Securities Inc.
Deutsche Bank Securities Inc.
William Blair & Company LLC
----------------
Total
================
</TABLE>
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<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF PIPER MARBURY RUDNICK & WOLFE LLP
COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each of Maryland, New Jersey,
Indiana, Wisconsin and Oregon and has full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement;
(ii) the authorized capital stock of the Company consists of
_______ shares of Common Stock, $0.01 par value, of which there are
outstanding _________ shares (including the Firm Shares plus the number
of shares of Option Shares, if any, issued on the date hereof) and
____________ shares of Preferred Stock, $0.01 par value, of which there
are no shares outstanding; proper corporate proceedings have been taken
to validly authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Firm Shares and
the shares of Option Shares issued, if any) have been duly and validly
issued and are fully paid and nonassessable; any Option Shares
purchased after the Closing Date, when issued and delivered to and paid
for by the Underwriters as provided in the Underwriting Agreement, will
have been duly and validly issued and be fully paid and nonassessable;
and no preemptive rights of, or rights of refusal in favor of,
shareholders exist with respect to the Shares, or the issue and sale
thereof, except those that have been waived or exercised, pursuant to
the Articles of Incorporation or Bylaws of the Company and, to the
knowledge of such counsel, there are no contractual preemptive rights
that have not been waived, rights of first refusal or rights of co-sale
which exist with respect the issue and sale of the Shares;
(iii) the Registration Statement has become effective under
the Securities Act and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement
or suspending or preventing the use of the Prospectus is in effect and
no proceedings for that purpose have been instituted or are pending or
contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as
to the financial statements and schedules and other financial data
contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Securities Act and with the rules and regulations of the Commission
thereunder;
(v) the information required to be set forth in the
Registration Statement in answer to Items 9, 10 (insofar as it relates
to such counsel) and 11(c) of Form S-1 is to the best of such counsel's
knowledge accurately and adequately set forth therein in all material
respects or no response is required with respect to such Item and the
description of the Company's stock option plan and the options granted
and which may be granted thereunder in the Prospectus accurately and
fairly presents the information required to be shown with respect to
said plan and options to the extent required by the Securities Act and
the rules and regulations of the Commission thereunder;
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<PAGE>
(vi) such counsel do not know of any franchises, contracts,
leases, documents or legal proceedings, pending or threatened, which in
the opinion of such counsel are of a character required to be described
in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not described and
filed as required;
(vii) the Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the issue and sale by the Company of the Shares as
contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, the Articles of Incorporation or Bylaws of the
Company or any agreement or instrument known to such counsel to which
the Company is a party or any applicable law or regulation, or so far
as is known to such counsel, any order, writ, injunction or decree, of
any jurisdiction, court or governmental instrumentality;
(ix) all holders of securities of the Company having rights to
the registration of shares of Common Stock, or other securities,
because of the filing of the Registration Statement by the Company have
waived such rights or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the
Registration Statement;
(x) no consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws in connection with the purchase
and distribution of the Shares by the Underwriters; and
(xi) the Shares issued and sold by the Company will been duly
authorized for quotation on the Nasdaq National Market upon official
notice of issuance.
------------------------------------
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of Maryland, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to the attention of such counsel that leads them to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such counsel
need not express any opinion or belief) at the Effective Date contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
that the Prospectus (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such counsel
need not express any opinion or belief) as of its date or at the Closing Date
(or any later date on which Option Shares are purchased), contained or contains
any untrue statement of
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<PAGE>
a material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
-27-
<PAGE>
EXHIBIT 23.1
ACCOUNTANT'S CONSENT
The Board of Directors
iSky, Inc.
We consent to the use of our reports included herein and the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
McLean, Virginia
April 3, 2000
