<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997
REGISTRATION NO. 333-22923
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INFORMATION MANAGEMENT ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CONNECTICUT 7372 06-1289928
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
----------------
ONE CORPORATE DRIVE, SUITE 414
SHELTON, CONNECTICUT 06484
(203) 925-6800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ALBERT R. SUBBLOIE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER INFORMATION MANAGEMENT ASSOCIATES, INC.
ONE CORPORATE DRIVE, SUITE 414 SHELTON, CONNECTICUT 06484 (203) 925-6800 (203)
925-1170 (FACSIMILE)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS L. FAIRFIELD, ESQ. KEITH F. HIGGINS, ESQ.
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. ROPES & GRAY
GOODWIN SQUARE, 225 ASYLUM STREET ONE INTERNATIONAL PLACE
HARTFORD, CONNECTICUT 06103 BOSTON, MASSACHUSETTS 02110
(860) 293-3500 (617) 951-7000
(860) 293-3555 (FACSIMILE) (617) 951-7050 (FACSIMILE)
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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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL 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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JULY 1, 1997
3,900,000 Shares
[IMA Logo]
Common Stock
--------
Of the 3,900,000 shares of Common Stock offered hereby, 2,800,000 shares are
being sold by Information Management Associates, Inc. (the "Company") and
1,100,000 shares are being sold by certain selling shareholders (the "Selling
Shareholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Shareholders. See "Principal and Selling
Shareholders." Prior to this offering, there has been no public market for the
Common Stock. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "IMAA." It is currently estimated that the
initial public offering price will be between $11.00 and $13.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3)........................ $ $ $ $
</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
to be $1,200,000.
(3) Certain Selling Shareholders have granted the Underwriters a 30-day option
to purchase up to 585,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Selling Shareholders
will be $ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to their right to reject orders in whole or in part. It is
expected that delivery of certificates for such shares of Common Stock will be
made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on
or about , 1997.
Alex. Brown & Sons
INCORPORATED
Robertson, Stephens & Company
SoundView Financial Group, Inc.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[DIAGRAM/FLOWCHART OF INFORMATION MANAGEMENT ASSOCIATES, INC.'S
MARKETPLACE,APPLICATIONS AND TECHNOLOGY TO BE INSERTED]
------------
As used in this Prospectus, the term the "Company" refers to Information
Management Associates, Inc. and its wholly-owned subsidiary, Information
Management Associates Limited, unless the context otherwise requires. EDGE(R)
and TeleBusiness(R) are registered trademarks of the Company. This Prospectus
also includes tradenames, trademarks and registered trademarks of companies
other than the Company.
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by its independent public accountants, and with quarterly reports
for the first three quarters of each fiscal year containing unaudited summary
financial information.
------------
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock,
including over-allotment, stabilizing and short-covering transactions and the
imposition of penalty bids. For a description of these activities, see
"Underwriting."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Prospective investors should
consider carefully the information discussed under "Risk Factors."
THE COMPANY
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size to large-scale telephone call centers. The Company's EDGE TeleBusiness
software ("EDGE") is a suite of applications and tools that enable businesses
to automate telebusiness activities (telemarketing, telesales, account
management, customer service and customer support) on an enterprise-wide basis.
The Company complements its EDGE products by offering its clients professional
consulting, technical support and maintenance services. EDGE has been licensed
to over 175 customers in a range of industries, including teleservices
outsourcing, telecommunications and financial services. Customers include APAC
Teleservices, Inc., AT&T Corp., Belgacom, S.A., Bose Corporation, ING Bank,
N.V., SITEL Corporation, Sprint PCS, United Parcel Service General Services Co.
and Wells Fargo Bank, N.A.
Businesses are increasingly using telephony-based customer interaction, from
initial marketing and sales activities to post-sales service and support, as a
key competitive component to increase sales, reduce costs, enhance customer
service, distinguish products and services and receive and process valuable
customer information. Telebusiness activities are generally conducted through
call centers that are typically designed and equipped with special
telecommunications and computer hardware and software. Businesses are seeking
call center customer interaction solutions which are based on an open
client/server architecture, provide broad functionality, can be deployed and
updated rapidly throughout the organization, are scalable to meet the needs of
growing businesses, and seamlessly integrate and leverage telephony technology.
Additionally, the Company believes that call center customer interaction
solutions will be required to support and incorporate emerging customer
interaction channels and computing platforms such as the Internet and
corporate-based intranets as such technologies become more commercially
significant. In a May 1996 research report, Aberdeen Group, Inc., an
independent market research firm, projected that the market for sales and
customer support software will grow at an average annual compounded rate of
approximately 40%, from $400 million in 1995 to $1.7 billion in 1999.
The Company's objective is to become the global leader in providing flexible,
technologically advanced, feature-rich customer interaction software and
services to mid-size and large-scale call centers. To achieve this objective,
the Company is pursuing the following strategies: targeting specific industries
by utilizing its knowledge of the business processes and requirements of those
industries; extending its call center technology leadership by continuing its
product development efforts; broadening its international distribution network
including its indirect distribution channels and direct sales force; increasing
revenues generated from its existing client relationships; leveraging strategic
relationships with leading systems integration and technology companies; and
embracing Internet technology to expand the scope of its customer interaction
solutions.
The Company's EDGE products are designed to provide superior functionality,
flexibility, integration, scalability and speed of deployment. Based upon an
open systems software architecture, EDGE supports multiple hardware platforms,
operating environments, database management systems, network topologies,
desktop standards, and legacy system and computer-telephony middleware. The
Company's products provide call center agents with real-time data and guidance
needed to manage increasingly complex
3
<PAGE>
processes for selling products and servicing customers. For example, EDGE
offers scripting to support order-taking, cross-selling and up-selling, enables
agents to track and resolve customer service problems and facilitates the
collection of valuable customer information that can be disseminated on an
enterprise-wide basis. The Company's professional consulting, technical support
and maintenance services include application development, systems integration,
systems and database design and construction and software training. The Company
believes that these services significantly differentiate the Company from its
competitors and complement its EDGE products to provide a total solution for
mid-size and large-scale call centers.
The Company markets its software and services in the United States through a
direct sales organization. The Company also works closely with strategic
consulting and systems integration companies such as Ernst & Young LLP,
International Business Machines Corporation ("IBM"), A.T. Kearney, Inc. ("A.T.
Kearney"), a subsidiary of Electronic Data Systems Corp. ("EDS"), and
dbINTELLECT Technologies ("dbINTELLECT"), a division of EDS, to increase market
awareness and acceptance of the Company's products. The Company markets its
software internationally in Europe, the Pacific Rim, Canada, Mexico and Latin
America through remarketing and distribution relationships which it supplements
with a direct sales force in certain regions.
Until September 1996, the Company developed, marketed and supported a
telemarketing and telesales automation software application called Telemar
which runs on the IBM AS/400 platform. Due to the substantial growth in EDGE
software license fees and client/server open system software market
opportunities, the Company elected to focus exclusively on its EDGE products
and sold Telemar and certain related assets and liabilities on September 1,
1996. Currently, substantially all of the Company's revenues are attributable
to the licensing of EDGE products and the provision of professional consulting,
technical support and maintenance services relating to EDGE. The Company
currently expects that the licensing of EDGE products and the provision of such
related services will account for substantially all of the Company's revenues
for the foreseeable future.
The Company was incorporated in Connecticut in 1990. The Company's principal
executive office is located at One Corporate Drive, Suite 414, Shelton,
Connecticut 06484, and its telephone number is (203) 925-6800.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............... 2,800,000 shares
Common Stock offered by the Selling Shareholders.. 1,100,000 shares
Common Stock to be outstanding after the offering. 9,195,782 shares (1)
Use of proceeds................................... For repayment of
indebtedness, working
capital and other general
corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............ IMAA
</TABLE>
- --------
(1) Based upon the number of shares of Common Stock outstanding as of March 31,
1997. The number of shares outstanding excludes (i) 1,382,241 shares of
Common Stock issuable upon the exercise of outstanding stock options at a
weighted average exercise price of $5.49 per share and (ii) 6,750 shares of
Common Stock issuable upon the exercise of outstanding warrants at an
exercise price of $4.89 per share. See "Management--Stock Option Plans" and
Note 9 of Notes to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (1):
Revenues:
EDGE revenues:
License fees.......... $2,125 $ 5,550 $ 4,703 $ 8,368 $12,180 $ 2,449 $ 3,802
Services and mainte-
nance................ 752 2,209 7,872 10,342 11,643 2,612 3,654
------ ------- ------- ------- ------- --------- ---------
Total EDGE revenues.. 2,877 7,759 12,575 18,710 23,823 5,061 7,456
------ ------- ------- ------- ------- --------- ---------
Telemar revenues:
License fees.......... 3,636 1,916 2,690 2,457 842 480 --
Services and mainte-
nance................ 2,652 3,276 3,087 2,642 1,612 548 --
------ ------- ------- ------- ------- --------- ---------
Total Telemar reve-
nues................ 6,288 5,192 5,777 5,099 2,454 1,028 --
------ ------- ------- ------- ------- --------- ---------
Total revenues...... 9,165 12,951 18,352 23,809 26,277 6,089 7,456
Operating income
(loss)................ (58) (2,462) (3,034) (2,586) 62 (348) 161
Net loss............... (293) (2,955) (4,083) (3,786) (1,047) (629) (186)
Pro forma net loss per
share (2)............. $ (0.17) $ (0.10) $ (0.03)
Pro forma shares used
in net loss per share
calculation (2)....... 6,127 6,019 6,668
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 2,541 $25,259
Working capital....................................... 83 28,438
Total assets.......................................... 18,565 40,562
Short-term debt....................................... 5,567 249
Long-term debt........................................ 2,607 315
Senior redeemable convertible preferred stock......... 9,622 --
Redeemable common stock warrants...................... 2,865 --
Total shareholders' equity (deficit).................. (11,385) 31,028
</TABLE>
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(1) On September 1, 1996, the Company sold Telemar and certain related assets
and liabilities. As a result, the Summary Consolidated Financial
Information does not include any Telemar revenues or expenses after this
date.
(2) Computed as described in Note 2 of Notes to Consolidated Financial
Statements.
(3) Adjusted to give effect to the receipt and application of the estimated net
proceeds of this offering based on an assumed initial public offering price
of $12.00 per share. See "Use of Proceeds."
------------
Except as otherwise indicated, all information contained in this Prospectus
(i) has been adjusted to give effect to a 2.25-for-1 split of the Common Stock,
no par value (the "Common Stock"), to be effected prior to the closing of this
offering; (ii) reflects the conversion of all outstanding shares of the
Company's Series A and Series B Senior Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock") into an aggregate of
1,532,161 shares of Common Stock upon the closing of this offering; (iii)
reflects the filing of an Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") upon the closing of this offering to
eliminate the Convertible Preferred Stock; (iv) reflects the issuance of
154,934 shares of Common Stock pursuant to the exercise of stock options upon
the closing of this offering; (v) reflects the issuance of 415,308 shares of
Common Stock pursuant to a cashless exercise of warrants upon the closing of
this offering; and (vi) assumes no exercise of the Underwriters' over-allotment
option. See "Description of Capital Stock" and Notes 7, 8 and 9 of Notes to
Consolidated Financial Statements.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating
the Company and its business before purchasing the shares of Common Stock
offered by this Prospectus. This Prospectus contains forward-looking
statements and the Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of numerous
factors, including those set forth in the following risk factors, and
elsewhere in this Prospectus.
History of Operating Losses; Uncertainty of Future Operating Results. The
Company has incurred significant net operating losses in each of 1992, 1993,
1994 and 1995 and had an accumulated deficit of $17.1 million as of March 31,
1997. The Company's operating history makes the prediction of future operating
results difficult or impossible. Accordingly, although the Company has
recently experienced revenue growth, such growth should not be considered
indicative of future revenue growth, if any, or of future operating results.
There can be no assurance that any of the Company's business strategies will
be successful or that the Company will be able to achieve or sustain
profitability on a quarterly or annual basis in the future. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Fluctuations in Quarterly Performance. The Company's quarterly operating
results have varied significantly in the past and may vary significantly in
the future depending upon a number of factors, many of which are beyond the
Company's control. These factors include, among others, the ability of the
Company to develop, introduce and market new and enhanced versions of its
products on a timely basis; the demand for the Company's products; the lengthy
sales cycle for full implementation of its products; the size, timing and
contractual terms of significant orders; the timing and significance of
product enhancements and new product announcements by the Company or its
competitors; changes in the Company's business strategies; budgeting cycles of
its potential customers; customer order deferrals in anticipation of
enhancements or new products; changes in the mix of products and services
sold; changes in the amount of revenue attributable to domestic and
international sales; changes in foreign currency exchange rates; the level of
product and price competition; the cancellations or non-renewals of licenses
or maintenance agreements; investments to develop marketing and distribution
channels; or changes in the level of operating expenses. The Company is
dependent upon obtaining orders in any given quarter for delivery in that
quarter in order to achieve its quarterly revenue objectives. The timing of
revenue recognition can be affected by many factors, including the timing of
contract execution and delivery, post-delivery obligations and customer
acceptance. See "--Lengthy Sales and Implementation Cycles; Post-Delivery
Obligations." A significant portion of the Company's revenues in any quarter
are typically derived from non-recurring, large license fees received from a
relatively small number of customers. Although particular customers may vary
from quarter to quarter, the Company expects that sales to a limited number of
customers will continue to account for a significant percentage of its revenue
in any quarter for the foreseeable future. Therefore, the loss, deferral or
cancellation of a contract, or a failure of a customer to honor its
contractual obligations (and for which the Company's reserves and allowances
may be inadequate), could have a significant impact on the Company's operating
results in a particular quarter. Conversely, to the extent that significant
sales occur earlier than expected, operating results for subsequent quarters
may be adversely affected. In addition, the Company's business has experienced
and is expected to continue to experience seasonality, with stronger demand
during the quarters ending in June and December than during the quarters
ending in March and September, and a substantial portion of orders being
received in the last month or weeks of any given quarter.
Due to the foregoing factors, quarterly revenues and operating results are
not predictable with any significant degree of accuracy. The Company's expense
levels are based in significant part on the Company's expectations as to
future revenues and are therefore relatively fixed for the short term. If
revenue levels are below expectations, the Company's business, operating
results, and financial condition
6
<PAGE>
are likely to be materially adversely affected. As a result, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indications of
future performance. There can be no assurance that the Company will be able to
achieve or sustain profitability on a quarterly or annual basis in the future.
Due to all of the foregoing factors, it is likely that in some future quarter
the Company's total revenues or operating results will be below the
expectations of public market analysts and investors. In such event, or in the
event that adverse conditions prevail or are perceived to prevail generally or
with respect to the Company's business, the price of the Common Stock would
likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Selected Quarterly
Operating Results."
Product Concentration. Substantially all of the Company's revenues are
attributable to the licensing of EDGE and the provision of professional
consulting, technical support and maintenance services relating to EDGE. The
Company currently expects that the licensing of EDGE products and the
provision of such related services will account for significantly all of its
revenues for the foreseeable future. As a result, factors adversely affecting
the pricing of or demand for EDGE products and services, such as competition
or technological changes, could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future financial performance will depend, in significant part, on the
continued market acceptance of its EDGE products and the successful
development, introduction and client acceptance of new and enhanced versions
of EDGE products. There can be no assurance that the Company will continue to
be successful in developing and marketing EDGE. See "--Competition," "--
Dependence on Proprietary Technology" and "Business--Products and Services,"
"Business--Sales and Marketing," "Business--Product Development" and
"Business--Competition."
Lengthy Sales and Implementation Cycles; Post-Delivery Obligations. The
licensing and implementation of the Company's products generally involves a
significant commitment of resources by customers and often requires the
Company to provide a significant level of education to prospective customers
regarding the use of the Company's products. As a result, the Company's sales
process is often subject to delays associated with lengthy customer approval
processes that typically accompany significant capital expenditures. For these
and other reasons, the sales cycle associated with the license of the
Company's products is often lengthy and may be subject to a number of
significant delays over which the Company has little or no control. In
addition, the time required to implement the Company's products can vary
significantly with the needs of its customers and generally extends for
several months or, for larger, more complex implementations, multiple
quarters.
Depending on the contract terms and conditions, licensing fees are
recognized upon delivery of the product if no customer acceptance conditions
or significant post-delivery obligations remain and collection of the
resulting receivable is probable. However, if post-delivery obligations exist,
or if the product is subject to customer acceptance, revenue will be deferred
until no significant Company obligations exist or acceptance has occurred.
When the Company has provided consulting services to implement certain larger
projects, in the past some customers have failed to honor their contractual
obligations by delaying payments of a portion of license fees until
implementation was complete and in some cases have disputed the consulting
fees charged for implementation. There can be no assurance that the Company
will not experience delays, cancellations or disputes regarding payment in the
future, which could have a material adverse effect on the Company's business,
operating results and financial condition and cause its quarterly operating
results to vary significantly in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Sales and Marketing."
Dependence on Proprietary Technology. The Company's success and ability to
compete is dependent in part upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
nondisclosure agreements and technical measures to protect its proprietary
rights. The Company typically enters into confidentiality or license
agreements with its
7
<PAGE>
employees, distributors, clients and potential clients, and limits access to
and distribution of its software, documentation and other proprietary
information. There can be no assurance that these steps will be adequate to
deter misappropriation or independent third-party development of its
technology or to prevent an unauthorized third party from obtaining or using
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect or enforce proprietary rights to the
same extent as do the laws of the United States. Policing unauthorized use of
the Company's products is difficult and, while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology. Although the Company believes that its products and technology do
not infringe on any existing proprietary rights of others, the use of patents
to protect software has increased, and there can be no assurance that third
parties will not assert infringement claims in the future or, if infringement
claims are asserted, that such claims will be resolved in the Company's favor.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms favorable to the Company or at all, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Any infringement claims resolved against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. In addition, litigation may be necessary in the future to protect
the Company's trade secrets or other intellectual property rights, or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Intellectual Property and
Other Proprietary Rights."
The Company has entered into agreements with a small number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by
or against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. The escrow agreements, and any that the
Company may enter into in the future, may increase the possibility of
misappropriation by third parties. In addition, the Company utilizes a third-
party contractor for selected product development projects which may also
increase the possibility of misappropriation by third parties.
Dependence on Indirect Marketing and Distribution Channels; Potential
Conflicts. The Company maintains co-marketing relationships with consulting
and systems integration companies to expand the visibility of its products in
the United States and internationally and distributes its products outside the
United States through remarketers and distributors. Such co-marketers,
remarketers and distributors are not under the direct control of the Company
and install and support the product lines of a number of companies. In
addition, the co-marketers, remarketers and distributors are not subject to
any minimum purchase requirements and can discontinue marketing the Company's
products at any time without cause. The consulting and systems integration
companies may also sell or co-market potentially competitive products.
Accordingly, the Company must compete for the focus and sales efforts of these
third party entities. Additionally, selling through indirect channels may
limit the Company's contacts with its customers, potentially hindering its
ability to accurately forecast sales and revenue, evaluate customer
satisfaction and recognize emerging customer requirements. There can be no
assurance that co-marketers, remarketers and distributors will continue to
distribute or recommend the Company's products or do so successfully, or that
the Company will succeed in increasing the use of these indirect channels
profitably. There can also be no assurance that one or more of these companies
will not begin to market products in competition with the Company. The
termination of one or more of these relationships or the failure of
8
<PAGE>
the Company to establish additional relationships could adversely affect the
Company's business, operating results and financial condition. See "Business--
Sales and Marketing."
The Company's strategy of marketing its products directly to end-users and
indirectly through remarketers and distributors may result in distribution
channel conflicts. The Company's direct sales efforts may compete with those
of its indirect channels and, to the extent different resellers target the
same customers, resellers may also come into conflict with each other.
Although the Company has attempted to manage its distribution channels in a
manner to avoid potential conflicts, there can be no assurance that
distribution channel conflicts will not materially adversely affect its
relationships with existing remarketers and distributors or adversely affect
its ability to attract new remarketers and distributors. See "Business--Sales
and Marketing."
Need to Expand Marketing and Distribution Channels. The Company sells its
products both through its direct sales organization and through remarketers
and distributors. Part of the Company's strategy is to increase its use of
remarketers and distributors to sell its products internationally and to
expand its existing co-marketing relationships and establish new relationships
with other consulting and systems integration companies. The Company is also
seeking to expand its existing international direct sales force in order to
take advantage of international growth opportunities. The Company's ability to
achieve revenue growth in the future will depend on its success in recruiting
and training sufficient direct sales personnel and attracting and retaining
qualified remarketers and distributors. The Company has at times experienced
and continues to experience difficulty in recruiting qualified personnel, and
there can be no assurance that the Company will be able to expand successfully
its direct sales force or other remarketing and distribution channels or that
any such expansion will result in an increase in revenues. Any failure by the
Company to expand its direct sales force or other remarketing and distribution
channels could materially and adversely affect the Company's business,
operating results and financial condition. See "--Management of Growth," "--
Dependence on Key Personnel," "Business--Strategy" and "Business--Sales and
Marketing."
Emerging Markets for Call Center Customer Interaction Software; Dependence
on Increased Use of Products by Existing Customers. The market for call center
customer interaction software is relatively new and is characterized by
ongoing technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The Company's future financial performance will depend in large part on
continued growth in the number of organizations adopting call center customer
interaction software products on an enterprise-wide basis and on the number of
applications and software components developed for such use. There can be no
assurance that the call center customer interaction software market will
continue to grow. If this market fails to grow, or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition could be materially and adversely affected.
In addition, certain of the Company's larger customers have licensed the
Company's software on an incremental basis and there can be no assurance that
the Company's customers will expand their use of the Company's software on an
enterprise-wide basis or license new or enhanced software products introduced
by the Company. The failure of the Company's software to perform according to
customer expectations or otherwise to be deployed on an enterprise-wide basis
could have a material adverse effect on the ability of the Company to increase
revenues from existing customers. See "Business--Industry Background" and
"Business--Strategy."
Rapid Technological Change. The call center customer interaction software
market is characterized by rapid technological change, frequent introductions
of new products, changes in customer demands and evolving industry standards,
any of which can render existing products obsolete and unmarketable. As a
result, the Company's position in its existing markets or other markets that
it may enter could diminish rapidly by product advancements. The life cycles
of the Company's products are difficult to estimate. The
9
<PAGE>
Company's product development and testing efforts are expected to require,
from time to time, substantial investments by the Company and there can be no
assurance that it will have sufficient resources to make the necessary
investments. The Company's customers have adopted a wide variety of hardware,
software, database and networking platforms, and as a result, to gain broad
market acceptance, the Company must continue to support and maintain its
products on a variety of such platforms. The Company's future success will
depend on its ability to address the increasingly sophisticated needs of its
customers by supporting existing and emerging hardware, software, database and
networking platforms and by developing and introducing enhancements to its
existing products and new products on a timely basis that keep pace with
technological developments, changing customer requirements and evolving
industry standards. The success of the Company's products may also depend, in
part, on its ability to introduce products which are compatible with the
Internet, and on the broad acceptance of the Internet as a viable customer
interaction channel. There can be no assurance that the Internet will become a
viable customer interaction channel or that the demand for Internet-related
products and services will increase in the future. In addition, there can be
no assurance that the Company will be successful in developing and marketing
enhancements to its products that respond to technological developments,
changing customer requirements or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements, or that
such enhancements will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. If release dates of any
future product enhancements or new products are delayed or if these products
or enhancements fail to achieve market acceptance when released, the Company's
business, operating results or financial condition could be materially and
adversely affected. In addition, the introduction or announcement of new
product offerings or enhancements by the Company, the Company's competitors or
major hardware, systems or software vendors may cause customers to defer or
forego licenses of the Company's products, which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's ability to remain competitive and respond to technological
change is also dependent upon the products of other software vendors,
including certain system software vendors, such as Microsoft Corporation, and
relational database software vendors. In the event that the products of such
vendors have design defects or are unexpectedly delayed in their introduction,
the Company's business, operating results and financial condition could be
materially adversely affected.
Management of Growth. The Company is currently experiencing a period of
rapid growth that could place a significant strain on its management and other
resources. The Company's senior management has not had experience in managing
publicly traded companies. The Company anticipates that continued growth, if
any, will require it to recruit, hire, train and retain a substantial number
of new and highly skilled product development, managerial, finance, sales and
marketing and support personnel. Competition for such personnel is intense and
the Company expects that such competition will continue for the foreseeable
future. There can be no assurance that the Company will be successful at
hiring or retaining such personnel. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and
manage its work force. There can be no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
operations. If the Company's management is unable to manage growth
effectively, the quality of the Company's products and its business, operating
results and financial condition could be materially adversely affected. See
"--Need to Expand Marketing and Distribution Channels," "--Dependence on Key
Personnel" and "Business--Employees."
Competition. The market for telemarketing, telesales and customer service
software is intensely competitive, rapidly evolving and highly sensitive to
new product introductions or enhancements and marketing efforts by industry
participants. The Company competes with a large number of competitors ranging
from internal information systems departments to packaged software application
vendors. The
10
<PAGE>
Company believes that as the United States and international software markets
continue to grow, a number of new vendors will enter the market and existing
competitors and new market entrants will attempt to develop applications
targeting additional markets. Competitors have established and may in the
future establish cooperative relationships or alliances which may increase
their ability to provide superior software solutions or services. In addition,
consolidation within the call center customer interaction software industry
could create new or stronger competitors.
Increased competition resulting from new entrants, consolidation of the call
center customer interaction software industry, cooperative relationships or
alliances could result in price reductions, reduced operating income or loss
of market share, any of which could materially adversely affect the Company's
business, operating results or financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources, generate higher
revenues and have greater name recognition than the Company. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by it or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
client requirements. There can be no assurance that the Company will be able
to compete effectively against current or future competitors or that
competitive pressures faced by the Company would not materially and adversely
affect its business, operating results or financial condition. See "Business--
Competition."
Dependence on Key Personnel. The Company's business involves the
development, marketing and installation of technologically complex software
products and the delivery of professional services and is labor intensive. The
Company's success will depend in large part upon its ability to attract,
retain and motivate highly skilled employees. There is significant competition
for employees with the skills required to perform the services needed by the
Company in order to operate its business successfully. If the Company is
unable to hire and retain sufficient numbers of highly skilled employees, the
Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the loss of Albert R.
Subbloie, Jr., the President and Chief Executive Officer, or Gary R. Martino,
Chairman of the Board and Chief Financial Officer, or some of the Company's
other key personnel could have a material adverse effect on the Company's
business, operating results or financial condition, including its ability to
attract employees and secure and complete engagements. The Company maintains
key-man life insurance policies with respect to certain of its executive
officers, including Mr. Subbloie and Mr. Martino. See "Business--Employees."
Risk of Product Defects. Software products frequently contain errors,
especially when first introduced or when new versions are released. Although
the Company conducts extensive product testing during product development, the
Company has at times been forced to delay commercial release of software until
problems were corrected and, in some cases, has provided enhancements to
correct errors in released software. The Company could, in the future, lose
revenues as a result of software errors or defects. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in software or releases after commencement of
commercial shipments, resulting in loss or delay of revenue, delay in market
acceptance, diversion of development resources, damage to the Company's
reputation, or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "--Product Liability."
Risks Associated with International Operations. International operations
accounted for approximately 28%, 38% and 26% of total revenues for 1994, 1995
and 1996, respectively. The Company intends to expand its international sales
activity, which will require significant management attention and financial
resources and will require the Company to establish additional foreign
operations and hire additional personnel. As of March 31, 1997 the Company
employed 23 employees who are based in Europe. The Company has an office
located in London, England. There can be no assurance that the Company will be
able to maintain or increase international market demand for its products and,
to the
11
<PAGE>
extent the Company is unable to do so, its business, operating results or
financial condition could be materially adversely affected. The Company's
international sales are currently denominated in U.S. dollars with respect to
sales outside of the United Kingdom and Europe, and generally in pounds
sterling with respect to sales in the United Kingdom and Europe. An increase
in the value of the U.S. dollar or pound sterling relative to other currencies
could make the Company's products more expensive and, therefore, potentially
less competitive in foreign markets. Currently, the Company does not employ
currency hedging strategies to reduce this risk. In addition, the Company's
international business may be subject to a variety of other risks, including
potentially longer payment cycles and difficulties in collecting international
accounts receivable, difficulties in enforcement of contractual obligations
and intellectual property rights, potentially adverse tax consequences,
increased costs associated with maintaining international marketing efforts,
costs of localizing products for foreign markets, tariffs, duties and other
trade barriers, adverse changes in regulatory requirements, possible
recessionary economies outside of the United States and political and economic
instability. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on its business, operating results or financial condition. See
"--Dependence on Indirect Marketing and Distribution Channels; Potential
Conflicts," "--Need to Expand Marketing and Distribution Channels,"
"Business--Employees" and "Business--Facilities."
Dependence on Licensed Technology. The Company licenses, and expects to
license in the future, technology from other companies for use in and with its
products. The inability of the Company to license these products or other
necessary products for use in or with its products could have a material
adverse effect on the Company's business, operating results or financial
condition. In addition, the effective implementation of the Company's products
may depend in the future upon the successful operation of licensed products as
an integrated part of, or in conjunction with, the Company's products. Any
undetected errors in such licensed products could impair the functionality of
the Company's products or otherwise delay or prevent the implementation of an
installation or the introduction of new products, and injure the Company's
reputation, which could have a material adverse effect on its business,
operating results or financial condition. See "--Risk of Product Defects."
Increased Use of Third-Party Development Tools. The Company's EDGE products
include application development tools which are used to build and modify
applications. If third-party application development tools become more widely
used as a result of technological advances or customer requirements, the
Company could be required to make greater use of third-party tools in the
future, and to enter into license arrangements with such third parties, which
could result in higher royalty payments, a loss of product differentiation and
delays. Such effects or the inability of the Company to enter into
commercially reasonable licenses could have a material adverse effect on the
Company's business, operating results or financial condition. See "--Rapid
Technological Change" and "Business--Products and Services."
Dependence on Growth of Client/Server Computing Environment. The Company
markets its products to customers that have committed or are committing their
call center systems to client/server computing environments, or are converting
legacy systems, in part or in whole, to a client/server computing environment.
The Company's success will depend on further growth in the number of
organizations adopting client/server computing environments. There can be no
assurance that the client/server computing trends anticipated by the Company
will occur or that the Company will be able to respond effectively to the
evolving requirements of this market. If the client/server market fails to
grow, or grows at a rate slower than experienced in the past, the Company's
business, operating results or financial condition could be materially
adversely affected. See "--Rapid Technological Change" and "--Product
Development."
Industry Concentration. A substantial portion of the Company's revenues
historically have been derived from customers in the teleservices outsourcing,
telecommunications and financial services industries. The Company's strategy
is to further develop its knowledge of the business processes and
12
<PAGE>
requirements of other industries in order to establish additional market
opportunities, but there can be no assurance that the Company will be
successful in doing so. The failure of the Company to increase its customers
among a broader base of varied industries, or a downturn in one or more of the
teleservices outsourcing, telecommunications or financial services industries
could have a material adverse effect on the Company's business, operating
results or financial condition. See "Business--Strategy."
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license
agreements may not be enforceable under the laws of certain jurisdictions. The
risk of product liability claims is inherent in the sale and support of
products, and there can be no assurance that the Company will not be subject
to such claims in the future. A successful product liability claim brought
against the Company could have a material adverse effect on the Company's
business, operating results and financial condition. See "--Risk of Product
Defects."
Regulatory Environment. Certain uses of outbound call processing systems are
regulated by federal, state and foreign law. Although the Company's systems
can be programmed to operate in compliance with these laws through the use of
appropriate calling lists and calling campaign time parameters, compliance
with these laws may limit the potential use of the Company's products. In
addition, there can be no assurance that future legislation further
restricting telephone solicitation practices, if enacted, would not adversely
affect the Company. See "Business--Regulatory Environment."
Control by Directors and Officers. Based upon the number of shares
outstanding as of March 31, 1997, upon completion of this offering the
Company's officers and directors, and their affiliates, will beneficially own
approximately 52.2% of the Company's outstanding Common Stock. These
shareholders, if acting together, will have the ability to elect the Company's
directors and to determine the outcome of corporate actions requiring
shareholder approval, irrespective of how other shareholders of the Company
may vote. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
and Selling Shareholders."
Discretion as to Use of Proceeds. The primary purposes of this offering are
to create a public market for the Company's Common Stock, to facilitate future
access to public markets and to obtain additional working capital. As of the
date of this Prospectus, the Company has no specific plans to use the net
proceeds from this offering other than for working capital and general
corporate purposes, including the repayment of bank debt. Accordingly, the
Company's management will retain broad discretion as to the allocation of the
net proceeds from this offering. See "Use of Proceeds."
No Public Market. Prior to this offering, there has been no public market
for the Common Stock, and there can be no assurance that an active trading
market will develop or be sustained after this offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price will be determined by negotiations
among the Company, the Selling Shareholders and the representatives of the
Underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The trading price
of the Common Stock could be subject to significant fluctuations in response
to quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, and other events or factors. In
addition, investors should be aware that market prices for securities of
companies similar to the Company are highly volatile and such volatility is
sometimes unrelated to the operating performance of such companies. These
fluctuations, as well as general economic, market and political conditions,
may materially and adversely affect the market price of the Common Stock. See
"--Fluctuations in Quarterly Performance."
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
amounts of Common Stock in the public market after this offering could
adversely affect the prevailing market price of the Common
13
<PAGE>
Stock. In addition to the 3,900,000 shares of Common Stock offered hereby, as
of the date of this Prospectus (the "Effective Date"), based upon shares
outstanding as of March 31, 1997, there will be approximately 5,295,782 shares
of Common Stock outstanding. Approximately 57,744 shares of Common Stock,
which are not subject to lock-up agreements with representatives of the
Underwriters ("Lock-up Agreements"), will be eligible for sale beginning 90
days following the Effective Date subject to certain resale restrictions
pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, beginning 90 days after the Effective Date,
approximately 318,373 shares of Common Stock that are subject to 90-day Lock-
up Agreements will be available for sale without restriction in reliance on
Rule 144(k) under the Securities Act. Beginning 180 days after the Effective
Date, approximately 4,887,265 shares of Common Stock that are subject to 180-
day Lock-up Agreements will be available for sale, of which approximately
4,515,500 shares will be subject to certain resale restrictions pursuant to
Rule 144 and approximately 371,765 shares will be available for sale without
restriction pursuant to Rule 144(k). As of the Effective Date, based on the
number of options outstanding at March 31, 1997, 779,053 shares of Common
Stock will be issuable pursuant to vested options under the Company's option
plans, of which approximately 729,906 shares will be subject to 180-day Lock-
up Agreements. Shortly after the Effective Date, the Company intends to file
one or more registration statements on Form S-8 to register under the
Securities Act shares issuable under the Company's option plans, upon which
filing such shares will generally be available for sale in the public market,
subject to Rule 144 limitations and Lock-up Agreements, to the extent
applicable. In addition, holders of 3,574,726 shares of Common Stock will have
certain rights to registration of their shares under the Securities Act. See
"Shares Eligible for Future Sale."
Antitakeover Provisions. The Company's Certificate of Incorporation requires
that any action required or permitted to be taken by shareholders of the
Company must be effected at a duly called annual or special meeting of
shareholders and may not be effected by consent in writing except by unanimous
written consent, and requires advance notice by a shareholder of any matter
which such shareholder desires to present at any annual or special meeting of
shareholders. Special meetings of shareholders may be called only by the
Chairman of the Board or by the Secretary of the Company at the request of the
Board or upon the written demand of the holders of 35% of the voting stock
entitled to vote at such special meeting. The Certificate of Incorporation
provides for a classified Board of Directors, and members of the Board of
Directors may be removed only for cause upon the affirmative vote of holders
of at least two-thirds of the shares of capital stock of the Company entitled
to vote. In addition, shares of preferred stock ("Preferred Stock") may be
issued in the future without further shareholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of any
holders of Preferred Stock that may be issued in the future. The Company has
no present plans to issue any shares of Preferred Stock. These provisions, and
other provisions of the Certificate of Incorporation, may have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company, including transactions in which shareholders might
otherwise receive a premium for their shares over then current market prices.
In addition, these provisions may limit the ability of shareholders to approve
transactions that they may deem to be in their best interests. See
"Description of Capital Stock--Certain Provisions of the Certificate of
Incorporation, Bylaws and Connecticut Law; Antitakeover Effects."
Dilution. Purchasers of shares of Common Stock in this offering will suffer
an immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price. See "Dilution."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$30.0 million, assuming an initial public offering price of $12.00 per share
and after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company. The Company will not receive any of
the net proceeds from the sale of Common Stock by the Selling Shareholders.
See "Principal and Selling Shareholders."
The principal purposes of this offering are to increase the Company's equity
capital, to create a public market for the Common Stock and to facilitate
future access by the Company to public equity markets. The Company intends to
use approximately $7.7 million of the net proceeds of the offering to repay in
full the outstanding indebtedness under the Loan and Security Agreement dated
October 26, 1995, as amended (the "Loan and Security Agreement"), between the
Company and People's Bank (the "Bank"). The Loan and Security Agreement
provides for a $6.0 million line of credit (the "Line of Credit") and a $2.5
million Term Note (the "Term Note"). The Line of Credit expires on February 1,
1998 and bears interest at a floating rate which was 9.25% per annum at March
31, 1997. The Term Note is payable in monthly principal installments through
October 2002. The Term Note bears interest at 11.0% payable on a current basis
and accrues additional interest based upon a formula which approximates 9.0%.
The outstanding principal balances of the Term Note and the Line of Credit,
together with accrued interest thereon, are required to be paid in full upon
consummation of the offering. The Company, however, will be permitted to
continue to borrow amounts under the Line of Credit through February 1, 1998.
In addition, the Company intends to use $250,000 of the net proceeds of the
offering to repay in full a note bearing an interest rate of 12.0% payable to
Wand/IMA Investments, L.P., dated December 21, 1990, as amended (the "Wand
Note").
The Company expects to use the remaining net proceeds from the offering for
working capital and other general corporate purposes. A portion of the net
proceeds may also be used for the acquisition of businesses, products and
technologies that are complementary to those of the Company. While the Company
engages from time to time in discussions with respect to potential
acquisitions, the Company has no plans, commitments or agreements with respect
to any such acquisitions as of the date of this Prospectus. The Company has
not as yet identified specific uses for such proceeds and will have discretion
over their use and investment. Pending such uses, the Company intends to
invest the net proceeds from this offering in short-term, investment grade,
interest-bearing instruments. See "Risk Factors--Discretion as to Use of
Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support
its growth strategy and does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account
various factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion. The
Company is currently prohibited by the terms of the Loan and Security
Agreement from paying any cash dividends without the prior written consent of
the Bank.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March 31,
1997 (i) on an actual basis, (ii) on a pro forma basis giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock into
1,532,161 shares of Common Stock, the issuance of 415,308 shares pursuant to
the cashless exercise of outstanding Common Stock purchase warrants, the
issuance of 154,934 shares of Common Stock pursuant to the exercise of stock
options, and the filing of an amendment to the Certificate of Incorporation to
eliminate the Convertible Preferred Stock and (iii) on a pro forma as adjusted
basis giving effect to the issuance and sale by the Company of 2,800,000 shares
of Common Stock offered hereby at an assumed public offering price of $12.00
per share and the receipt and application of the net proceeds therefrom, after
deducting estimated underwriting discounts and commissions and offering
expenses. See "Use of Proceeds." This table should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Bank line of credit........................... $ 4,860 $ 4,860 $ --
Term note payable to bank..................... 208 208 --
Subordinated note payable to shareholder...... 250 250 --
Capital lease obligations..................... 249 249 249
-------- -------- --------
Total......................................... $ 5,567 $ 5,567 $ 249
======== ======== ========
Term note payable to bank, net of current
portion....................................... $ 2,292 $ 2,292 $ --
Capital lease obligations, net of current
portion....................................... 315 315 315
Series A senior redeemable convertible
preferred stock, no par value (liquidation
value of $5,272,000), 4,500 shares issued and
outstanding (actual); no shares authorized,
issued or outstanding (pro forma and pro forma
as adjusted).................................. 5,248 -- --
Series B senior redeemable convertible
preferred stock, no par value (liquidation
value of $4,496,000), 4,350 shares issued and
outstanding (actual); no shares authorized,
issued or outstanding (pro forma and pro forma
as adjusted).................................. 4,374 -- --
Redeemable common stock warrants............... 2,865 -- --
Shareholders' equity (1):
Preferred stock, undesignated, no par value,
500,000 shares authorized, no shares issued or
outstanding (actual, pro forma and pro forma
as adjusted).................................. -- -- --
Common Stock: no par value, 20,000,000 shares
authorized, 4,293,379 shares issued and
outstanding (actual); 20,000,000 shares
authorized (pro forma and pro forma as
adjusted); 6,395,782 shares issued and
outstanding (pro forma); 9,195,782 shares
issued and outstanding (pro forma as
adjusted)..................................... 5,798 18,163 48,211
Cumulative translation adjustment.............. (114) (114) (114)
Accumulated deficit............................ (17,069) (17,069) (17,069)
-------- -------- --------
Total shareholders' equity (deficit).......... (11,385) 980 31,028
-------- -------- --------
Total capitalization......................... $ 3,709 $ 3,587 $ 31,343
======== ======== ========
</TABLE>
- --------
(1) Based upon the number of shares of Common Stock outstanding as of March 31,
1997. The number of shares outstanding excludes (i) 1,382,241 shares of
Common Stock issuable upon the exercise of outstanding stock options at a
weighted average exercise price of $5.49 per share and (ii) 6,750 shares of
Common Stock issuable upon the exercise of outstanding warrants at an
exercise price of $4.89 per share. See "Management--Stock Option Plans,"
"Description of Capital Stock" and Note 9 of Notes to Consolidated
Financial Statements.
16
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock.
At March 31, 1997, the pro forma net tangible book value of the Company was
approximately $1.0 million, or $0.15 per share of Common Stock. Pro forma net
tangible book value per share is equal to the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding, after giving effect upon closing of this offering to (i) the
conversion of the Convertible Preferred Stock into 1,532,161 shares of Common
Stock, (ii) the issuance of 415,308 shares of Common Stock pursuant to the
cashless exercise of outstanding Common Stock purchase warrants and (iii) the
exercise of stock options for 154,934 shares of Common Stock by certain
Selling Shareholders. After giving effect to the sale by the Company of shares
of Common Stock offered hereby (at an assumed initial public offering price of
$12.00 per share) and the receipt and application of the net proceeds
therefrom, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma net tangible
book value of the Company at March 31, 1997 would have been approximately
$31.0 million, or $3.37 per share. This represents an immediate increase in
pro forma net tangible book value of $3.22 per share to existing shareholders
and an immediate dilution of $8.63 per share to new investors purchasing
shares of Common Stock in this offering. The following table illustrates the
per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $12.00
Pro forma net tangible book value per share as of March 31, 1997. $0.15
Increase per share attributable to new investors................. 3.22
-----
Pro forma net tangible book value per share after the offering.... 3.37
------
Dilution per share to new investors............................... $ 8.63
======
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31, 1997,
the differences between existing shareholders and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average consideration paid per share
by the existing shareholders and by the new investors in this offering (at an
assumed initial public offering price of $12.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 6,395,782 69.6% $14,430,083 30.0% $ 2.26
New investors............... 2,800,000 30.4 33,600,000 70.0 $12.00
--------- ----- ----------- -----
Totals.................... 9,195,782 100.0% $48,030,083 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Sales of shares by the Selling Shareholders in the offering will reduce
the number of shares held by existing shareholders to 5,295,782 or 57.6%
(4,710,782 shares or 51.2% if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock
outstanding after the offering and will increase the number of shares held
by new investors to 3,900,000 or 42.4% (4,485,000 shares or 48.8% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after the offering. The
foregoing computations assume no exercise of outstanding stock options at
or after March 31, 1997, except options for 154,934 shares of Common Stock
to be exercised by certain Selling Shareholders. Based upon the number of
shares of Common Stock outstanding as of March 31, 1997; the number of
shares outstanding excludes (i) 1,382,241 shares of Common Stock issuable
upon the exercise of outstanding stock options at a weighted average
exercise price of $5.49 per share and (ii) 6,750 shares of Common Stock
issuable upon the exercise of outstanding warrants at an exercise price of
$4.89 per share. See "Capitalization," "Management--Stock Option Plans,"
"Description of Capital Stock" and Note 9 of Notes to Consolidated
Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1995
and 1996, and for each of the years in the three-year period ended December
31, 1996 are derived from financial statements which have been audited by
Arthur Andersen LLP, independent public accountants, which appear elsewhere in
this Prospectus. The selected financial data as of December 31, 1992, 1993 and
1994 and for the years ended December 31, 1992 and 1993 are derived from
audited financial statements not included in this Prospectus. The selected
financial data as of March 31, 1997 and for the three months ended March 31,
1996 and 1997 have been derived from unaudited financial statements of the
Company which have been prepared on the same basis as the audited financial
statements and which, in the opinion of management, include all adjustments
necessary for a fair presentation of such data. The results of operations for
the three months ended March 31, 1997 are not necessarily indicative of the
results for the full year. This selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- -------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees:
EDGE product line..... $2,125 $ 5,550 $ 4,703 $ 8,368 $ 12,180 $2,449 $ 3,802
Telemar product line.. 3,636 1,916 2,690 2,457 842 480 --
------ ------- ------- ------- -------- ------ --------
Total license fees... 5,761 7,466 7,393 10,825 13,022 2,929 3,802
------ ------- ------- ------- -------- ------ --------
Services and mainte-
nance:
EDGE product line..... 752 2,209 7,872 10,342 11,643 2,612 3,654
Telemar product line.. 2,652 3,276 3,087 2,642 1,612 548 --
------ ------- ------- ------- -------- ------ --------
Total services and
maintenance......... 3,404 5,485 10,959 12,984 13,255 3,160 3,654
------ ------- ------- ------- -------- ------ --------
Total revenues...... 9,165 12,951 18,352 23,809 26,277 6,089 7,456
------ ------- ------- ------- -------- ------ --------
Cost of revenues:
License fees........... 60 165 462 700 709 166 71
Services and mainte-
nance................. 1,434 2,108 6,268 8,225 7,191 1,822 1,952
------ ------- ------- ------- -------- ------ --------
Total cost of reve-
nues................. 1,494 2,273 6,730 8,925 7,900 1,988 2,023
------ ------- ------- ------- -------- ------ --------
Gross profit........... 7,671 10,678 11,622 14,884 18,377 4,101 5,433
------ ------- ------- ------- -------- ------ --------
Operating expenses:
Sales and marketing.... 2,604 3,694 5,857 6,844 8,055 1,872 2,648
Product development.... 2,553 4,356 6,106 6,802 6,382 1,553 1,532
General and adminis-
trative............... 1,994 2,862 2,693 3,824 3,878 1,024 1,092
Amortization of ac-
quired software....... 578 -- -- -- -- -- --
Write-off of acquired
software.............. -- 2,228 -- -- -- -- --
------ ------- ------- ------- -------- ------ --------
Total operating ex-
penses............... 7,729 13,140 14,656 17,470 18,315 4,449 5,272
------ ------- ------- ------- -------- ------ --------
Operating income
(loss)................ (58) (2,462) (3,034) (2,586) 62 (348) 161
Other income (expense). (223) (381) (917) (1,100) (1,079) (281) (257)
------ ------- ------- ------- -------- ------ --------
Loss before provision
for income taxes...... (281) (2,843) (3,951) (3,686) (1,017) (629) (96)
Provision for income
taxes................. 12 112 132 100 30 -- 90
------ ------- ------- ------- -------- ------ --------
Net loss............... $ (293) $(2,955) $(4,083) $(3,786) $ (1,047) $ (629) $ (186)
====== ======= ======= ======= ======== ====== ========
Pro forma net loss per
share (1)............. $ (0.17) $(0.10) $ (0.03)
======== ====== ========
Pro forma shares used
in net loss per share
calculation (1)....... 6,127 6,019 6,668
======== ====== ========
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------- ---------
1992 1993 1994 1995 1996 1997
------ ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents................. $ 234 $1,395 $ 446 $ 1,543 $ 3,073 $ 2,541
Working capital (defi-
cit).................. 276 63 (3,619) (1,233) 1,210 83
Total assets........... 7,795 9,613 12,150 12,519 17,281 18,565
Short-term debt........ 1,174 2,962 5,499 3,871 5,444 5,567
Long-term debt......... 2,139 1,926 1,423 3,042 2,803 2,607
Senior redeemable con-
vertible preferred
stock................. -- -- -- 4,751 9,431 9,622
Redeemable common stock
warrants.............. 1,058 1,058 1,517 2,480 2,865 2,865
Total shareholders' eq-
uity (deficit)........ 1,285 (871) (4,200) (9,295) (10,906) (11,385)
</TABLE>
- --------
(1) Computed as described in Note 2 of Notes to Consolidated Financial
Statements.
18
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma consolidated statement of operations that follows is presented
to give effect to the sale of the Telemar product line on September 1, 1996,
as if the sale occurred on January 1, 1996. The pro forma information, which
reflects the elimination of identifiable revenues and expenses attributable to
the Telemar product line, does not purport to be indicative of the actual
results that would have been achieved had the sale taken place on January 1,
1996 or the results which may be achieved in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------
ACTUAL ADJUSTMENT PRO FORMA
------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees:
EDGE product line.......................... $12,180 $ -- $12,180
Telemar product line....................... 842 (842)(1) --
------- -------
Total license fees....................... 13,022 12,180
------- -------
Services and maintenance:
EDGE product line.......................... 11,643 11,643
Telemar product line....................... 1,612 (1,612)(2) --
------- -------
Total services and maintenance........... 13,255 11,643
------- -------
Total revenues......................... 26,277 23,823
------- -------
Cost of revenues:
License fees................................. 709 (93)(3) 616
Services and maintenance..................... 7,191 (520)(4) 6,671
------- -------
Total cost of revenues...................... 7,900 7,287
------- -------
Gross profit.................................. 18,377 16,536
------- -------
Operating expenses:
Sales and marketing.......................... 8,055 (823)(5) 7,232
Product development.......................... 6,382 (1,070)(6) 5,312
General and administrative................... 3,878 (244)(7) 3,634
------- -------
Total operating expenses.................... 18,315 16,178
------- -------
Operating income.............................. 62 358
Other income (expense)........................ (1,079) (92)(8) (1,171)
------- -------
Loss before provision for income taxes........ (1,017) (813)
Provision for income taxes.................... 30 30
------- -------
Net loss...................................... $(1,047) $ (843)
======= =======
</TABLE>
- --------
(1) Represents the elimination of Telemar license fees.
(2) Represents the elimination of Telemar services and maintenance revenues.
(3) Represents the elimination of payroll, taxes and benefits of $66,000
related to employees dedicated to Telemar, as well as the elimination of
$27,000 of direct license costs.
(4) Represents the elimination of payroll, taxes and benefits of $455,000
related to employees dedicated to Telemar, as well as $20,000 of outside
consulting costs and $45,000 of other direct costs related to Telemar.
(5) Represents the elimination of payroll, taxes and benefits of $466,000
related to employees dedicated to Telemar, as well as $295,000 of related
travel costs, $49,000 of advertising and promotional costs and $13,000 of
other direct costs related to Telemar.
(6) Represents the elimination of payroll, taxes and benefits of $1,002,000
related to employees dedicated to Telemar, as well as $68,000 of direct
costs used in the research and development efforts related to Telemar.
(7) Represents the elimination of $28,000 of legal costs, $69,000 of equipment
depreciation expense, $60,000 of provision for doubtful accounts and
$87,000 of other direct costs related to Telemar.
(8) Represents the elimination of the gain on sale of Telemar.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. The following discussion contains forward-looking statements and
the Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors," "Business" and elsewhere in this
Prospectus.
OVERVIEW
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size and large-scale telephone call centers. The Company currently derives
substantially all of its revenues from licensing its EDGE suite of products
and providing services related to the implementation, deployment and
maintenance of EDGE. The Company's predecessor, Information Management
Associates (the "Partnership"), was founded in 1984 as a partnership, with a
focus on information systems consulting and software development and released
its first software product, called Telemar, a telemarketing application for
IBM mid-range computers, at the end of 1985. The Partnership transferred
substantially all of its software assets to the Company in connection with the
Company's formation in 1990. In 1991 the Company acquired the EDGE software
and related assets from Coffman Systems, Inc. and made available its first
client/server open system product offering in the fourth quarter of that year.
Since the acquisition of EDGE, the Company has engaged in significant product
development efforts related to the EDGE architecture and product features. The
Company's EDGE software license fees increased from approximately $4.7 million
in 1994 to $8.4 million in 1995 and to $12.2 million in 1996, which
represented year-over-year growth of 77.9% from 1994 to 1995 and 45.6% from
1995 to 1996. The Company's EDGE software license fees also increased from
$2.4 million in the first quarter of 1996 to $3.8 million in the first quarter
of 1997 which represented year-over-year growth for such period of 55.2%. Due
to the substantial growth in EDGE software license fees and client/server open
system software market opportunities, the Company elected to focus exclusively
on its EDGE products and, in September 1996, sold Telemar and certain related
assets and liabilities to Telemar Software International LLC ("TSI"). The
Company maintains its principal office in Shelton, Connecticut and branch
offices in Irvine, California, Lisle, Illinois, Annapolis, Maryland and
Roswell, Georgia. The Company's subsidiary, Information Management Associates
Limited, maintains an office in London, England.
The Company realized operating losses in 1994 and 1995 which resulted
primarily from the Company's significant investments in product development
and increased services costs. The Company spent $6.1 million, $6.8 million and
$6.4 million on product development, representing 33.3%, 28.6% and 24.3% of
total revenues, in 1994, 1995 and 1996, respectively, primarily to enhance and
develop new components to the EDGE product line to support the complex
requirements of mid-size and large-scale call centers. The Company believes
that these investments have enhanced the competitiveness of its software
products and intends to continue to engage in substantial product development
activities for the foreseeable future. The Company expects that product
development expenses will increase, in absolute dollars, over time, although
the Company currently anticipates that such expenditures will remain the same
or decrease as a percentage of total revenues in the next two years. As a
result of investments in product development, growth in the client/server open
system software market and the sale of Telemar, the Company earned a small
operating profit in 1996 and in the first quarter of 1997.
The Company's revenue is derived from two sources: software license fees for
the use of the Company's software products, and services and maintenance fees
for implementation, consulting, support and training related to the Company's
software products. For all periods presented herein, the Company has
recognized license fee revenues in accordance with Statement of Position 91-1
entitled "Software
20
<PAGE>
Revenue Recognition" issued by the American Institute of Certified Public
Accountants. License fee revenues consist of revenues from initial licenses
for the Company's software products and license upgrades to existing customers
for additional users or modules. The Company recognizes initial license fee
revenues upon licensing and delivery of the software, if the software is not
subject to customer acceptance or post-delivery obligations. If the license is
subject to customer acceptance or post-delivery obligations, the license fee
revenues are deferred until customer acceptance has occurred or the post-
delivery obligations have been met.
The second component of the Company's revenues derives from professional
services associated with the implementation and deployment of the Company's
software products and maintenance fees for ongoing customer support. The
Company's professional consulting, technical support and maintenance services
include application development, systems integration, systems and database
design and construction and software training. The Company recognizes revenue
from professional services as such services are performed. Annual maintenance
fees are charged as a percentage of the license fee, and are recognized
ratably over the term of the maintenance agreement, which is usually twelve
months. The maintenance agreements are renewable at the discretion of the
customer and subject to change annually.
The Company markets its products in the United States through a direct sales
organization. The Company markets its products outside the United States in
Europe, the Pacific Rim, Canada, Mexico and Latin America through remarketing
and distribution relationships which it supplements with a direct sales force
in certain regions. The Company established sales and support operations in
the United Kingdom in 1990 to broaden its European distribution capabilities.
In 1996, United States and international revenues were approximately 74% and
26% of total revenues, respectively. See "Risk Factors--Risks Associated with
International Operations" and Note 15 of Notes to Consolidated Financial
Statements.
Although the Company has experienced significant growth in revenues during
the past three years, the Company does not believe prior growth is necessarily
indicative of future operating results. In addition, the Company expects
increased competition and intends to continue to invest in its business. The
Company believes that its existing working capital, operating activities and
business strategies will provide sufficient cash to fund its operations
through December 31, 1997. There can be no assurance that the Company will be
profitable on a quarterly or annual basis. Future operating results will
depend on many factors, including demand for the Company's products, the level
of product competition, competitor pricing, the size and timing of significant
orders, changes in pricing policies by the Company or its competitors, the
ability of the Company to develop, introduce and market new products on a
timely basis and changes in levels of operating expenses. See "Risk Factors--
History of Operating Losses; Uncertainty of Future Operating Results," "Risk
Factors--Rapid Technological Change" and "Risk Factors--Competition."
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statement of operations data for the years
ended December 31, 1994, 1995 and 1996 and the three months ended March 31,
1996 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees:
EDGE product line......... 25.6% 35.2% 46.4% 40.2% 51.0%
Telemar product line...... 14.7 10.3 3.2 7.9 --
------- ------- ------- --------- ---------
Total license fees...... 40.3 45.5 49.6 48.1 51.0
------- ------- ------- --------- ---------
Services and maintenance:
EDGE product line......... 42.9 43.4 44.3 42.9 49.0
Telemar product line...... 16.8 11.1 6.1 9.0 --
------- ------- ------- --------- ---------
Total services and main-
tenance................ 59.7 54.5 50.4 51.9 49.0
------- ------- ------- --------- ---------
Total revenues........ 100.0 100.0 100.0 100.0 100.0
------- ------- ------- --------- ---------
Cost of revenues:
License fees................ 2.5 2.9 2.7 2.7 1.0
Services and maintenance.... 34.2 34.5 27.4 29.9 26.2
------- ------- ------- --------- ---------
Total cost of revenues.... 36.7 37.4 30.1 32.6 27.2
------- ------- ------- --------- ---------
Gross profit................. 63.3 62.6 69.9 67.4 72.8
------- ------- ------- --------- ---------
Operating expenses:
Sales and marketing......... 31.9 28.7 30.7 30.7 35.5
Product development......... 33.3 28.6 24.3 25.6 20.6
General and administrative.. 14.7 16.1 14.8 16.8 14.6
------- ------- ------- --------- ---------
Total operating expenses.. 79.9 73.4 69.8 73.1 70.7
------- ------- ------- --------- ---------
Operating income (loss)...... (16.6) (10.8) 0.1 (5.7) 2.1
Other income (expense)....... (5.0) (4.6) (4.1) (4.6) (3.4)
------- ------- ------- --------- ---------
Loss before provision for in-
come taxes.................. (21.6) (15.4) (4.0) (10.3) (1.3)
Provision for income taxes... 0.7 0.4 -- -- 1.2
------- ------- ------- --------- ---------
Net loss..................... (22.3)% (15.8)% (4.0)% (10.3)% (2.5)%
======= ======= ======= ========= =========
</TABLE>
The following table sets forth for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cost of license fees.... 6.2% 6.5% 5.4% 5.7% 1.9%
Cost of services and
maintenance ........... 57.2 63.3 54.3 57.7 53.4
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Revenues
Total revenues increased 22.5% from $6.1 million in the first quarter of
1996 to $7.5 million in the first quarter of 1997.
22
<PAGE>
License Fees. Total license fees increased 29.8% from $2.9 million, or 48.1%
of total revenues, in the first quarter of 1996 to $3.8 million, or 51.0% of
total revenues, in the first quarter of 1997. EDGE license fees increased
55.2% from $2.4 million in the first quarter of 1996 to $3.8 million in the
first quarter of 1997. The increase in EDGE license fees was primarily
attributable to increased market awareness and acceptance of the EDGE
products, increased productivity resulting from focusing solely on the EDGE
product line, and expansion of the Company's sales and marketing organization.
Telemar license fees decreased from $500,000 in the first quarter of 1996 to
$0 in the first quarter of 1997 due to the sale of the Telemar product line in
September 1996.
Services and Maintenance. Services and maintenance revenues increased 15.6%
from $3.2 million, or 51.9% of total revenues, in the first quarter of 1996 to
$3.7 million, or 49.0% of total revenues, in the first quarter of 1997. EDGE
services and maintenance revenues increased 39.9% from $2.6 million in the
first quarter of 1996 to $3.7 million in the first quarter of 1997. The
increase in EDGE services and maintenance revenues was primarily attributable
to the significant increase in EDGE software licenses in the fourth quarter of
1996 and the first quarter of 1997. Telemar services and maintenance revenues
decreased from $500,000 in the first quarter of 1996 to $0 in the first
quarter of 1997 due to the sale of the Telemar product line in September 1996.
Cost of Revenues
Cost of revenues increased 1.8% from $1.99 million in the first quarter of
1996 to $2.02 million in the first quarter of 1997.
Cost of License Fees. Cost of license fees is comprised of the costs of
media packaging, documentation, third party software and software production
personnel. Cost of license fees decreased 57.2% from $166,000, or 5.7% of
total license fees, in the first quarter of 1996 to $71,000, or 1.9% of total
license fees, in the first quarter of 1997. The higher cost of license fees in
1996 was attributable to the cost of other vendors' products resold by the
Company in connection with the Telemar product line.
Cost of Services and Maintenance. The cost of services and maintenance
consists of salaries, wages, benefits and other costs related to installation,
implementation, training, and maintenance support of the Company's software
products. The cost of services and maintenance increased 7.1% from $1.8
million, or 57.7% of services and maintenance revenues, in the first quarter
of 1996 to $2.0 million, or 53.4% of services and maintenance revenues, in the
first quarter of 1997. The improvement in services and maintenance margin was
primarily due to higher productivity from the Company's client services
organization.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
commissions, salaries, bonuses and other related expenses for sales and
marketing personnel, as well as marketing, advertising and promotional
expenses. Sales and marketing expenses increased 41.5% from $1.9 million, or
30.7% of total revenues, in the first quarter of 1996 to $2.6 million, or
35.5% of total revenues, in the first quarter of 1997. This increase was
primarily attributable to the hiring of additional sales and marketing
personnel, increased print advertisements for participation in trade shows,
travel expenses and other sales and marketing expenses. Sales and marketing
expenses are expected to continue to increase in connection with continued
expansion of the sales and marketing staff during the remainder of 1997.
Product Development. Product development expenses consist primarily of
salaries, bonuses, other related personnel expenses and consulting fees, as
well as the cost of facilities and equipment. Costs related to product
development are expensed as incurred. Product development expenses decreased
1.4% from $1.6 million, or 25.6% of total revenues, in the first quarter of
1996 to $1.5 million, or 20.6% of total revenues, in the first quarter of
1997. The reduction of product development expenses was attributable to the
sale of the Telemar product line in September 1996, after which no Telemar
product development expenses were incurred.
23
<PAGE>
General and Administrative. General and administrative expenses represent
the costs of executive, finance and administrative support personnel, the
portion of occupancy expenses allocable to administration, unallocated
corporate expenses such as fees for legal and auditing services and bad debt
expense. The Company's general and administrative expenses increased 6.6% from
$1.0 million, or 16.8% of total revenues, in the first quarter of 1996 to $1.1
million, or 14.6% of total revenues, in the first quarter of 1997. The 6.6%
increase in general and administrative expenses was primarily attributable to
an increase in personnel costs incurred in connection with additions to the
Company's accounting and legal staff to support higher business volume.
Other Income (Expense)
Interest Expense. Interest expense consists of interest on debt and
equipment financing less interest earned on cash, notes receivable from
officers and the promissory note entered into in connection with the sale of
Telemar. Net interest expense decreased 8.5% from $281,000 in the first
quarter of 1996 to $257,000 in the first quarter of 1997. The reduction in net
interest expense was primarily due to higher interest income of $38,000 netted
against an increase in interest expense of $17,000.
Provision for Income Taxes. Provision for income taxes consists of foreign
and state income and withholding taxes. The increase in provision for income
taxes is primarily attributable to an increase in international withholding
taxes. At March 31, 1997, the Company had approximately $8.5 million of
U.S. Federal net operating loss carryforwards and approximately $2.0 million
of state net operating loss carryforwards, which can be used, subject to
certain limitations, to offset future taxable income. The U.S. Federal net
operating loss carryforwards expire through 2011 and the state net operating
loss carryforwards expire through 2001. The Company believes the sale of
Common Stock by the Company and the Selling Shareholders in this offering may
cause an annual limitation on the use of its net operating loss carryforwards
pursuant to the "change in control" provisions of Section 382 of the Internal
Revenue Code. However, the Company does not anticipate that the limitation
will materially impact its utilization of its net operating loss carryforwards
in the near term.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Total revenues increased 10.4% from $23.8 million in 1995 to $26.3 million
in 1996.
License Fees. Total license fees increased 20.3% from $10.8 million, or
45.5% of total revenues, in 1995 to $13.0 million, or 49.6% of total revenues,
in 1996. EDGE license fees increased 45.6% from $8.4 million in 1995 to $12.2
million in 1996. The increase in EDGE license fees was primarily attributable
to an increase in the average size of customer licenses, increased market
awareness and acceptance of the EDGE products, and increased productivity
resulting from expansion of the Company's sales and marketing organization.
Telemar license fees decreased 65.7% from $2.5 million in 1995 to $842,000 in
1996. The decrease in Telemar license fees was due to a decrease in demand for
Telemar software and the sale of the Telemar product line in September 1996.
Services and Maintenance. Services and maintenance revenues increased 2.1%
from $13.0 million, or 54.5% of total revenues, in 1995 to $13.3 million, or
50.4% of total revenues, in 1996. EDGE services and maintenance revenues
increased 12.6% from $10.3 million in 1995 to $11.6 million in 1996. The
increase in EDGE services and maintenance revenue of $1.3 million was
primarily attributable to the significant increase in EDGE software licenses,
all of which involved a consulting services component, offset in part by the
substantial completion of several service projects in 1995. Telemar services
and maintenance revenues decreased 39.0% from $2.6 million in 1995 to $1.6
million in 1996. The decrease
24
<PAGE>
in Telemar services and maintenance revenue was due to decreased demand for
Telemar software and the sale of the Telemar product line on September 1,
1996.
Cost of Revenues
Cost of revenues decreased 11.5% from $8.9 million in 1995 to $7.9 million
in 1996.
Cost of License Fees. Cost of license fees increased 1.3% from $700,000, or
6.5% of total license fees, in 1995 to $709,000, or 5.4% of total license
fees, in 1996.
Cost of Services and Maintenance. The cost of services and maintenance
decreased 12.6% from $8.2 million, or 63.3% of services and maintenance
revenues, in 1995 to $7.2 million, or 54.3% of services and maintenance
revenues, in 1996. The improvement in services and maintenance margin was
primarily due to a reduction in the cost of subcontractors used to supplement
the Company's internal client services organization from $2.5 million in 1995
to $500,000 in 1996, offset in part by an increase in personnel costs of $1.1
million from 1995 to 1996. In 1995, approximately $650,000 of the $2.5 million
of subcontractor costs was attributable to third party subcontractor fees for
services provided in connection with a customer installation pursuant to the
terms of a fixed price services contract entered into in December 1993 for
which no corresponding revenue was realized. Since 1993 the Company has not
entered into any large fixed price contracts.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 17.7% from $6.8
million, or 28.7% of total revenues, in 1995 to $8.1 million, or 30.7% of
total revenues, in 1996. This increase was primarily attributable to the
hiring of additional sales and marketing personnel as well as increased print
advertising, participation in trade shows, travel expenses and other sales and
marketing expenses. Sales and marketing expenses are expected to continue to
increase in connection with the planned expansion of the sales and marketing
staff.
Product Development. Product development expenses decreased 6.2% from $6.8
million, or 28.6% of total revenues, in 1995 to $6.4 million, or 24.3% of
total revenues, in 1996. The reduction of product development expenses in
absolute dollars was primarily attributable to the sale of the Telemar product
line on September 1, 1996, after which no Telemar product development expenses
were incurred. The absolute dollar amount of product development expenses
related to EDGE increased from $5.1 million in 1995 to $5.3 million in 1996,
although the amount of such investment as a percentage of EDGE revenues
declined slightly.
General and Administrative. The Company's general and administrative
expenses increased from $3.8 million, or 16.1% of revenues, in 1995 to $3.9
million, or 14.8% of revenues, in 1996. The relatively consistent expense
levels from 1995 to 1996 reflect primarily an increase in personnel costs
offset by a decrease in the provision for doubtful accounts.
Other Income (Expense)
Interest Expense. Interest expense increased 53.3% from $764,000 in 1995 to
$1,171,000 in 1996 primarily as a result of the accrual of interest on the
Term Note of $391,000 and interest paid on monies borrowed from certain
executive officers of $110,000 offset by a reduction in the principal amounts
outstanding under capital leases and subordinated indebtedness.
Other Items. The Company incurred expenses of $113,000 in 1995 in connection
with losses relating to the disposal of certain office equipment and the sale
of an office building in Trumbull, Connecticut, which had been leased by the
Company and with respect to which the Company had guaranteed the repayment of
a mortgage loan. See "Certain Transactions." In 1996, the Company realized
25
<PAGE>
a gain of $92,000 in connection with the sale of Telemar and certain related
assets and liabilities to TSI. In connection with the sale of Telemar, the
Company received a promissory note from TSI in the principal amount of
$650,000 (the "TSI Note") payable in five equal annual installments commencing
October 1997 and which bears interest at 8.0% per annum. The Company has fully
reserved for the TSI Note because collectibility, based on the start-up nature
of TSI operations, was not ascertainable at the time of sale. The Company will
recognize gain in an amount equal to payments on the TSI Note as such
payments, if any, are received. The Company incurred a one-time expense of
$223,000 in 1995 in connection with its early termination of an office lease
in Fountain Valley, California because space available at the premises no
longer met the Company's needs.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total revenues increased 29.7% from $18.4 million in 1994 to $23.8 million
in 1995.
License Fees. Total license fees increased 46.4% from $7.4 million, or 40.3%
of total revenues, in 1994 to $10.8 million, or 45.5% of total revenues, in
1995. EDGE license fees increased 77.9% from $4.7 million in 1994 to $8.4
million in 1995. The increase in EDGE license fees was primarily attributable
to an increase in the average size of customer licenses, increased market
awareness and acceptance of the EDGE products, and increased productivity
resulting from expansion of the Company's sales and marketing organization.
Telemar license fees decreased 8.7% from $2.7 million in 1994 to $2.5 million
in 1995.
Services and Maintenance. Services and maintenance revenues increased 18.5%
from $11.0 million, or 59.7% of total revenues, in 1994 to $13.0 million, or
54.5% of total revenues, in 1995. EDGE services and maintenance revenues
increased 31.4% from $7.9 million in 1994 to $10.3 million in 1995 due to the
continuation of several large projects involving significant service
components contracted for in 1994 together with the addition of new services
and maintenance contracts. Telemar services and maintenance revenues decreased
14.4% from $3.1 million in 1994 to $2.6 million in 1995. The decrease in
Telemar services and maintenance revenues was primarily attributable to
decreased licensing of Telemar software products.
Cost of Revenues
Cost of revenues increased 32.6% from $6.7 million in 1994 to $8.9 million
in 1995.
Cost of License Fees. Cost of license fees increased 51.5% from $462,000, or
6.2% of total license fees, in 1994 to $700,000, or 6.5% of total license
fees, in 1995.
Cost of Services and Maintenance. The cost of services and maintenance
increased 31.2% from $6.3 million, or 57.2% of services and maintenance
revenues, in 1994 to $8.2 million, or 63.3% of services and maintenance
revenues, in 1995. The increase in cost of services and maintenance in 1995
was due to significant use of subcontractors to assist with several large
projects involving significant customer service components as well as the
hiring of additional services personnel to meet increased service demands
associated with large software licenses requiring extensive consulting and
systems integration services. In 1995, the Company incurred costs of
approximately $650,000 for third party subcontractor fees for services
provided in connection with a customer installation pursuant to the terms of a
fixed price services contract entered into in December 1993 without realizing
any corresponding revenue.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 16.9% from $5.9
million, or 31.9% of total revenues, in 1994 to $6.8 million, or 28.7% of
total revenues, in 1995. This increase was primarily attributable to the
hiring of additional sales and marketing personnel.
26
<PAGE>
Product Development. Product development expenses increased 11.4% from $6.1
million, or 33.3% of total revenues, in 1994 to $6.8 million, or 28.6% of
total revenues, in 1995. The increase in product development expenses was
primarily attributable to an increase in product development personnel hired
in connection with the Company's efforts to enable its products to support the
complex requirements of mid-size and large-scale call centers.
General and Administrative. The Company's general and administrative
expenses increased 42.0% from $2.7 million, or 14.7% of total revenues, in
1994 to $3.8 million, or 16.1% of total revenues, in 1995. The increase in
general and administrative expenses in 1995 was primarily attributable to an
increase in rental payments of $250,000, an increase of $260,000 in expenses
for outside legal and auditing services utilized to support the growth of the
Company, and an increase of $389,000 in the provision for doubtful accounts.
Other Income (Expense)
Interest Expense. Interest expense increased 23.4% from $619,000 in 1994 to
$764,000 in 1995. This increase in interest expense is attributable to
increased borrowings under the Line of Credit and borrowing under the Term
Note.
Other Items. The Company incurred losses associated with the disposal of
property and equipment of $298,000 in 1994 and $113,000 in 1995. The entire
amount of such loss in 1994 and $78,000 of such loss in 1995 was attributable
to the sale of an office building in Trumbull, Connecticut which had been
leased by the Company and with respect to which the Company had guaranteed the
repayment of a mortgage loan. See "Certain Transactions." The balance of the
expense incurred in 1995 was related to the disposal of equipment. The Company
incurred a one-time expense of $223,000 in 1995 in connection with its early
termination of an office lease in Fountain Valley, California because space
available at the premises no longer met the Company's needs.
27
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table presents certain unaudited quarterly financial
information for the nine quarters ended March 31, 1997. In the opinion of the
Company's management, this information has been prepared on the same basis as
the Consolidated Financial Statements appearing elsewhere in this Prospectus
and includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarters are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1995 1995 1995 1995 1996 1996 1996 1996 1997
------- ------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees:
EDGE product line...... $ 902 $2,134 $2,350 $2,982 $2,449 $2,937 $2,409 $4,385 $3,802
Telemar product line... 572 749 419 717 480 321 42 -- --
------- ------ ------ ------ ------ ------ ------ ------ ------
Total license fees.... 1,474 2,883 2,769 3,699 2,929 3,258 2,451 4,385 3,802
------- ------ ------ ------ ------ ------ ------ ------ ------
Services and
maintenance:
EDGE product line...... 1,671 2,560 3,009 3,102 2,612 2,813 2,970 3,248 3,654
Telemar product line... 784 748 532 578 548 624 439 -- --
------- ------ ------ ------ ------ ------ ------ ------ ------
Total services and
maintenance.......... 2,455 3,308 3,541 3,680 3,160 3,437 3,409 3,248 3,654
------- ------ ------ ------ ------ ------ ------ ------ ------
Total revenues....... 3,929 6,191 6,310 7,379 6,089 6,695 5,860 7,633 7,456
------- ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
License fees........... 148 173 292 87 166 186 289 68 71
Services and
maintenance........... 1,720 1,992 2,187 2,326 1,822 1,811 1,842 1,716 1,952
------- ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues.............. 1,868 2,165 2,479 2,413 1,988 1,997 2,131 1,784 2,023
------- ------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 2,061 4,026 3,831 4,966 4,101 4,698 3,729 5,849 5,433
------- ------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing.... 1,540 1,661 1,455 2,188 1,872 1,964 1,793 2,426 2,648
Product development.... 1,642 1,526 1,851 1,783 1,553 1,741 1,471 1,617 1,532
General and
administrative........ 807 1,017 1,030 970 1,024 961 1,008 885 1,092
------- ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 3,989 4,204 4,336 4,941 4,449 4,666 4,272 4,928 5,272
------- ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. (1,928) (178) (505) 25 (348) 32 (543) 921 161
Other income (expense). (231) (497) (174) (198) (281) (301) (164) (333) (257)
------- ------ ------ ------ ------ ------ ------ ------ ------
Loss before provision
for income taxes...... (2,159) (675) (679) (173) (629) (269) (707) 588 (96)
Provision for income
taxes................. 25 25 25 25 -- 30 -- -- 90
------- ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $(2,184) $ (700) $ (704) $ (198) $ (629) $ (299) $ (707) $ 588 $ (186)
======= ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1995 1995 1995 1995 1996 1996 1996 1996 1997
------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License fees
EDGE product line...... 23.0% 34.5% 37.3% 40.4% 40.2% 43.9% 41.1% 57.4% 51.0 %
Telemar product line... 14.5 12.1 6.6 9.7 7.9 4.8 0.7 -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total license fees.... 37.5 46.6 43.9 50.1 48.1 48.7 41.8 57.4 51.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Services and mainte-
nance:
EDGE product line...... 42.5 41.4 47.7 42.1 42.9 42.0 50.7 42.6 49.0
Telemar product line... 20.0 12.0 8.4 7.8 9.0 9.3 7.5 -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total services and
maintenance.......... 62.5 53.4 56.1 49.9 51.9 51.3 58.2 42.6 49.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License fees........... 3.8 2.8 4.6 1.2 2.7 2.8 4.9 0.9 1.0
Services and mainte-
nance................. 43.7 32.2 34.7 31.5 29.9 27.0 31.5 22.5 26.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Total cost of reve-
nues................. 47.5 35.0 39.3 32.7 32.6 29.8 36.4 23.4 27.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 52.5 65.0 60.7 67.3 67.4 70.2 63.6 76.6 72.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing.... 39.2 26.8 23.1 29.7 30.7 29.3 30.6 31.8 35.5
Product development.... 41.8 24.6 29.3 24.2 25.6 26.0 25.1 21.2 20.6
General and
administrative........ 20.6 16.5 16.3 13.1 16.8 14.4 17.2 11.5 14.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 101.6 67.9 68.7 67.0 73.1 69.7 72.9 64.5 70.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss)................. (49.1) (2.9) (8.0) 0.3 (5.7) 0.5 (9.3) 12.1 2.1
Other income (expense).. (5.8) (8.0) (2.8) (2.7) (4.6) (4.5) (2.8) (4.4) (3.4)
----- ----- ----- ----- ----- ----- ----- ----- -----
Loss before provision
for income taxes....... (54.9) (10.9) (10.8) (2.4) (10.3) (4.0) (12.1) 7.7 (1.3)
Provision for income
taxes.................. 0.7 0.4 0.4 0.3 -- 0.5 -- -- 1.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (55.6)% (11.3)% (11.2)% (2.7)% (10.3)% (4.5)% (12.1)% 7.7% (2.5)%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth, for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1995 1995 1995 1995 1996 1996 1996 1996 1997
------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of license fees.... 10.0% 6.0% 10.5% 2.4% 5.7% 5.7% 11.8% 1.6% 1.9%
Cost of services and
maintenance............ 70.1 60.2 61.8 63.2 57.7 52.7 54.0 52.8 53.4
</TABLE>
The Company's quarterly operating results have varied significantly in the
past and may vary significantly in the future, depending on factors such as
the ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the size, timing and
contractual terms of significant orders, the level of price and product
competition, demand for the Company's products and changes in pricing policies
by the Company or its competitors. In addition, the Company's quarterly
operating results are dependent on factors such as budgeting cycles of its
potential customers, customer order deferrals in anticipation of enhancements
or new products, the cancellation or non-renewal of licenses or maintenance
agreements, product life cycles, changes in Company strategy, investments to
develop sales distribution channels, seasonal trends, changes in the level of
operating expenses and general domestic and international economic and
political conditions, among others.
29
<PAGE>
The Company's business has experienced and is expected to experience
significant seasonality, in part due to customer buying patterns. In recent
years, the Company has generally had stronger demand for its products during
the quarters ending in June and December and weaker demand in the quarters
ending in March and September. The Company has generally recorded 50% to 70%
of its total quarterly revenues in the third month of a quarter, with a
concentration of the revenues in the last half of the third month. The Company
has also experienced a seasonal trend in its revenues whereby its fiscal
fourth quarter revenues represented a disproportionate part of the Company's
annual revenues.
The Company's EDGE license fees increased for the first quarter of 1997
compared to the first quarter of 1996 and for each of the four quarters of
1996 from the comparable periods in 1995, with the highest increase in the
first quarter of 1996 and the lowest increase in the third quarter. In the
first quarter of 1997 EDGE license fees increased by 55.2% from the first
quarter of 1996. In addition, EDGE license fees for the first quarter of 1996
increased by 171.5% from the first quarter of 1995, resulting primarily from a
license to a significant customer; however, total revenue from such customer
represented less than 10% of 1996 revenues. The increase of 2.5% in the third
quarter of 1996 compared to 1995 reflected the timing of certain orders which
were delayed to the fourth quarter of 1996 and a significant international
license in the third quarter of 1995.
EDGE services and maintenance revenues increased for the first quarter of
1997 compared to the first quarter of 1996, and for each of the quarters of
1996 from the comparable periods in 1995, except for the third quarter of
1996, which decreased slightly from the third quarter of 1995, primarily as a
result of a significant service engagement during the third quarter of 1995.
Sales and marketing expenses increased for the first quarter of 1997
compared to the first quarter of 1996, and in each quarter of 1996 over the
comparable periods in 1995, reflecting expansion of the Company's sales and
marketing organization. The lower sales and marketing expenses in the third
quarter of each of 1995 and 1996 reflect lower commissions associated with
lower license fees and services and maintenance revenues for such periods.
Product development expenses were lower in each quarter of 1996 than in the
comparable periods in 1995 except for the second quarter, and were also lower
for the first quarter of 1997 compared to the first quarter of 1996. The lower
costs in the third and fourth quarters of 1996 and first quarter of 1997 were
primarily attributable to the sale of Telemar on September 1, 1996. The
expenses in the second quarter of 1996 included fees paid to independent
contractors retained to assist the Company's internal staff with specific
development projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and met its capital expenditure
requirements primarily from proceeds of private sales of its Convertible
Preferred Stock and Common Stock and from funds obtained from a credit
facility with a commercial bank. Through March 31, 1997, the Company has
raised approximately $14.5 million from the sale of its Convertible Preferred
Stock, warrants and Common Stock. The Company's credit facility consists of a
$6.0 million Line of Credit and a $2.5 million Term Note. Borrowings under the
Line of Credit are limited to 75% of qualified accounts receivable, as defined
in the Loan and Security Agreement. The Line of Credit had an outstanding
balance of approximately $4.9 million at March 31, 1997. Advances under the
Line of Credit bear interest at a variable rate equal to the prime rate plus
1.0%. The Line of Credit terminates on February 1, 1998. Upon the closing of
this offering, the Company is required to repay the outstanding principal
balance of and accrued interest on the Line of Credit and the Term Note. The
Company, however, will be permitted to continue to borrow amounts under the
Line of Credit through February 1, 1998. The Term Note is payable in equal
monthly installments of $41,667, commencing November 1, 1997 through October
2002 and bears interest at 11.0%, payable on a current basis, and accrues
additional interest based upon a formula which approximates 9.0%. As of March
31, 1997, the balance of accrued interest was $319,000. This additional
interest is payable at the earlier of November 1, 1998 or the full repayment
of the Term Note.
30
<PAGE>
During 1996, the Company was in violation of the financial covenants in the
Loan and Security Agreement relating to tangible net worth and capital
expenditures, as well as certain other non-financial covenants, all of which
violations were waived by the Bank through December 31, 1996. In addition to
such waivers, the Company and the Bank have amended the Loan and Security
Agreement to amend or eliminate certain covenants and to extend the maturity
date of the Line of Credit to February 1, 1998. The Company is currently in
compliance with the covenants in the Loan and Security Agreement and does not
believe that the covenants in the Loan and Security Agreement, as amended,
will have a material effect on the Company's operations, growth or liquidity
in the foreseeable future.
At March 31, 1997, the Company had approximately $2.5 million in cash and
approximately $12.4 million in accounts receivable. For the three years ended
December 31, 1994, 1995 and 1996, net cash used in operations totaled
approximately $3.3 million, $1.9 million and $3.3 million, respectively, while
net cash of $201,000 was provided by operations for the three months ended
March 31, 1997. The 1994, 1995 and 1996 cash used was primarily attributable
to net losses of $4.1 million, $3.8 million and, $1.0 million, respectively,
offset by depreciation, amortization and other non-cash charges of $1.1
million, $1.1 million and $1.1 million, respectively. In addition, changes in
operating assets and liabilities used $333,000 and $3.3 million of cash in
1994 and 1996, respectively, and provided $824,000 of cash in 1995. The
fluctuations in operating assets and liabilities were due primarily to the
timing of operating activities, including the timing of orders, collections of
accounts receivable and the payment of accounts payable. Cash provided by
operations was $201,000 for the first quarter of 1997 as a result of a net
loss of $186,000, offset by depreciation, amortization and other non-cash
charges of $345,000 and cash provided by changes in operating assets and
liabilities of $42,000.
For the past three fiscal years and the first quarter of the current fiscal
year, the Company's primary investing activities consisted of purchases of
computer and office equipment to support the Company's expanding employee
base. The Company used approximately $1.0 million in each of fiscal 1994, 1995
and 1996, and $556,000 in the first quarter of 1997 to purchase computer and
office equipment. During 1994 and 1995, the Company financed $851,000 and
$113,000, respectively, of computer and office equipment acquisitions through
capital leases and, in 1996, the Company entered into a sale/leaseback
transaction with respect to certain computer equipment which was reflected as
a debt obligation of $509,000. The Company currently has no significant
capital spending or purchase commitments other than existing commitments under
certain capital leases, but expects to continue to engage in capital spending
in the ordinary course of business.
In 1994, 1995 and 1996, net cash provided by financing activities was
approximately $3.4 million, $3.3 million and $5.8 million, respectively. Cash
from financing activities was primarily attributable to approximately $1.1
million, $4.5 million and $4.5 million, respectively, of net cash proceeds
from the sale of the Company's Common Stock and Convertible Preferred Stock in
1994, 1995 and 1996, respectively, and $1.2 million and $1.3 million,
respectively, of net proceeds from long-term indebtedness and short-term bank
borrowings in 1994 and 1996. See "Certain Transactions."
The Company anticipates that proceeds from this offering together with
existing sources of working capital will be sufficient to meet the Company's
projected working capital and other cash requirements for the next eighteen
months. The Company's future operating and capital requirements will depend on
numerous factors, including the Company's internal research and development
programs, the level of resources the Company devotes to marketing and sales
capabilities, advances in technology and the successful development and
introduction of new products. In order to meet these requirements, the Company
may need to sell additional equity or debt securities or obtain additional
credit facilities. There can be no assurance that any necessary additional
financing will be available to the Company on commercially reasonable terms,
or at all. In addition, there are no present undertakings, commitments or
agreements with respect to any acquisitions of businesses, products or
technologies. The Company, from time to time, does however evaluate potential
acquisitions of other businesses, products and technologies
31
<PAGE>
that are complementary to those of the Company, and may in the future require
additional equity or debt financings to consummate such acquisitions.
Effect of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is not permitted. The Company has not quantified the effect of
adopting the new standard.
32
<PAGE>
BUSINESS
THE COMPANY
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size to large-scale telephone call centers. The EDGE TeleBusiness software
is a suite of applications and tools that enable businesses to automate
telebusiness activities (telemarketing, telesales, account management,
customer service and customer support) on an enterprise-wide basis. The
Company complements its EDGE products by offering its clients professional
consulting, technical support and maintenance services. EDGE has been licensed
to over 175 customers in a range of industries, including teleservices
outsourcing, telecommunications and financial services. Customers include APAC
Teleservices, Inc., AT&T Corp., Belgacom, S.A., Bose Corporation, ING Bank,
N.V., SITEL Corporation, Sprint PCS, United Parcel Service General Services
Co. and Wells Fargo Bank, N.A. See "Risk Factors--Product Concentration."
The Company's EDGE products are designed to provide superior functionality,
flexibility, integration, scalability and speed of deployment. Based upon an
open systems software architecture, EDGE supports multiple hardware platforms,
operating environments, database management systems, network topologies,
desktop standards, and legacy system and computer-telephony middleware.
Additionally, the Company has developed and is currently testing software
which will enable EDGE to support the Internet and corporate-based intranets.
The Company's products provide call center agents with real-time data and
guidance needed to manage increasingly complex processes for selling products
and servicing customers. For example, EDGE offers scripting to support order-
taking, cross-selling and up-selling, enables agents to track and resolve
customer service problems and facilitates the collection of valuable customer
information that can be disseminated on an enterprise-wide basis. The
Company's professional consulting, technical support and maintenance services
include application development, systems integration, systems and database
design and construction and software training. The Company believes that these
services significantly differentiate the Company from its competitors and
complement its EDGE products to provide a total solution for mid-size and
large-scale call centers.
Until September 1996, the Company developed, marketed and supported a
telemarketing and telesales automation software application called Telemar
which runs on the IBM AS/400 platform. Over the last five years, the Company
has increasingly focused on its EDGE products. Due to the substantial growth
in EDGE software license fees and client/server open system software market
opportunities, the Company elected to focus exclusively on its EDGE products
and sold Telemar and certain related assets and liabilities on September 1,
1996. Currently, substantially all of the Company's revenues are attributable
to the licensing of EDGE products and the provision of professional
consulting, technical support and maintenance services relating to EDGE. The
Company currently expects that the licensing of EDGE products and the
provision of such related services will account for substantially all of the
Company's revenues for the foreseeable future.
INDUSTRY BACKGROUND
Competitive pressures have intensified across many industries as a result of
increased global competition, deregulation, rapid technological change and
higher customer expectations. Businesses are expanding their use of telephony-
based customer interaction, from initial sales and marketing activities to
post-sales service and support, as a key component of their competitive
efforts to increase sales, reduce costs, enhance customer service, distinguish
their products and services and receive and process valuable customer
information. Effective customer interaction can increase revenue, build
customer loyalty and improve customer acquisition and retention while reducing
costs.
In recent years, telephony-based customer interaction has become a strategic
business weapon driven by decreased telecommunications costs associated with
deregulation, the proliferation of toll-free 800 numbers and the introduction
of new computing and telecommunications technologies, all of which have
enabled businesses to develop an efficient and interactive communications
medium with its existing and prospective customers. In a May 1996 research
report, Aberdeen Group, Inc., an independent computer
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and communications consulting and market research organization, projected that
the market for sales and customer support software will grow at an average
annual compounded rate of approximately 40%, from $400 million in 1995 to $1.7
billion in 1999. The Company paid $500 to Aberdeen Group, Inc. as a
subscription fee for its research report.
High-volume, telephony-based customer interaction activities are conducted
through call centers that are typically designed and equipped with special
telecommunications and computer hardware and software. Common examples of call
centers are the customer service or sales centers for outbound and inbound
telemarketing, telesales, account management, customer service and support.
Call centers can range in size from tens to thousands of sales or service
agents. The Company defines small, mid-size and large-scale call centers based
upon the number of agents dedicated to telephony-based activities in the call
center. Small call centers typically have up to 50 agents, while mid-size call
centers have from 50 to 250 agents and large-scale centers over 250 agents.
Initial applications of technology for call centers were primarily telephony-
based and included such devices as high capacity telephone switches, predictive
dialers, automatic call distributors and interactive voice response units.
These technologies offered point solutions addressing only certain functions of
call center management and the customer interaction process. As call centers
progressed, organizations implemented solutions based on software used with
legacy systems in an effort to improve the effectiveness and efficiency of call
centers and customer interaction processes. These solutions were typically
internally developed and mainframe-based and as such, were generally
inflexible, expensive to maintain and difficult to deploy throughout a
decentralized organization. Moreover, these systems did not fully integrate and
leverage improvements in telephony technology, resulting in technology
infrastructures that could not provide comprehensive customer interaction and
call center management throughout the organization and across business
processes.
Enterprises are seeking to exploit emerging technologies to improve the
effectiveness and efficiency of their telebusiness operations. Distributed
client/server computing environments have become increasingly commonplace,
built upon a foundation of relational database platforms, object-oriented
technology and wide deployment of network solutions. Customer interaction
software solutions today must leverage emerging technology and offer the
functionality necessary to support the broad spectrum of call center and
customer interaction functions and integrate these functions with other
business processes in the organization. Additionally, businesses are seeking
customer interaction solutions which can be deployed and updated rapidly
throughout the organization, are scalable to meet the needs of growing
businesses, and seamlessly integrate and leverage telephony technology. Call
center customer interaction solutions will also need to support and incorporate
emerging customer interaction channels and computing platforms, such as the
Internet and corporate-based intranets.
THE IMA SOLUTION
The EDGE suite of software applications and tools, coupled with the Company's
comprehensive service offerings, represent a total solution designed to enable
businesses to increase their productivity and revenue-generating capabilities
by improving the effectiveness of their interaction with customers through
telephone call centers.
The IMA solution incorporates five design tenets: functionality, flexibility,
integration, scalability and speed of deployment.
Functionality. Customer calls are often three to five minute events which,
when handled effectively, can have a dramatic impact on a business's ability to
acquire and retain customers. The Company's products are designed to enable the
user to more effectively manage the telephone conversation with the customer
before, during and after the call by automating numerous call center
activities, providing real-time access to customer information, and providing
features such as intelligent
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scripting, contact management, time management, work flow management,
voice/data management and other conversation management aids. In addition,
EDGE provides comprehensive call center reporting tools which enable managers
and supervisors to efficiently and effectively manage call center agents and
marketing campaigns.
Flexibility. EDGE includes an integrated development environment that
enables a business to rapidly develop or change applications relating to
specific sales, marketing or service activities without disrupting live
operations. EDGE allows a call center manager to tailor scripts, screen
displays and workflow processes. The ability to change applications allows
clients to adapt call center operations quickly in response to changing
business needs such as new product sales or marketing campaigns, special
customer service programs or crisis management events.
Integration. EDGE is designed to integrate seamlessly with other
technologies to improve call center productivity. With its component-based
open architecture, EDGE can be integrated with a wide variety of computer and
telephony-based technologies and products, including telephony devices (voice
response units, predictive dialers, automatic call distributors and private
branch exchange technology), relational databases, legacy systems, other
third-party desktop applications and facsimile technology.
Scalability. The Company's products are scalable from small single-site
departmental networks to multi-site global implementations without
significantly increasing the risk of system degradation. EDGE has been
deployed in client configurations consisting of more than 1,000 users handling
over 1,000,000 calls per month.
Speed of Deployment. The EDGE integrated development environment allows
businesses to rapidly develop and deploy call center customer interaction
software solutions on an enterprise-wide basis. The ability to swiftly develop
and deploy applications enables the Company's clients to implement sales,
marketing and service programs quickly in response to changes in the business
environment.
STRATEGY
The Company's objective is to become the global leader in providing
flexible, technologically advanced, feature-rich customer interaction software
and services to mid-size and large-scale call centers. To achieve this
objective, the Company is pursuing the following strategies:
Target Specific Industries
The Company has established particular expertise in the teleservices
outsourcing, telecommunications and financial services industries, and has
developed client relationships in several other industries which it believes
in time will become specific areas of focus. The Company believes that it can
utilize its knowledge of the business processes and requirements of selected
industries to focus its marketing efforts, improve its services and increase
the speed and productivity of its research and development efforts targeted at
these industries.
Extend Call Center Technology Leadership
The Company provides technologically advanced customer interaction software
products that are designed to meet and exceed the complex and changing
requirements of mid-size and large-scale call centers. The Company believes
EDGE's integrated development environment and its ability to integrate
extensive computer-telephony capabilities and access legacy systems have been
and will continue to be important differentiators of its products. The Company
continues to develop integration capabilities for third-party technologies
utilized in call centers including relational databases, computer-telephony
technology and Internet and corporate-based intranet links. The Company is
also focusing its development efforts on building ready-to-use templates for
specific business functions.
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Broaden International Distribution
The Company will seek to expand its existing international distribution
network, including its indirect distribution channels and direct sales force,
in order to take advantage of international growth opportunities. Since 1990,
the Company has been offering its products in key international markets and
has gained valuable experience with respect to engaging in business overseas.
In support of its overseas business commitment, EDGE has been translated into
Japanese and permits users to work in a number of other foreign languages. The
Company has licensed EDGE to over 90 international customers in 20 countries
and in 1996 international revenues comprised approximately 26% of total
revenues.
Expand Existing Customer Relationships
The Company's products are licensed to over 175 customers worldwide. The
Company's strategy is to increase revenues generated from this existing base
of customers by licensing its products to additional users, developing new and
enhanced products specifically tailored to customer requirements, and
providing additional consulting and support services. The Company believes
that its customer relationships provide key insights into market trends and
customer needs that help the Company more effectively shape its product and
service offerings and development efforts.
Leverage Strategic Business and Technology Relationships
The Company's strategy is to increase market acceptance of its software by
working with large systems integration firms and technology companies to
broaden market awareness and visibility of the Company's products and
services, and to maintain its product integration capabilities with related
and complementary technology. The Company has established relationships with
several leading consulting and systems integration firms, including Ernst &
Young LLP, IBM, A.T. Kearney and dbINTELLECT, and hardware and software
companies, including Hewlett-Packard Company, NCR Corporation, Oracle and
Microsoft. While the scope of these relationships vary, such relationships
provide the Company with lead generation and co-marketing support and the
ability to facilitate its technology integration efforts.
Leverage Internet Technology
The Company has developed and is currently testing products to enable its
clients to expand customer interaction activities to the Internet and
corporate-based intranets. The Company believes that the Internet is rapidly
evolving as a new communication medium that can be integrated with a call
center. The Company expects that EDGE will enable customers to purchase
products, complete service requests and conduct other customer interactions
over the Internet without assistance from a live agent, or complement an
interaction on the World Wide Web with a live conversation with a call center
agent for assistance with sales or service questions. In addition, the Company
is incorporating Internet/intranet technology into its products so that
clients may utilize corporate-based intranets and industry standard browsers
as an alternative computing platform for customer interaction software
applications.
PRODUCTS AND SERVICES
The EDGE suite of products is based on a distributed, multi-tier
client/server open architecture which allows for the distinct separation of
presentation, application and database layers. This architecture provides the
system performance and scalability that is critical for mid-size and large-
scale call centers and permits hardware, relational database and operating
system independence to preserve and leverage existing information technology
investments. EDGE currently supports Windows 3.X, Windows 95, Windows NT
workstation clients and a wide variety of Unix platforms. The Company expects
to provide server support for Windows NT and database support for Microsoft
SQL Server during the second half of 1997.
List prices for the Company's EDGE products range from $1,600 to $5,700 per
user and are based upon the client's desired configuration and number of
users.
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EDGE COMPONENT ARCHITECTURE
The EDGE Component Architecture is comprised of a Business Application
Framework based on an integrated development environment and is augmented by
an external technology layer designed to provide seamless integration with
third-party products. The following diagram illustrates the EDGE Component
Architecture:
[DIAGRAM DEPICTING THE EDGE COMPONENT ARCHITECTURE. THE TEXT
BELOW ACCOMPANIES THE DIAGRAM]
Business Application Framework
Call Center Customer Interaction Industry
Objects Software Objects Objects
Integrated Development Environment
Client/Server Desktop Workflow Legacy Business
Development Integration Management System Telephony Rules
Access
External Technology Layer
Desktop Relational Legacy Computer Internet
Links Database Gateway Telephony Technology
BUSINESS APPLICATION FRAMEWORK
EDGE business applications are constructed by linking together component
objects in a building block approach to enable the user to perform functions
required in a call center ranging from simple individual tasks to complex
business processes. EDGE component objects include Call Center Objects,
Customer Interaction Software Objects and Industry Objects. The following
diagram illustrates the EDGE Business Application Framework:
[DIAGRAM DEPICTING THE EDGE BUSINESS APPLICATION FRAMEWORK. THE
TEXT BELOW ACCOMPANIES THE DIAGRAM]
Industry Object Layer
Teleservice Tele- Finance Technology Healthcare Utilities Consumer
Outsourcing Communications Products
Customer Interaction Software Object Layer
Account Lead Telesales Customer Support/ Campaign Opportunity
Manage- Manage- Incident Processing Management Management
Call Center Object Layer
Intelligent Queue Telephony Call List Call Center Customer Additional
Scripting Management Functions Processing Reporting Management Objects
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Call Center Objects. Call Center Objects perform discrete functions that are
used by a call center agent at many different points before, during and after
a customer conversation. Call center managers and supervisors also utilize
Call Center Objects to help manage call center operations and personnel. More
than 75 ready-to-use Call Center Objects are available with the EDGE product,
the most common of which are:
. Intelligent Scripting--Provides dynamic screen presentation and
navigational routing based on defined business rules, historical customer
data and other input derived from the customer conversation.
. Queue Management--Provides for administration, prioritization, security
and processing of user and system workflow activities such as calling
campaigns, call backs, appointments, to-do's, incidents, personal
schedules and tasks.
. Telephony Functions--Allows control of all telephone-related functions
and interfaces such as automatic call distributors, voice response units
and predictive dialers through the application.
. Call List Processing--Provides importing, manipulation, sorting,
selecting and loading of calls into prioritized lists, which can be
managed by user, group, time of day and quota levels.
. Call Center Reporting--Provides ongoing operational results for
management analysis of call center activity in a variety of categories,
including by agent, group, department, campaign, list and time period.
. Customer Management--Allows for user-defined searching, selection and
modification of customer and company information, including system and
user-defined data.
Customer Interaction Software Objects. Customer Interaction Software Objects
contain a higher level of functionality than Call Center Objects and assist in
the performance of more complex customer interaction processes. At present,
these objects are developed by the client or by the Company's client services
organization by combining Call Center Objects to create customer-specific
applications using the EDGE integrated development environment. The Company is
currently developing packaged versions of commonly used Customer Interaction
Software Objects, which it plans to release in the second half of 1997.
Customer Interaction Software Objects that may be developed as part of an EDGE
installation include:
. Account Management--Supports call center agents during free-form
conversations with customers. Critical customer information such as
contacts, corporate hierarchy and profiles is combined with corporate
information such as product, lead source and objection handling and is
displayed in a timely manner.
. Lead Management--Provides closed-loop lead tracking for users to manage
leads and prospects through a sales qualification process by providing
list import and segmentation facilities, lead profiling and scoring,
results tracking and management reporting.
. Telesales--Provides graphical, interactive telephone sales and order
capture utilizing intelligent prompts for objection handling, cross-
selling, up-selling, product and service information, campaign based
pricing and order and inventory file integration.
. Customer Support/Case Processing--Allows a user to track and resolve
customer inquiries or cases in single call or multiple step resolution
environments, providing closed looped case management with fast path
entry, problem determination and resolution support, predefined workflows
by type and category, escalation with proactive alerts and on-line status
reports.
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. Campaign Management--Allows a user to create, manage and analyze sales
process protocols containing workflow assignments, simultaneous call
lists, date parameters, escalations, control groups, inbound call
recognition and lead source tracking.
. Opportunity Management--Allows a user to manage multiple sales
engagements at the same time by providing detailed opportunity
definition, forecasting data, team selling, corresponding relationships,
history and workflow management.
Industry Objects. Industry Objects are applications that combine Call Center
Objects and Customer Interaction Software Objects to perform complex,
typically enterprise-wide business processes according to the requirements of
the particular industry in which the business operates. The Company has
historically utilized its consulting services and support organization to
provide individual customers with Industry Objects, but expects to package
Industry Objects in the future as discrete product offerings for the Company's
targeted industries.
INTEGRATED DEVELOPMENT ENVIRONMENT
The EDGE integrated graphical development environment is used to tailor EDGE
applications to meet a client's specific needs. The primary components
supported within the integrated development environment include:
Client/Server Development. The Company's EDGE TeleBusiness Workstation (ETW)
provides a client/server graphical development tool for accessing and
integrating business application framework objects and external technologies
into end user applications.
Desktop Integration. The desktop integration component provides integration
capabilities between EDGE applications and third-party software applications
running on the desktop. The Company's Graphical EDGE Operations (GEO) product
allows EDGE to support Windows on the desktop. The Company has developed and
is currently testing a product to support Internet browsers.
Workflow Management. The workflow management component allows a user to
develop elaborate workflow routing within the call center and enables
creation, prioritization, processing and tracking of multiple customer
interaction activities coordinated on a "just in time" basis between the
client, its call center and its customer. The workflow management component
integrates agent and task scheduling with a variety of inbound and outbound
customer touch points.
Legacy System Access. The legacy system access component is a suite of
development tools which allows a user to access and update legacy system
information. Legacy system information or other data may be viewed or updated
from the same graphical presentation as local call center operations and
management data.
Telephony. The telephony component is a series of development tools which
permit a client to quickly establish a telephony interface to a particular
private branch exchange, predictive dialer or voice response unit, providing,
for example, the capability to capture automatic number identification/direct
number identification services and route the call and relevant data to a
particular agent, or to transfer voice/data from one agent to another.
Business Rules. The business rules component utilizes an intuitive graphical
user interface which allows rapid integration of client business processes and
practices into an application. This component enables a client to define the
critical processes and tasks for qualifying, selling and servicing the
client's customers. These rules become the basis of a client's customer
interaction process. Business rules embody specific procedures and policies
for handling each customer event in a manner consistent with the best business
practices established by each client.
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EXTERNAL TECHNOLOGY LAYER
The EDGE external technology layer consists of components that are designed
to enable clients to link to a variety of external technologies on a real-time
basis. The following diagram illustrates the EDGE External Technology Layer
components:
[DIAGRAM DEPICTING THE EXTERNAL TECHNOLOGY LAYER. THE TEXT
BELOW ACCOMPANIES THE DIAGRAM]
External Technology Layer
<TABLE>
<CAPTION>
Computer
Desktop Relational Legacy Telephony Internet
Links Database Gateway Integration Technology
<S> <C> <C> <C> <C> <C>
Dynamic Data Oracle 3270 access PRX: Predictive Dialer: MS Internet Explorer*
Exchange (DDE) Informix HLLAPI ---- ------------------ Netscape Navigator*
Sysbase LU 6.2 Lucent EIS Java*
Dynamic Library Microsoft SQL IBM MQ Series Definity G3 Intervoice Javascript*
Links (DDL) Server* message 5ESS VRU: Active X*
DB/2 400* middleware NEC ----
Object Linking IPC Nortal IBM Direct Talk
and Embedding TCP/IP Sockets Meridian I Lucent Conversant
(OLE) DMS 100 Intervoice*
Aspect Periphonics*
Active X* Rockwell Middleware:
Galaxy -----------
Spectrum* ATT ASAI
Rolm 9751 HP CCM
Siemens HP ACT
Ericsson IBM Callpath
Aspect Application
Bridge
Rockwell Gateway*
TSAPI
*Estimated to be available in 1997
</TABLE>
Desktop Links. The EDGE client component links to other desktop applications
through support of dynamic data exchange (DDE), dynamic library links (DLL)
and object linking and embedding (OLE). The Company is developing support
capability for Microsoft's Active X which it expects to be commercially
available in the second half of 1997.
Relational Database. EDGE supports Oracle, Informix and Sybase relational
databases. Existing corporate data stored in these relational databases may be
accessed and updated along with the setup and definition of new databases for
management of call center data. As part of its Windows NT support strategy,
the Company is developing support capability for Microsoft SQL Server which it
expects it to be commercially available in the second half of 1997.
Legacy Gateway. EDGE supports a variety of legacy system links and data
access options, including 3270 access, HLLAPI, LU 6.2, IBM's MQ Series
messaging middleware, UNIX InterProcess Communication (IPC) and TCP/IP
Sockets.
Computer Telephony Integration. EDGE supports a variety of commonly used
telephony technology, including private branch exchanges, predictive dialers,
voice response units and telephony-middleware. Functionality provided through
these telephony links include automatic number identification, direct number
identification services, screen notification, voice/data transfer and
conference, outbound preview dial, automated agent logon/logoff, agent
available/unavailable, call hold, retrieve, answer and disconnect and host-
based routing.
Internet Technology. The Company has developed and is currently testing
products that support the most commonly used Internet and corporate-based
intranets through Microsoft's Internet Explorer browser, Netscape's Navigator
browser and Javascript as well as integration to Microsoft's Active X. These
products are expected to be commercially available in the second half of 1997.
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CLIENT SERVICES
The Company believes that its client services are a significant
differentiating factor in its target markets and are an important component of
EDGE deployments. The Company provides consulting and maintenance and
technical support services to its customers, including custom application
development, systems integration, systems design and construction, database
design, installation, skills training, custom documentation, client help desk
and software training. The Company has developed a comprehensive and standard
methodology to provide continuity through a project from the initial sale to
implementation of its applications. The Company's client services organization
helps to develop and maintain long-term customer relationships by applying
specialized knowledge of industry needs, business processes and technology to
help design and provide the customer with a highly functional and flexible
solution. The Company's client service department works with strategic
consulting and systems integration companies to identify and provide services
for large-scale service projects. The Company principally relies on
distributors and remarketers to provide consulting and client support services
to its international customers. As of March 31, 1997, the Company employed 83
employees in its client services organization. Services and maintenance
revenues as a percentage of total revenues were 59.7%, 54.5%, 50.4% and 49.0%
in 1994, 1995, 1996 and for the three months ended March 31, 1997,
respectively. The Company provides the following services:
Consulting Services. The Company provides a comprehensive range of
professional services for its customers including project management, business
consulting, application development, implementation and integration of the
Company's products with the customer's existing systems. In addition, the
Company offers training programs to meet the specific needs of its customers.
The Company maintains a large consulting services staff with extensive
experience in the implementation and deployment of complex customer
interaction solutions. The demand for the Company's consulting services has
increased as the Company's product offerings have been accepted for large-
scale installations. Consulting services fees are determined on a time and
expense basis and training fees are generally charged on a per class or per
student basis.
Maintenance and Technical Support Services. The Company's maintenance and
technical support services staff provides clients with telephone and on-line
support of the Company's products. These support services include access to
technical support via the Company's telephone help-desk, customer support Web
site and e-mail. The Company offers several product support plans, including a
7 day/24 hour plan, which are generally offered for an annual fee based upon a
percentage of the license fee. The Company also provides its customers with
software upgrades, account management services, technical bulletins, status
reports and ongoing communication regarding new features and products under
development.
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CUSTOMERS AND APPLICATIONS
As of March 31, 1997, the EDGE suite of products had been licensed to over
175 customers with more than 25,000 total users. In 1996, no customer
accounted for more than 10% of the Company's total revenues. However, Zurich
Insurance Company accounted for approximately 23.7% of the Company's total
revenues for 1995 and Pacific Gas and Electric Company accounted for 14.4% of
total revenues for 1994. The following is a representative list of the
Company's customers. Each customer listed below has provided revenues in
excess of $100,000 from license fees, services or maintenance.
<TABLE>
<CAPTION>
TELESERVICES OUTSOURCING FINANCIAL SERVICES TECHNOLOGY
- ------------------------ ------------------ ----------
<S> <C> <C>
APAC Teleservices, Inc. American Express Company Cabletron Systems, Inc.
Direct Marketing American Maturity Life Hewlett-Packard Company
Services, Inc. Insurance Company Nippon Motorola Ltd.
ICT Group, Inc. Bank of New Zealand
ITI Marketing Services, Commonwealth Bank of UTILITIES
Inc. Australia ---------
Neodata Services, Inc. ING Bank, N.V.
Service Data Corporation JCB Co., Ltd. British Gas plc
SITEL Corporation The Bank of Tokyo Pacific Gas and
Service Network Mitsubishi Electric Company
Telephony B.V. The Mutual Life
Telespectrum Worldwide, Assurance Company of HEALTH CARE
Inc. Canada -----------
NationsBank
TELECOMMUNICATIONS Trans Financial, Inc. FHP, Inc.
- ------------------ TSB Bank plc Kaiser Foundation
United Overseas Bank Health Plan, Inc.
AT&T Corp. Ltd. Merck-Medco Managed
Belgacom, S.A. Wells Fargo Bank, N.A. Care, L.L.C.
British Zurich Insurance Company The Prudential
Telecommunications plc Insurance Company of
Cincinnati Bell CONSUMER GOODS America
Telephone Company --------------
New Zealand Telecom OTHER
P.T.T. Telecom B.V. Bose Corporation -----
Sprint PCS Philip Morris, Inc.
TeleNor Direkte AS SecurityLink from Securicor Distribution
Ameritech United Parcel Service
General Services Co.
</TABLE>
EDGE applications have been selected by businesses in a variety of
industries for domestic and global implementation. The following are
representative examples of EDGE deployments by several of the Company's
clients. The Company believes that the EDGE deployments described below
constitute representative examples because they are relatively recent,
represent several of the Company's target industries (including teleservices
outsourcing, consumer goods, telecommunications and utilities) and include
characteristics which are representative of other EDGE deployments, such as
extensive integration with computer telephony devices and system design
directed to support outbound and inbound telebusiness activities. The gross
revenues generated through March 31, 1997 in connection with each of the
deployments described below exceeded $1.0 million.
SITEL Corporation
Situation: SITEL Corporation ("SITEL") is one of the largest independent
teleservices outsourcing companies in the United States. SITEL creates,
manages and conducts large-scale, telephone-based direct sales and customer
service programs on an outsourced basis for large corporations using both
outbound and inbound call processing. After completing the implementation of
specialized predictive dialing and private branch exchange technology, SITEL
required comprehensive customer interaction software technology that was
flexible, allowed for rapid application deployment of multiple campaigns,
could be integrated with existing predictive dialers and automatic call
distributors, and was scalable for a range of hundreds to thousands of call
center agents.
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Solution: SITEL has licensed EDGE for over 900 users at seven different call
centers. SITEL is currently opening two new call centers and has licensed 400
additional users. EDGE's flexibility and functionality enabled SITEL to
rapidly add new customer applications, integrate with installed predictive and
automatic call distributor technology, and scale across multiple locations.
The Company's EDGE solution has been expanded from an initial license for
approximately 200 call center agents in 1993 to its current license for more
than 1,300 agents. SITEL has primarily used EDGE in its telecommunications
division for outbound calling, and is presently executing customer winback,
retention and loyalty campaigns for major telecommunications providers to
aggressively seek additional market share.
Bose Corporation
Situation: Bose Corporation ("Bose") is a leading manufacturer of innovative
stereo systems, automotive audio equipment and home stereo speakers. Bose
identified a need for an automated customer interaction system to promote the
rapid growth in sales of Bose Wave Radios through direct telesales. Bose
telesales agents processed inbound prospect and customer calls from extensive
print, radio, direct mail and television advertising, and conducted outbound
calls to prospects who have been sent information about Bose products. Bose
desired a complete automated system to support every phase of its telephony-
based marketing, sales and customer support programs.
Solution: The Bose project commenced in early July 1995 with an absolute
requirement to have the call center operational by October 1, 1995. The
Company worked with Bose to develop a scripted inbound sales guide and to
provide real-time access to marketing campaign information to facilitate order
capture, literature fulfillment, customer service and re-call management. The
EDGE solution provided computer-telephony links for automatic number
identification to facilitate presentation of customer data and directed number
identification services to present the appropriate campaign to the agent based
upon the advertisement or promotion to which the customer was responding. The
EDGE product also provided Bose agents with access to extensive product
information as part of a total sales, marketing and service solution.
Sprint PCS
Situation: The emergence of wireless technology has presented an alternative
method of communication using mobile technology, including mobile telephones,
pagers, and remote computing and fax. Sprint Spectrum L.P., which markets its
services as Sprint PCS, was formed in 1996 as a joint venture among
subsidiaries of each of Sprint Corporation, Tele-Communications, Inc., Comcast
Corporation and Cox Communications, Inc., in an effort to capitalize on the
personal communications services market. Sprint PCS's sales strategy consisted
of multiple sales channels, including retail stores, a field sales force, and
direct inside sales through a call center. Sprint PCS also required a common
customer database for all sales and marketing activities to facilitate
consistent customer communications. The launch of these services was a large
and complex undertaking with many interdependencies between nationwide
marketing programs and internal management information systems. Sprint PCS
utilized a variety of outside consultants and vendors including Ernst & Young
and Electronic Data Systems Corp. to assist in the evaluation, selection and
implementation of these systems.
Solution: The EDGE product constituted one of the main architectural
components for the customer information repository built using an Oracle
database for inside and outside application components. The EDGE
implementation was developed and deployed in under three months by the
Company's client services staff who worked with Ernst & Young, the overall
systems integrator. The EDGE suite of products was integrated with an Aspect
automatic call distributor for computer telephony and third-party software for
sales force automation. Additionally, EDGE was integrated to an external
mainframe system to improve eligibility verification and enrollment processes
for Sprint PCS. The Company's on-time delivery allowed Sprint PCS to perform
its integration testing with the other call center business applications and
begin its marketing programs on schedule.
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Pacific Gas and Electric Company
Situation: At the end of 1993 the Pacific Gas and Electric Company ("PG&E"),
one of the largest utilities in the United States, saw the need to develop a
plan for a world-class customer service operation to address competition
resulting from deregulation. PG&E's plan called for a company-wide
reorganization to consolidate customer service from 31 offices into four call
centers with over 800 agents and 18 district offices with more than 200
agents. The new call centers, along with PG&E's district offices, were
intended to enable PG&E to improve the effectiveness and efficiency of its
customer service to its approximately eight million residential and business
customers while reducing costs. To support its customer service plan, PG&E
required leading edge, scalable call center and customer service software
which could be rapidly deployed to meet aggressive reorganization timetables.
Solution: PG&E chose EDGE to be integrated with PG&E's telephony and legacy
systems. Since mid-1994, EDGE has acted as a front-end interface to PG&E's
legacy customer information system, enabling customer service agents during a
customer call to easily access information stored on the mainframe while
maintaining call center data on local servers. Based upon automatic number
identification, local area information is presented to PG&E agents
automatically via a screen notification. As the agents process calls, EDGE
allows for scripting, queues and other information to be presented in an easy
conversational flow. Due to the critical nature of providing continuous
utility services during natural disasters, the Company created and implemented
backup and recovery strategies for PG&E designed to detect database failure
and to automatically and transparently write to a mirror Oracle database.
SALES AND MARKETING
The Company markets its software and services in the United States through a
direct sales organization. The Company's sales representatives are focused by
industry expertise and geographical location. To support its sales efforts,
the Company conducts marketing programs including advertising, telemarketing,
direct mail, seminars, public relations and trade shows. As of March 31, 1997,
the Company's sales and marketing organization covering the United States
consisted of 46 employees.
The Company's direct sales force employs a consultative sales process,
working closely with prospective customers to understand and define their
needs and to determine how those needs are best addressed by the Company's
product offerings as well as complementary technology and services offered by
strategic systems integration and technology companies. In addition to
pursuing sales opportunities with new customers, the Company works closely
with its existing customer base to gain knowledge of their industries, and
focuses on selling new and enhanced products specifically tailored to such
existing customers' requirements, as well as licensing its products to
additional users within a customer. Because customer interaction software
applications are highly visible within an organization, the Company's sales
efforts are generally directed to the senior management of a customer.
The Company also works closely with strategic consulting and systems
integration companies such as Ernst & Young LLP, IBM, A.T. Kearney and
dbINTELLECT to increase market awareness and acceptance of the Company's
products. The Company has worked jointly with each of these companies by
providing software and services as part of a total customer software and
systems project in which the consulting or systems integration company also
provides services, software or hardware and may be responsible for the overall
coordination of the project. In addition, the Company has engaged in co-
marketing efforts with IBM and dbINTELLECT. These relationships have led to
the Company's introduction into strategic accounts, increased account
penetration and reduced sales cycle length. A key part of the Company's
strategy is to expand and enhance its existing relationships with leading
consulting and systems integration companies to capture additional market
share.
44
<PAGE>
The Company markets its software internationally in Europe, the Pacific Rim,
Canada, Mexico and Latin America through remarketing and distribution
relationships which it supplements with a direct sales force in certain
regions. The Company's principal remarketers and distributors include
Datapoint (U.K.) Limited (Europe), TeleDynamics BV (Holland), NCR Corporation
(France, Canada, Turkey and Southeast Asia), Kawasaki Steel Systems R&D
Corporation (Japan), Locus Corporation (Korea), TKM Communications, Inc.
(Canada), Telebusiness New Zealand Limited (New Zealand and Australia), and
Communicacoes, Processamento e Mecanismos de Automacao Ltda. (Brazil). As of
March 31, 1997, the Company had a direct sales force consisting of eight sales
and marketing professionals covering Europe from its London, England office,
and three sales professionals focused on Mexico and Latin America. The Company
is seeking to expand its existing international distribution network including
its indirect distribution channels and direct sales force in order to take
advantage of international growth opportunities.
PRODUCT DEVELOPMENT
The Company believes that to maintain its competitive advantage it must
enhance existing applications, introduce new products and features into the
market on a regular basis to keep pace with technological advances, meet
changing customer requirements and respond to competitors' products. To meet
these goals, the Company has invested in developing a comprehensive product
development process to define and evaluate rigorous requirements for product
functionality and quality. The Company's research and development engineers
work closely with its marketing and support personnel and its customers to
design enhancements and new products to assure that product evolution reflects
developments in the marketplace and trends in client requirements.
The Company intends to continue its product research and development efforts
in order to meet the complex and changing requirements of mid-size and large-
scale call centers. The Company recently released an enhanced version of EDGE
which includes advanced relational database capabilities, integration to IBM's
MQ messaging middleware and support of Novell TSAPI and Aspect Application
Bridge telephony middleware. In addition, the Company is planning releases of
EDGE during the second half of 1997 to support Microsoft NT 4.0 and SQL Server
release 6.5 and Microsoft Active X, and to integrate case-based reasoning
technology. In the area of computer-telephony integration, the Company is
adding support for Genesys T-Server and Rockwell Spectrum and enhanced blended
agent and software-based dialing functionality. In addition, the Company has
developed and is currently testing products with Internet and corporate-based
intranet capabilities, which will enable call centers to integrate with sites
on the World Wide Web and allow applications to be deployed over an intranet
with a browser user interface. These new releases will support multiple
integrated channels of customer interaction including voice, interactive voice
response, e-mail and the World Wide Web.
The Company is making long-term investments to enhance the componentization
and object orientation of EDGE's underlying architecture. The Company is
utilizing emerging industry standards such as Microsoft COM/DCOM, CORBA
compliant object technology, Java language and supporting Java technology. The
Company believes that these investments will provide a number of important
benefits including the ability to migrate easily to new components in the
future in a "plug and play" mode, to shield business objects and customer
applications from the underlying technology infrastructure, and to seamlessly
integrate with other business applications that adhere to the same standards.
As of March 31, 1997, the Company's product development staff consisted of
51 employees. In addition, the Company augments its internal research and
development organization with the services of an outside consulting firm. The
Company's total expenses for product development for the years ended
December 31, 1994, 1995 and 1996 were $6.1 million, $6.8 million and $6.4
million, respectively, and represented 33.3%, 28.6% and 24.3% of total
revenues in these periods, respectively. The Company's total expenses for
product development for the three months ended March 31, 1997 were $1.5
million and represented 20.6% of total revenues for such period. The Company
expects that it will continue to commit substantial resources to product
development in the future.
45
<PAGE>
COMPETITION
The market for telemarketing, telesales and customer service software is
intensely competitive, rapidly evolving and highly sensitive to new product
introductions or enhancements and marketing efforts by industry participants.
The Company competes with a large number of competitors ranging from internal
information systems departments to packaged software application vendors. The
Company believes that as the United States and international software markets
continue to grow, a number of new vendors will enter the market and existing
competitors and new market entrants will attempt to develop applications
targeting additional markets.
Management believes that it competes in most of its markets with the
internal information systems departments of potential customers who desire to
develop their own customer interaction software rather than acquire software
from a third-party vendor such as the Company. The Company believes that the
principal software companies with which it competes are Versatility Inc. for
telesales and telemarketing automation software, and The Vantive Corporation,
Clarify Inc. and Scopus Technology, Inc. for teleservices automation software.
The Company also competes on occasion with systems integration firms. Among
the Company's current and potential competitors are also a number of large
hardware and software companies that may develop or acquire products that
compete with the Company's products. Competitors have established and may in
the future establish cooperative relationships or alliances which may increase
their ability to provide superior software solutions or services. In addition,
consolidation within the call center customer interaction software industry
could create new or stronger competitors. Increased competition resulting from
new entrants, call center customer interaction software industry
consolidation, cooperative relationships or alliances could result in price
reductions, reduced operating income or loss of market share, any of which
could materially adversely affect the Company's business, operating results or
financial condition. Many of the Company's current and potential competitors
have significantly greater financial, technical, marketing, service, support
and other resources, generate higher revenues and have greater name
recognition than the Company. There can be no assurance that the Company's
current or potential competitors will not develop products comparable or
superior to those developed by it or adapt more quickly than the Company to
new technologies, evolving industry trends or changing client requirements.
There can be no assurance that the Company will be able to compete effectively
against current or future competitors or that competitive pressures faced by
the Company would not materially and adversely affect its business, operating
results or financial condition.
The Company believes that the principal competitive factors in its industry
include product performance and functionality, flexibility, ease of use,
adherence to open standards, scalability, ability to integrate external data
sources, speed of deployment, client service, customer support and price.
Although the Company believes that it currently competes favorably with
respect to such factors, there can be no assurance that it will be able to
maintain its competitive position against current and potential competitors,
especially those with greater financial, technical, marketing, service,
support and other resources than the Company, or that competitive pressures
will not materially and adversely affect the Company's business, operating
results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, nondisclosure agreements and technical measures to
protect its proprietary rights. The Company typically enters into
confidentiality or license agreements with its employees, distributors,
clients and potential clients, and limits access to and distribution of its
software, documentation and other proprietary information. There can be no
assurance that these steps will be adequate to deter misappropriation or
independent third-party development of its technology or to prevent an
unauthorized third party from obtaining or using information that the Company
regards as proprietary. In addition, the laws of some foreign countries do not
protect or enforce proprietary rights to the same extent as do the laws of the
46
<PAGE>
United States. Policing unauthorized use of the Company's products is
difficult and, while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. Although the
Company believes that its products and technology do not infringe on any
existing proprietary rights of others, the use of patents to protect software
has increased, and there can be no assurance that third parties will not
assert infringement claims in the future or, if infringement claims are
asserted, that such claims will be resolved in the Company's favor. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms favorable to the Company or at all, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Any infringement claims resolved against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. In addition, litigation may be necessary in the future to protect
the Company's trade secrets or other intellectual property rights, or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company has entered into agreements with a small number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by
or against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. The escrow agreements, and any that the
Company may enter into in the future, may increase the possibility of
misappropriation by third parties. In addition, the Company utilizes a third-
party contractor for selected product development projects which may also
increase the possibility of misappropriation by third parties.
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal,
state and foreign law. The Federal Telephone Consumer Protection Act required
the Federal Communications Commission to create regulations protecting
residential telephone subscribers from unwanted telephone solicitations.
Certain states have enacted similar laws limiting access to telephone
subscribers who object to receiving solicitations. Although compliance with
these laws may limit the potential use of the Company's products, the
Company's products can be programmed to operate in compliance with these laws
through the use of appropriate calling lists and calling campaign time
parameters. There can be no assurance, however, that future legislation
further restricting telephone solicitation practices, if enacted, would not
materially adversely affect the Company.
EMPLOYEES
As of March 31, 1997, the Company employed 221 employees, consisting of 51
employees in research and development, 57 employees in sales and marketing, 62
employees in consulting services, 21 employees in client support services and
30 employees in finance and administration. Of these, 23 are located in Europe
and the remainder are located in the United States. None of these employees is
covered by any collective bargaining agreements. The Company believes that its
relationship with its employees is good.
47
<PAGE>
FACILITIES
The Company leases its corporate headquarters in Shelton, Connecticut, which
consists of approximately 25,000 square feet of office space. The lease for
the Shelton, Connecticut office has a term ending on March 31, 2004. In
addition, the Company maintains an office in Irvine, California with a lease
for approximately 22,000 square feet of office space. The lease for the
Irvine, California office has a term ending on January 19, 2001. In support of
its direct sales and service and support operations, the Company leases
offices in three other locations in the United States, as well as an office in
London, England. These offices comprise between 1,200 and 6,000 square feet
each and have lease terms ending between December 31, 1997 and April 30, 2001.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation in the normal
course of business relating to claims arising out of its operations. The
Company is not currently involved in any litigation which, in management's
opinion, would have a material adverse effect on its business, operating
results or financial condition.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages and their
respective positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Albert R. Subbloie, Jr........... 37 President, Chief Executive Officer and
Director
Gary R. Martino.................. 37 Chairman of the Board, Chief Financial
Officer,
Treasurer, Assistant Secretary and
Director
Andrei Poludnewycz............... 37 Executive Vice President--Technology,
Secretary and Director
James S. Aufdemberge............. 44 Senior Vice President--Sales and
Marketing
Paul G. Frederick................ 37 Senior Vice President--Client Services
James E. Anderson................ 51 Vice President--International
Operations
David G. Caldeira................ 40 Vice President--Products Division
Michael P. McGroarty............. 36 Vice President and General Counsel,
Assistant Secretary
Paul J. Schmidt.................. 37 Vice President--Applied Technologies
and Director
David J. Callard (1)(2).......... 58 Director
Thomas F. Hill (1)............... 51 Director
Donald P. Miller (2)............. 66 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Each officer serves at the discretion of the Board of Directors. Each
director holds office until his successor is duly elected and qualified or
until his resignation or removal. There are no family relationships among any
of the directors or executive officers of the Company.
Following this Offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
Board will consist of three Class I Directors (Messrs. Schmidt, Miller and
Hill), two Class II Directors (Messrs. Poludnewycz and Subbloie) and two Class
III Directors (Messrs. Callard and Martino). At each annual meeting of
shareholders, a class of directors will be elected for a three-year term to
succeed the directors or director of the same class whose terms are then
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors expire upon the election and qualification of successor directors at
the annual meeting of shareholders held during the calendar years 1998, 1999
and 2000, respectively.
Mr. Subbloie has been the President, Chief Executive Officer and a Director
of the Company since its incorporation in 1990. Prior to incorporation of the
Company, Mr. Subbloie was a founding partner of the Partnership with Messrs.
Martino and Poludnewycz, which engaged in the business of consulting and
development of computer software. From 1982 to 1984, Mr. Subbloie was employed
with the consulting division of Arthur Andersen & Co., a professional
accounting firm ("Arthur Andersen"), and specialized in distribution and
manufacturing consulting.
49
<PAGE>
Mr. Martino has been a Director and officer of the Company since its
incorporation in 1990. In his capacity as a director, he has served as the
Chairman of the Board of Directors since the Company's incorporation in 1990.
In his capacity as an officer, he has served as Treasurer, Chief Financial
Officer and Assistant Secretary. Prior to incorporation of the Company, Mr.
Martino was also a founder of the Partnership with Messrs. Subbloie and
Poludnewycz. From 1982 to 1984, Mr. Martino was employed with the consulting
division of Arthur Andersen and specialized in financial application
consulting.
Mr. Poludnewycz has been an officer and a Director of the Company since its
incorporation in 1990. Mr. Poludnewycz has served as Secretary of the Company
since its incorporation in 1990. From 1992 to 1994, he served as Executive
Vice President--Products Division and subsequently served as Executive Vice
President--Technology. Prior to incorporation of the Company, Mr. Poludnewycz
was a founding partner of the Partnership with Messrs. Subbloie and Martino.
From 1982 to 1984, Mr. Poludnewycz was employed with the consulting division
of Arthur Andersen and specialized in developing computer applications for the
mid-range hardware platforms of IBM.
Mr. Aufdemberge served as Vice President--Sales of the Company from 1994
through 1995 and has served as Senior Vice President--Sales and Marketing
since 1996. Prior to joining the Company in 1994, Mr. Aufdemberge was employed
for ten years with Dun & Bradstreet Software, Inc. ("Dun & Bradstreet"), a
financial, human resources and manufacturing applications software company.
Mr. Aufdemberge's primary responsibilities with Dun & Bradstreet were sales
and support services.
Mr. Frederick has served as Senior Vice President--Client Services of the
Company since 1995. Prior to joining the Company, he was employed from 1991 to
1995, most recently as associate partner, with a division of Andersen
Consulting LLP ("Andersen Consulting") which specialized in large scale
systems integration. Mr. Frederick's primary responsibilities with Andersen
Consulting included project and practice management.
Mr. Anderson served as Vice President--Business Development of the Company
from 1994 to 1995 and has since served as Vice President--International
Operations. From 1970 to 1994, Mr. Anderson was employed by IBM as a software
product planning manager, a branch sales manager and the Worldwide Market
Development Manager for IBM's CallPath product.
Mr. Caldeira has been employed with the Company in several capacities since
its incorporation in 1990. He served as Vice President--Sales from 1990 to
1992 and as Vice President--Business Development from 1992 to 1994. He has
served in his present position of Vice President--Products Division since
1994. Mr. Caldeira joined the Partnership in 1989 as a Regional Sales Manager
and was formerly employed as a Senior Manager with the consulting division of
Arthur Andersen where he specialized in systems for mid-size companies.
Mr. McGroarty joined the Company in 1996 as Vice President and General
Counsel, and also serves as an Assistant Secretary. From 1990 to 1996, Mr.
McGroarty was an attorney with the law firm of Fulbright & Jaworski L.L.P.
Mr. Schmidt has served as an officer and Director of the Company since its
incorporation in 1990. From 1990 to 1994, he served as Vice President--Client
Services and has since served as Vice President--Applied Technologies. From
1985 to 1990, Mr. Schmidt was employed as a Vice President at the Partnership
and specialized in client services. From 1982 to 1985, Mr. Schmidt worked for
Andersen Consulting and specialized in financial, distribution and
manufacturing consulting.
Mr. Callard has served as a Director of the Company since March 1992. He has
served as President of Wand Partners Inc. ("WPI") since 1991. WPI and its
affiliates are principally engaged in the business of direct private equity
investments. Mr. Callard serves on the Company's Board of Directors pursuant
to a letter agreement, as amended, between WPI and the Company, which permits
WPI to designate two
50
<PAGE>
members of the Company's Board of Directors. The letter agreement will
terminate upon completion of this offering. See "Certain Transactions." Prior
to joining WPI, Mr. Callard was a Managing Director in mergers and
acquisitions with the investment banking firm of Alex. Brown & Sons
Incorporated. Mr. Callard has also served as a director since 1974 of Waverly,
Inc., a medical publisher, and as a director since 1992 of Chartwell Re Corp.,
a property and casualty reinsurer.
Mr. Hill has served as a Director of the Company since March 1991. He has
served as a director of WPI since 1990 and his present principal occupation is
as President of Thomas F. Hill, Inc., a management consulting company. Since
1994, he has also served as a director of Nestor, Inc., a company which
develops neural network pattern recognition technology. Mr. Hill serves on the
Company's Board of Directors pursuant to a letter agreement, as amended,
between WPI and the Company which permits WPI to designate two members of the
Company's Board of Directors. The letter agreement will terminate upon
completion of this offering. See "Certain Transactions."
Mr. Miller has served as a Director of the Company since March 1991. From
1970 to 1986 Mr. Miller was President and Chief Executive Officer of Posi-Seal
International, Inc., a manufacturer of industrial valves. He is presently
retired. Mr. Miller has served as a director of the following companies since
the dates indicated: Raytech Corp., a manufacturing holding company, since
1986; Saab Financial Receivable Corp., an automotive finance company and
wholly-owned subsidiary of Saab-Scania Corp., since 1991; and Smart Games
Interactive, Inc., a manufacturer of interactive consumer electronic systems,
since 1993.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee, in conjunction with the entire Board of Directors,
makes recommendations concerning salaries and incentive compensation for
employees of and consultants to the Company. It is comprised of Messrs.
Callard and Hill. The Audit Committee, in conjunction with the entire Board of
Directors, reviews the results and scope of the audit and other services
provided by the Company's independent public accountant. It is comprised of
Messrs. Callard and Miller.
DIRECTOR COMPENSATION
The Company reimburses each member of the Board of Directors for expenses
incurred in connection with attending Board and committee meetings. Mr. Miller
receives $2,500 for attendance at each meeting of the Board, unless his
attendance is via telephone. Mr. Hill receives a fixed fee of $10,000 per
year. Directors who are employees of the Company are not entitled to receive
compensation in their capacities as directors. For the fiscal year ended
December 31, 1996, non-employee directors received the following compensation:
(i) Thomas F. Hill--$20,000 ($10,000 for fiscal year 1995 and $10,000 for
fiscal year 1996) and (ii) Donald P. Miller--$7,500.
Pursuant to the Company's 1996 Non-Employee Directors Stock Option Plan,
each non-employee director receives a one-time grant of a stock option to
purchase 16,875 shares of Common Stock of the Company, subject to certain
adjustments, at the fair market value thereof on the date of grant. Each such
stock option is fully exercisable on the date that is six months following the
date of grant and expires ten years after the date of grant.
Pursuant to the 1996 Non-Employee Directors Stock Option Plan, Messrs.
Callard, Hill and Miller each received options to purchase 16,875 shares of
Common Stock at an exercise price of $7.11 on March 14, 1996.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth certain information
relating to compensation earned by the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers of the
Company whose total salary and bonus exceeded $100,000 (collectively, the
"Named Executive Officers") for services rendered in all capacities to the
Company for the fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION(1)
-------------------- ----------------
SHARES OF COMMON
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)(2) COMPENSATION ($)
--------------------------- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Albert R. Subbloie, Jr. ................... 225,000 18,750 123,750 25,104(3)
President and Chief Executive Officer
Gary R. Martino............................ 225,000 18,750 123,750 22,399(3)
Chairman of the Board, Chief Financial
Officer, Treasurer and Assistant Secretary
Andrei Poludnewycz......................... 174,600 -- 22,500 11,569(3)
Executive Vice President--Technology and
Secretary
Paul G. Frederick.......................... 179,375 19,047 -- 899(4)
Senior Vice President--Client Services
James S. Aufdemberge....................... 152,500 74,645 -- 995(5)
Senior Vice President--Sales and Marketing
</TABLE>
- --------
(1) The Company did not make any restricted stock awards or long term
incentive plan payouts in the fiscal year ended December 31, 1996.
(2) The Company did not grant any stock appreciation rights ("SARs") in the
fiscal year ended December 31, 1996. The number of shares presented
reflects a 2.25-for-1 split of the Common Stock to be effected prior to
the closing of this offering.
(3) Amount includes term life insurance premiums paid in the amounts of
$3,524, $2,464 and $2,562 for Messrs. Subbloie, Martino and Poludnewycz,
respectively, and the benefit derived from the interest-free loans made by
the Company to such officers in the amounts of $21,580, $19,935, and
$9,007, respectively. The benefit derived from the interest-free loans was
calculated by taking the December 31, 1996 prime rate of 8.25% and
applying it to the January 1, 1996 through December 31, 1996 month-end
balances. See "Certain Transactions."
(4) Amount includes Company contributions or payments of (i) $667 to Mr.
Frederick's 401(k) plan and (ii) $232 of term life insurance premiums.
(5) Amount includes Company contributions or payments of (i) $763 to Mr.
Aufdemberge's 401(k) plan and (ii) $232 of term life insurance premiums.
52
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options to the Named
Executive Officers during the fiscal year ended December 31, 1996. No SARs
were granted during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
------------------------------------------------------
VALUE AT ASSUMED
SHARES OF % OF TOTAL ANNUAL RATES OF STOCK
COMMON STOCK OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED(3) FISCAL YEAR(4) PER SHARE(3) DATE 5% 10%
---- ------------- -------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Albert R. Subbloie, Jr.. 56,250 11.2% $7.11 3/14/06(5) $ 251,600 $ 637,500
67,500 13.4 8.00 7/11/06(6) 339,600 860,600
Gary R. Martino......... 56,250 11.2 7.11 3/14/06(5) 251,600 637,500
67,500 13.4 8.00 7/11/06(6) 339,600 860,600
Andrei Poludnewycz...... 22,500 4.5 8.00 7/11/06(6) 113,200 286,900
</TABLE>
- --------
(1) All options were granted at fair market value on the date of the grant as
determined by the Board of Directors of the Company.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth. Actual gains, if any,
on stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the individuals.
(3) The number of shares presented reflects a 2.25-for-1 split of the Common
Stock to be effected prior to the closing of this offering.
(4) Based on options to purchase an aggregate of 502,875 shares of Common
Stock granted to all employees of the Company in fiscal 1996.
(5) All 56,250 options became exercisable on March 14, 1996.
(6) The dates of exercisability for the options are as follows: (i) 25% on
July 11, 1997; (ii) 25% on July 11, 1998; (iii) 25% on July 11, 1999; and
(iv) 25% on July 11, 2000.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers as
of December 31, 1996. No stock options were exercised by any of the Named
Executive Officers during fiscal year 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VALUE OF UNEXERCISED
COMMON STOCK UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL YEAR-
AT FISCAL YEAR-END (#)(1) END ($)(1)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Albert R. Subbloie, Jr...... 131,287 67,500 233,450 --
Gary R. Martino............. 131,287 67,500 233,450 --
Andrei Poludnewycz.......... 37,518 22,500 116,725 --
Paul G. Frederick........... 18,750 37,498 36,667 73,333
James S. Aufdemberge........ 42,187 42,187 131,250 131,250
</TABLE>
- --------
(1) The numbers of shares and values of options presented reflects a 2.25-for-
1 split of the Common Stock to be effected prior to the closing of this
offering.
(2) Calculated on the basis of the difference between the fair market value of
the underlying securities at fiscal year end, as determined by the
Company's Board of Directors, and the exercise price of the option.
53
<PAGE>
STOCK OPTION PLANS
1991 Amended and Restated Stock Option Plan. The Company's 1991 Amended and
Restated Stock Option Plan (the "1991 Plan") provides for the grant of options
to purchase a maximum of 900,000 shares of Common Stock. As of March 31, 1997,
6,007 shares had been issued pursuant to the exercise of options granted under
the 1991 Plan, options for 840,224 shares were outstanding. The scheduled
termination date for the 1991 Plan is October 29, 2001; however, the
termination of the 1991 Plan will not affect any options previously granted
thereunder. The 1991 Plan provides for grants to employees of either or both
incentive stock options and nonqualified stock options. On March 14, 1996 the
Board of Directors resolved that no further options may be granted or issued
under the 1991 Plan.
The 1991 Plan is currently administered by the Board of Directors, which is
authorized to delegate its administrative duties to a committee. Subject to
the provisions of the 1991 Plan, the Board of Directors has the authority to
select the employees to whom options are granted and determine the terms of
each option.
1996 Non-Employee Directors Stock Option Plan. The Company's 1996 Non-
Employee Directors Stock Option Plan (the "1996 Non-Employee Directors Plan")
provides for the grant of options to purchase a maximum of 135,000 shares of
Common Stock. As of March 31, 1997, no shares had been issued under the 1996
Non-Employee Directors Plan, options for 50,625 shares were outstanding and
84,375 shares remained available for future issuance under the 1996 Non-
Employee Directors Plan. All options granted under the 1996 Non-Employee
Directors Plan must be granted by March 14, 2006, the scheduled termination
date of the 1996 Non-Employee Directors Plan; however, the termination of the
1996 Non-Employee Directors Plan will not affect any options previously
granted thereunder. The 1996 Non-Employee Directors Plan provides for grants
to non-employee directors of the Company ("Non-Employee Directors") of
nonqualified stock options.
The 1996 Non-Employee Directors Plan is administered by the Board of
Directors which is authorized to delegate its administrative duties to a
committee. Each Non-Employee Director receives at the first Board of Directors
meeting attended, a one-time grant of an option to purchase 16,875 shares of
Common Stock at an exercise price equal to the fair market value of the shares
on the grant date. Each option becomes fully exercisable on the date that is
six months following the grant date. All options expire ten years after the
grant date; however, the Board of Directors may limit the exercise period if
deemed necessary to comply with applicable law.
1996 Employee and Consultant Stock Option Plan. The Company's 1996 Employee
and Consultant Stock Option Plan (the "1996 Employee and Consultant Plan")
provides for the grant of options to purchase a maximum of 900,000 shares of
Common Stock. As of March 31, 1997, no shares had been issued under the 1996
Employee and Consultant Plan, options for 646,326 shares were outstanding and
253,674 shares remained available for future issuance. All options granted
under the 1996 Employee and Consultant Plan must be granted by March 14, 2006,
the scheduled termination date of the 1996 Employee and Consultant Plan,
however, the termination of the 1996 Employee and Consultant Plan will not
affect any options previously granted thereunder. The 1996 Employee and
Consultant Plan provides for grants to employees of the Company and certain of
its affiliates of either or both incentive stock options and nonqualified
stock options and grants of nonqualified stock options only to non-employee
consultants to the Company and certain of its affiliates.
The 1996 Employee and Consultant Plan is administered by the Board of
Directors which is authorized to delegate its administrative duties to a
committee. Subject to the provisions of the 1996 Employee and Consultant Plan,
the Board of Directors has the authority to select the employees and
consultants to whom options are granted and determine the terms of each
option.
54
<PAGE>
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan (the
"Purchase Plan") is designed to allow eligible employees of the Company and
designated subsidiaries to purchase shares of Common Stock each year through
accumulated payroll deductions under the Purchase Plan. A reserve of 450,000
shares of Common Stock has been established for this purpose.
Payroll deductions may not exceed 10% of the annual salary or wages paid by
the Company to the employee, including contributions to his 401(k) but
excluding any bonus, fee, overtime, severance or credits. The purchase price
per share will be an amount equal to eighty-five percent (85%) of (i) the fair
market value of a share of the Common Stock on the offering date or (ii) the
fair market value of a share of Common Stock on the exercise date. Employees
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment with
the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
eliminate to the fullest extent permissible under Connecticut law the liability
of its directors to the Company or its shareholders for monetary damages. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission. In addition, the Company's Certificate
of Incorporation and Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by Connecticut law.
There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company was comprised of Messrs. Callard
and Hill for the fiscal year ended December 31, 1996. Messrs. Subbloie,
Martino, Poludnewycz and Schmidt also participated in the deliberations of the
Board of Directors concerning executive officer compensation. Messrs. Callard
and Hill are affiliated with the Wand Group (as defined below) which have
engaged in certain financing and consulting transactions with the Company
during fiscal years 1994, 1995 and 1996. Messrs. Subbloie, Martino, Poludnewycz
and Schmidt also engaged in certain transactions with the Company during fiscal
years 1994, 1995 and 1996. See "Certain Transactions."
CERTAIN TRANSACTIONS
The Company entered into an agreement with Wand Partners L.P. ("Wand
Partners"), dated as of January 2, 1995 (the "Monitoring Agreement") pursuant
to which Wand Partners provides consulting services to the Company for a fee of
$40,000 per year payable in equal quarterly installments. The Monitoring
Agreement will terminate upon the completion of this offering. David J. Callard
is the President and a director of WPI and Wand (IMA) Inc. and Thomas F. Hill
is a director of WPI. WPI is a general partner of Wand/IMA Investments, L.P.
("Wand-I") and Wand/IMA Investments II L.P. ("Wand-II"). Wand (IMA) Inc. is a
general partner of Wand-II and Wand/IMA Investments III L.P. ("Wand-III").
Messrs. Callard and Hill are directors of the Company. During 1994, 1995 and
1996, the Company paid financial advisory and consulting fees in the aggregate
amount of $50,000, $50,000 and $40,000, respectively, to WPI and its
affiliates. In addition, the Company paid a fee of $100,000 to Wand (IMA) Inc.
in 1996 in connection with an equity financing transaction. Wand-I, Wand-II,
Wand-III, WPI, Wand (IMA) Inc. and Bruce W. Schnitzer are sometimes referred to
herein collectively as the "Wand Group."
The Company sold the Wand Note to Wand-I on December 21, 1990 and amended the
Wand Note on October 29, 1991. The Company used the proceeds of the Wand Note
for working capital purposes. The Wand Note is subordinated and unsecured, and
has an outstanding principal amount of $250,000 due
55
<PAGE>
and payable on December 21, 1997. Interest on the Wand Note is payable
quarterly on each March 21, June 21, September 21 and December 21, until
maturity at the rate of 12.0% per annum. During 1994, 1995 and 1996, the
Company made principal payments on the Wand Note in the amount of $0, $250,000
and $500,000, respectively.
In connection with the issuance of the Wand Note, a letter agreement, dated
December 21, 1990, as amended (the "Letter Agreement"), was entered into by
the Company, Wand-I, WPI, and certain shareholders of the Company, including
Albert R. Subbloie, Jr., Gary R. Martino, Andrei Poludnewycz and Paul J.
Schmidt, each of whom is a director, executive officer and shareholder of the
Company. The Letter Agreement provides, among other things, that the Wand
Group shall have the right to designate up to two members to the Board of
Directors of the Company until such time as there has been an Initial Public
Offering (as defined therein). Currently Messrs. Callard and Hill are such
designees. The Letter Agreement also provided for the payment of certain
financial advisory fees, which provisions were superseded by the Monitoring
Agreement. The Letter Agreement also grants to Wand-I a right of first refusal
to purchase securities issued by the Company below a certain price and certain
take-along rights. The Letter Agreement was amended on June 1, 1994 to change
certain provisions relating to take-along rights, to delete certain
individuals as parties to the Letter Agreement and to make certain other
definitional changes set forth therein. The Letter Agreement will terminate
upon completion of this offering.
On June 1, 1994, Messrs. Martino, Subbloie, Schmidt and Poludnewycz sold an
aggregate of 265,000 shares of Common Stock to Mercury Asset Management plc,
acting as agent for certain of its discretionarily managed accounts, for an
aggregate purchase price of $1,060,002. The Company was a party to the stock
purchase agreement relating to the foregoing transaction pursuant to which the
Company granted certain registration rights to the purchasers. The Company did
not receive any tangible consideration in connection with this transaction.
On June 1, 1994, Messrs. Martino, Subbloie, Schmidt and Poludnewycz sold an
aggregate of 66,249 shares of the Common Stock to Mr. Callard, Bruce W.
Schnitzer and Malcolm P. Appelbaum for an aggregate purchase price of
$264,996. Mr. Schnitzer is the majority shareholder and a director and officer
of WPI and Wand (IMA) Inc., and may be deemed to beneficially own the shares
of Common Stock held by the Wand Group. The Company granted registration
rights to the purchasers in connection with the transaction. The Company also
entered into certain amendments to the registration rights provisions of
outstanding Common Stock purchase warrants, the Letter Agreement and
registration rights provisions of certain other agreements between the Company
and Wand-I, Mr. Hill and WPI.
On November 16, 1994, the Company issued 250,000 shares of Common Stock to
Wand-I at a price of $4.00 per share. In connection with such financing, the
Company entered into certain amendments to outstanding Common Stock purchase
warrants held by Wand-I, Mr. Hill and WPI.
On March 31, 1995, the Company issued to Wand-I and Wand-II, 3,750 and 750
shares of Series A Senior Convertible Preferred Stock, no par value ("Series A
Preferred Stock"), respectively, for an aggregate consideration of $4,500,000.
The Series A Preferred Stock has a stated value of $1,000 per share and is
presently convertible into 920,433 shares of Common Stock at a conversion
price of $4.89 per share.
On May 2, 1995, the Partnership, whose general partners are Messrs. Martino,
Subbloie and Poludnewycz, sold an office building which had been formerly
leased by the Company to an unrelated third party. In connection with such
sale, the Partnership utilized the proceeds from the sale to repay a portion
of the outstanding commercial mortgage loan secured by the facility. The
amount of the sale price was less than the outstanding balance of the mortgage
loan and the Partnership reissued a promissory note to the Bank in an amount
equal to the remaining balance of $475,000, bearing interest at a floating
rate equal to the Bank's prime rate plus one and one-half percent (1.5%) (the
"Restated Partnership Note"). The Restated Partnership Note was payable in
equal monthly installments of $15,833 commencing June 1, 1995 and ending
November 1, 1997. In connection with such sale and refinancing, the Company's
lease
56
<PAGE>
with respect to the facility was terminated and the Company entered into a
lease termination agreement with the Partnership pursuant to which the Company
agreed to make payments in an amount equal to the debt service on the Restated
Partnership Note. The amount of net rent, operating expenses and other costs
paid by the Company to, or on behalf of, the Partnership during fiscal years
1994 and 1995 was $223,000 and $208,600, respectively. The previously existing
mortgage loan had been guaranteed by the Company, and the Company confirmed
its guaranty of the Restated Partnership Note in connection with the sale of
the office building.
On October 26, 1995, the Company entered into the Loan and Security
Agreement with the Bank pursuant to which the Bank provided the Line of Credit
in the maximum amount of $6.0 million and the Term Loan in the amount of $2.5
million. The Company used a portion of the proceeds from the bank financing to
prepay all of its obligations under the lease termination agreement and the
Partnership repaid in full the Restated Partnership Note. Messrs. Subbloie,
Martino and Poludnewycz guaranteed the payment of all of the indebtedness
under the Loan and Security Agreement and agreed to subordinate the payment of
any debt payable to such officers to the debt owed to the Bank.
On November 1, 1996, the Company issued 354 and 3,996 shares of its Series B
Senior Convertible Preferred Stock, no par value ("Series B Preferred Stock"),
to Wand-II and Wand-III, respectively, for an aggregate consideration of
$4,350,000. The Series B Preferred Stock has a stated value of $1,000 per
share and is presently convertible into 611,728 shares of Common Stock at a
conversion price of $7.11 per share.
As of January 1, 1994, the Company had borrowed $50,000 from Mr. Subbloie.
During 1994, the Company borrowed $481,500, $387,500 and $273,000 from Messrs.
Subbloie, Martino and Poludnewycz, respectively, and repaid $437,000, $377,500
and $273,000 to such individuals, respectively, resulting in outstanding
balances of $94,500, $10,000 and $0 as of December 31, 1994 for such
individuals, respectively. During 1995, the Company borrowed $421,500,
$119,200 and $273,000 from Messrs. Subbloie, Martino and Poludnewycz, and
repaid $356,500, $114,000 and $170,000 to such individuals, respectively,
resulting in outstanding balances of $159,500, $15,200 and $103,000 as of
December 31, 1995 for such individuals, respectively. During 1996, the Company
repaid the outstanding balances of the loans ($159,500, $15,200 and $103,000
to Messrs. Subbloie, Martino and Poludnewycz, respectively). The loans were
unsecured, subordinated and due on demand, and were used by the Company for
working capital purposes. During 1996, interest was charged on the 1994, 1995
and 1996 net borrowings under the loans at an effective interest rate of 9.5%
and all interest due for years 1994, 1995 and 1996 was paid by the Company in
1996.
As of January 1, 1994, Messrs. Subbloie, Martino and Poludnewycz had
received interest-free unsecured personal loans from the Company aggregating
approximately $127,300, $105,600 and $21,700, respectively. During 1994, 1995
and 1996 the Company made additional interest-free unsecured personal loans to
each of Messrs. Subbloie, Martino and Poludnewycz in the respective amounts of
$64,900, $17,700 and $28,800 for Mr. Subbloie; $68,300, $14,000 and $34,700
for Mr. Martino; and $41,300, $4,800 and $41,300 for Mr. Poludnewycz. No
amounts were repaid on the loans during 1994, 1995 or 1996 by any of Messrs.
Subbloie, Martino or Poludnewycz, and as a result the amounts outstanding at
December 31 of each such year were $192,200, $209,900 and $238,700 for Mr.
Subbloie; $173,900, $187,900 and $222,600 for Mr. Martino; and $63,000,
$67,800 and $109,100 for Mr. Poludnewycz, which amounts were the greatest
principal amounts outstanding at any time during such years for such officers.
Messrs. Subbloie, Martino and Poludnewycz executed promissory notes effective
as of December 31, 1996 equal
to the outstanding balance of their aggregate loans, which were $238,700,
$222,600 and $109,100, respectively (collectively, the "1996 Loans"). The 1996
Loans bear interest at 8.25% per annum, are unsecured and provide for the
payment of all principal and accrued interest thereon on the earlier to occur
of an initial public offering or June 1, 1999. The 1996 Loans represented
advances made by the Company which were used by Messrs. Subbloie, Martino and
Poludnewycz for personal expenses unrelated to the business of the Company.
57
<PAGE>
On February 28, 1997, the Company made unsecured personal loans of $57,000,
$58,500 and $34,000 to each of Messrs. Subbloie, Martino and Poludnewycz,
respectively (collectively, the "1997 Loans"). The 1997 Loans bear interest at
8.25% per annum and provide for the payment of all principal and accrued
interest thereon on the earlier of June 1, 1999 or an initial public offering
of Common Stock of the Company. The aggregate outstanding amount of the 1996
Loans and 1997 Loans for each of Messrs. Subbloie, Martino and Poludnewycz is
$295,700, $281,100 and $143,100, respectively. The principal amount and
accrued interest of the 1996 Loans and 1997 Loans will be repaid in full by
such officers upon the completion of this offering. The 1997 Loans represented
advances made by the Company which were used by Messrs. Subbloie, Martino and
Poludnewycz for personal expenses unrelated to the business of the Company.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1997 and as adjusted
to reflect the sale of the shares offered hereby (i) by each person or entity
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) by each director of the Company, (iii) by each of
the Named Executive Officers, (iv) by all directors and executive officers of
the Company as a group, and (v) by other Selling Shareholders. Unless
otherwise indicated below, to the knowledge of the Company, each person or
entity listed below maintains a mailing address c/o Information Management
Associates, Inc., One Corporate Drive, Suite 414, Shelton, Connecticut 06484
and has sole voting and investment power over the shares of Common Stock shown
as beneficially owned, except to the extent authority is shared by spouses
under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED
TO OFFERING(1) AFTER OFFERING(1)(2)
----------------------- -----------------------
DIRECTORS, EXECUTIVE NUMBER OF
OFFICERS AND FIVE SHARES
PERCENT SHAREHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------- ------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Wand Group (3).......... 3,516,913 55.0% 600,000 2,916,913 31.7%
630 Fifth Avenue, Suite
2435
New York, NY 10111
Albert R. Subbloie, Jr.
(4).................... 682,726 10.5 66,000 616,726 6.6
Gary R. Martino (5)..... 680,476 10.4 66,000 614,476 6.6
Andrei Poludnewycz (6).. 455,304 7.1 43,602 411,702 4.5
Paul J. Schmidt (7)..... 200,508 3.1 15,000 185,508 2.0
Thomas F. Hill (8)...... 68,661 1.1 6,000 62,661 *
Donald P. Miller (9).... 16,875 * 2,500 14,375 *
Directors and Executive
Officers as a Group
(12 persons) (10)...... 2,282,355 33.2 199,102 2,083,253 21.5
OTHER SELLING
SHAREHOLDERS
- -------------
Mercury Asset Management
plc.................... 265,000 4.1 33,125 231,875 2.5
James H. Coffman, Jr.
(11)................... 209,902 3.2 209,902 0 0.0
Michael Herlehy......... 67,974 1.1 7,500 60,474 *
Joseph Niciforo......... 67,974 1.1 7,500 60,474 *
Joseph R. LeMay, Jr.
(12)................... 67,140 1.0 3,750 63,390 *
Thomas Pedersen......... 28,867 * 28,867 0 0.0
William and Marylee
Trousdale.............. 16,992 * 1,875 15,117 *
Floyd Donahue........... 16,992 * 1,875 15,117 *
Charles Heller.......... 8,496 * 750 7,746 *
Craig Lund.............. 5,782 * 2,877 2,905 *
Robert Geissman (13).... 5,782 * 2,877 2,905 *
</TABLE>
- --------
*Less than 1%
(1) The number of shares beneficially owned by each shareholder is determined
under rules promulgated by the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose.
Under SEC rules, beneficial ownership includes any shares as to which an
individual or entity has sole or shared voting power or investment power
and also any shares which an individual or entity has the right to
acquire within 60 days after March 31, 1997 through the exercise of any
stock option, warrant or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
shareholder is a direct or indirect beneficial owner of such shares.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares such power with his or
her spouse) with respect to all shares of capital stock listed as owned
by such person or entity.
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<PAGE>
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 585,000 shares of Common Stock from the following
persons: Wand/IMA Investments, L.P. (213,253), Wand/IMA Investments II
L.P. (16,177), Wand/IMA Investments III L.P. (44,739), Wand Partners Inc.
(3,293), Bruce W. Schnitzer (2,538), Albert R. Subbloie, Jr. (60,000),
Gary R. Martino (60,000), Andrei Poludnewycz (39,375), James S.
Aufdemberge (15,000), Paul G. Frederick (8,625), James E. Anderson (565),
David G. Caldeira (7,500), Michael P. McGroarty (3,750), Paul J. Schmidt
(18,750), Thomas F. Hill (6,000), Mercury Asset Management plc (33,125),
Michael Herlehy (15,000), Joseph Niciforo (15,000), Joseph LeMay (7,500),
William and Marylee Trousdale (3,750), Floyd Donahue (3,750), Charles
Heller (1,500), Craig Lund (2,905) and Robert Geissman (2,905). Each of
Messrs. Aufdemberge, Frederick, Anderson, Caldeira and McGroarty
beneficially own less than one percent of the outstanding shares of Common
Stock.
(3) Includes (i) 2,678,546 shares held by Wand/IMA Investments, L.P. ("Wand-
I"), 456,971 of which are offered hereby; (ii) 203,187 shares held by
Wand/IMA Investments II L.P. ("Wand-II"), 34,665 of which are offered
hereby; (iii) 561,946 shares held by Wand/IMA Investments III L.P. ("Wand-
III"), 95,870 of which are offered hereby; (iv) 41,361 shares issuable
upon the cashless exercise of an outstanding warrant held by Wand Partners
Inc. ("WPI"), 7,056 of which are offered hereby; and (v) 31,873 shares
held by Bruce W. Schnitzer, 5,438 of which are offered hereby. Mr.
Schnitzer is the majority shareholder and a director of WPI and Wand (IMA)
Inc. and owns limited partnership interests in Wand-I and Wand-III. WPI is
a general partner of Wand-I and Wand II, and Wand (IMA) Inc. is a general
partner of Wand-II and Wand-III. Mr. Schnitzer may be deemed to
beneficially own all shares held by such entities.
(4) Includes 131,287 shares issuable pursuant to stock options which are
exercisable within 60 days.
(5) Includes 131,287 shares issuable pursuant to stock options which are
exercisable within 60 days.
(6) Includes 37,518 shares issuable pursuant to stock options which are
exercisable within 60 days.
(7) Includes 12,798 shares issuable pursuant to stock options which are
exercisable within 60 days.
(8) Includes 51,786 shares issuable upon the cashless exercise of an
outstanding warrant and an option to purchase 16,875 shares which is
exercisable within 60 days. Mr. Hill is a director of WPI which is a
general partner of Wand-I and Wand-II. Mr. Hill disclaims beneficial
ownership of any shares except for those held by him directly.
(9) Includes 16,875 shares issuable pursuant to stock options which are
exercisable within 60 days.
(10) Includes options to purchase an aggregate of 492,570 shares held by
directors and executive officers which are exercisable within 60 days.
(11) Includes 149,557 shares issuable pursuant to stock options which are
exercisable within 60 days. Mr. Coffman is a former employee of the
Company.
(12) Includes 13,500 shares issuable pursuant to stock options which are
exercisable within 60 days. Mr. LeMay was formerly the Vice President of
the Enterprise Application Division for the Company.
(13) Includes 5,782 shares issuable pursuant to stock options which are
exercisable within 60 days. Mr. Geissman is an employee of the Company.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
After giving effect to the amendment and restatement of the Company's
Certificate of Incorporation, to be effected upon the closing of this
offering, the authorized capital stock of the Company will consist of
20,000,000 shares of Common Stock, no par value per share, and 500,000 shares
of undesignated Preferred Stock, no par value per share. As of March 31, 1997
(after giving effect to the conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock and the exercise of all common
stock purchase warrants held by WPI and its affiliates and the exercise of
options for 154,934 shares of Common Stock), there were outstanding (i)
6,395,782 shares of Common Stock held by shareholders of record, (ii) stock
options for the purchase of a total of 1,382,241 shares of Common Stock, and
(iii) stock purchase warrants exercisable for a total of 6,750 shares of
Common Stock.
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Certificate of Incorporation and Bylaws, and of certain
provisions of the Connecticut Business Corporation Act (the "CBCA"), is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to the Certificate of Incorporation and Bylaws included as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters properly submitted to a vote of shareholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of Common Stock are entitled to
receive ratably such distributions, if any, as may be declared by the Board of
Directors out of funds legally available therefor, subject to any preferential
distribution rights of outstanding Preferred Stock. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities and subject to any prior claims.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. Certain holders of Common Stock
have the right, in certain circumstances, to require the Company to effect the
registration of their shares of Common Stock pursuant to the Securities Act.
See "Shares Eligible for Future Sale."
PREFERRED STOCK
Under the terms of the Certificate of Incorporation, the Board of Directors
is authorized, subject to any limitations prescribed by law, without
shareholder approval, to issue shares of Preferred Stock in one or more
series. Each such series of Preferred Stock issued may rank senior to the
Common Stock with respect to the payment of any distributions or amounts upon
liquidation, dissolution or winding up of the Company. In addition, it shall
have such preferences, limitations and relative rights, including voting
rights, distribution rights, conversion rights, redemption privileges and
liquidation preferences, as shall be determined by the Board of Directors,
without any further vote or action by the shareholders.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding
voting stock of the Company. The Company has no present plans to issue any
shares of Preferred Stock.
61
<PAGE>
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND CONNECTICUT
LAW; ANTITAKEOVER EFFECTS
Certificate of Incorporation and Bylaws. The Certificate of Incorporation
provides for the division of the Board of Directors into three classes as
nearly equal in size as possible with staggered three-year terms. See
"Management." In addition, the Certificate of Incorporation provides that
subject to the rights of holders of any class or series of Preferred Stock
then outstanding, directors may be removed only for cause at a meeting of
shareholders called expressly for that purpose at which a quorum is present by
the affirmative vote of the holders of two-thirds of the shares of the Company
entitled to vote in the election of directors generally. The classification of
the Board of Directors and the limitations on the removal of directors could
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from acquiring, control of the Company.
The Certificate of Incorporation provides that an amendment of the
Certificate of Incorporation will require the approval of the Board of
Directors and an affirmative vote of a majority of the shares entitled to vote
on the amendment, if shareholder approval is required by the CBCA. The CBCA
provides generally that bylaws may be amended by a majority vote of the board
of directors or the shareholders. The Certificate of Incorporation provides,
however, that any Bylaws adopted by the shareholders of the Company or
required by the CBCA to be adopted by the shareholders may only be made,
altered or repealed by the vote of a majority of the shareholders.
The Bylaws provide that any action required or permitted to be taken by the
shareholders of the Company at an annual meeting or special meeting of
shareholders may only be taken if it is properly brought before such meeting.
The Bylaws further provide that special meetings of the shareholders may only
be called by the Chairman of the Board of Directors or by the Secretary of the
Company at the written request or by resolution adopted by a majority of the
Board of Directors or upon the written demand of the holders of 35% of the
voting stock entitled to vote at such special meeting. Under the Bylaws, in
order for any matter to be considered "properly brought" before a meeting, a
shareholder must comply with certain requirements regarding advance notice to
the Company. The foregoing provisions could have the effect of delaying until
the next shareholders' meeting shareholder actions which are favored by the
holders of a majority of the outstanding voting securities of the Company.
The Certificate of Incorporation also contains certain provisions permitted
under the CBCA relating to the personal liability of directors. The provisions
limit a director's liability for monetary damages for a breach of fiduciary
duty to the amount of compensation received by the director for serving the
Company during the year of the violation, except in certain circumstances
involving (i) a knowing and culpable violation of law, (ii) receipt of an
improper personal economic gain by the director or an associate, (iii) a lack
of good faith and a conscious disregard for the duty of the director to the
Company under circumstances in which the director is aware that his conduct or
omission created an unjustifiable risk of serious injury to the Company, (iv)
a sustained and unexcused pattern of inattention that amount to an abdication
of the director's duty to the Company and (v) a director voting in favor of
certain types of distributions by the Company in violation of law or the
Certificate of Incorporation. Further, the Certificate of Incorporation
contains provisions to indemnify the Company's directors and officers to the
fullest extent permitted by the CBCA. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
Connecticut Antitakeover Statute. The Company is subject to the provisions
of Section 33-844 of the CBCA (the "Antitakeover Law"). The Antitakeover Law
prohibits a Connecticut corporation from engaging in a "business combination"
with an "interested shareholder" for a period of five years after the date of
the transaction in which the person became an interested shareholder, unless
the business combination is approved in a prescribed manner. A "business
combination" includes generally, mergers, asset sales, certain types of stock
issuances, and other transactions resulting in a disproportionate financial
benefit to the interested shareholder. Subject to certain exceptions, an
"interested shareholder" is a person who owns, or within five years did own,
10% or more of the corporation's voting stock.
62
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based upon the number of shares
outstanding at March 31, 1997, there will be 9,195,782 shares of Common Stock
outstanding (exclusive of 779,053 shares covered by vested options outstanding
at March 31, 1997). Of these shares, the 3,900,000 shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"), may not be resold except pursuant to an effective registration
statement of the Company, or an applicable exemption from registration,
including an exemption under Rule 144.
SALES OF RESTRICTED SHARES
The remaining 5,295,782 shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, 57,744 shares of
Common Stock will be eligible for sale beginning 90 days following the
Effective Date subject to certain resale restrictions pursuant to Rule 144
under the Securities Act. In addition, beginning 90 days after the Effective
Date, approximately 318,373 shares of Common Stock that are subject to 90-day
Lock-up Agreements will be available for sale without restriction in reliance
on Rule 144(k) under the Securities Act. Beginning 180 days after the
Effective Date, approximately 4,887,265 shares of Common Stock that are
subject to 180-day Lock-up Agreements will be available for sale, of which
approximately 4,515,500 shares will be subject to certain resale restrictions
pursuant to Rule 144 and approximately 371,765 shares will be available for
sale without restriction pursuant to Rule 144(k).
In general, under Rule 144, beginning 90 days after the Effective Date, a
person, including an Affiliate, who has beneficially owned restricted
securities for at least one year is entitled to sell, within any three-month
period, a number of such shares that does not exceed the greater of (i) 1% of
the then outstanding shares of Common Stock (approximately 91,958 shares
immediately after this offering) or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the date on which
notice of such sale is filed, provided that certain requirements concerning
availability of public information, manner of sale and notice of sale are
satisfied. In addition, under Rule 144(k), a person who is not an Affiliate
and has not been an Affiliate for at least three months prior to the sale and
who has beneficially owned restricted securities for at least two years is
entitled to sell such shares immediately without compliance with the foregoing
requirements of Rule 144. In meeting the one- and two-year holding periods
described above, a holder of restricted securities can include the holding
periods of a prior owner who was not an Affiliate. The one- and two-year
holding periods do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the restricted securities from
the issuer or an Affiliate.
LOCK-UP AGREEMENTS
The executive officers, directors and certain employees of the Company, and
certain shareholders, who in the aggregate will hold approximately 4,887,265
shares of Common Stock have agreed that for a period of 180 days following the
Effective Date, and certain other shareholders who will hold approximately
350,773 shares of Common Stock have agreed that for a period of 90 days
following the Effective Date, they will not offer, pledge, sell, contract to
sell, grant any option to purchase, purchase any option to sell, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock,
any options, rights or warrants to purchase any shares of Common Stock
(including any stock appreciation, right, or similar right with an exercise or
conversion privilege at a price related to or derived
63
<PAGE>
from the market price of the Common Stock) or any securities convertible into
or exchangeable for shares of Common Stock owned directly by them or with
respect to which they have the power of disposition, or engage in any hedging
transactions with respect to the Common Stock that may have an impact on the
market price of the Common Stock without the prior written consent of the
Representatives.
OPTIONS
As of the Effective Date, based on the number of options outstanding at
March 31, 1997, approximately 779,053 shares of Common Stock will be issuable
pursuant to vested options under the Company's 1991 Plan, 1996 Employee and
Consultant Plan and 1996 Non-Employee Directors Plan, of which approximately
729,906 shares will be subject to 180-day Lock-up Agreements. Shortly after
the Effective Date, the Company intends to file one or more registration
statements on Form S-8 to register under the Securities Act shares issuable
under such plans, upon which such shares will generally be eligible for sale
in the public market without restriction, subject to Rule 144 limitations
applicable to Affiliates and Lock-up Agreements, to the extent applicable.
REGISTRATION RIGHTS
Certain persons and entities (the "Rightsholders"), including certain
members of the Wand Group, Mercury Asset Management plc and certain individual
holders are entitled to certain rights under the Securities Act with respect
to the registration of a total of 3,574,726 shares of Common Stock (the
"Registrable Shares") pursuant to the terms of various stock purchase
agreements and warrant agreements (collectively, the "Registration Rights
Agreements"). The Registration Rights Agreements generally provide that, in
the event the Company proposes to register any of its securities under the
Securities Act, the Rightsholders shall be entitled to include Registrable
Shares in such registration, subject to the right of the managing underwriter
of any underwritten offering to limit for marketing reasons the number of
Registrable Shares included in such registration.
Certain members of the Wand Group have the right at any time and from time
to time to require the Company to prepare and file registration statements
under the Securities Act with respect to a total of 2,936,264 shares of Common
Stock held by them; provided, however, that the Company need effect no more
than three such demand registrations.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of the Common Stock
in the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to the Underwriters
named below, and the Underwriters, for whom Alex. Brown & Sons Incorporated,
Robertson, Stephens & Company LLC and SoundView Financial Group, Inc. are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Shareholders the following
respective number of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the front
cover of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Robertson, Stephens & Company LLC.....................................
SoundView Financial Group, Inc. ......................................
---------
Total............................................................... 3,900,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the Underwriters are
committed to purchase all of the shares of Common Stock offered hereby (other
than those covered by the over-allotment option described below), if any such
shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock in part directly to the public at the initial public offering price set
forth on the cover page of this Prospectus and in part to certain securities
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the Representatives.
Certain Selling Shareholders have granted the Underwriters an option,
exercisable for 30 days after the date of the Prospectus, to purchase up to an
aggregate of 585,000 additional shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus, solely to cover over-allotments, if any. To
the extent such option is exercised, the Underwriters will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares that the number of shares to be purchased by each
Underwriter shown in the foregoing table bears to the 3,900,000 shares of
Common Stock offered hereby.
65
<PAGE>
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company has agreed that for a period of 180 days after the Effective
Date it will not issue, sell or otherwise dispose of, directly or indirectly,
any shares of Common Stock or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivatives of
Common Stock without the prior written consent of the Representatives, except
that the Company may (i) issue shares upon the exercise of options outstanding
on the Effective Date issued pursuant to its 1991 Plan, 1996 Non-Employee
Directors Plan and 1996 Employee and Consultant Plan, (ii) grant options and
offer to sell shares of Common Stock to its employees and directors pursuant
to such plans, provided that the Company will not grant any options which will
become exercisable within 180 days after the Effective Date and (iii) issue
shares of Common Stock to its employees pursuant to its Employee Stock
Purchase Plan provided that the Company will not permit the withdrawal of such
shares from the plan for 180 days following the Effective Date.
The executive officers, directors and certain employees of the Company, and
certain shareholders, who in the aggregate will hold approximately 4,887,265
shares of Common Stock have agreed that for a period of 180 days following the
Effective Date, and certain other shareholders who will hold approximately
350,773 shares of Common Stock have agreed that for a period of 90 days
following the Effective Date, they will not offer, pledge, sell, contract to
sell, grant any option to purchase, purchase any option to sell, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock,
any options, rights or warrants to purchase any shares of Common Stock
(including any stock appreciation, right, or similar right with an exercise or
conversion privilege at a price related to or derived from the market price of
the Common Stock) or any securities convertible into or exchangeable for
shares of Common Stock owned directly by them or with respect to which they
have the power of disposition, or engage in any hedging transactions with
respect to the Common Stock that may have an impact on the market price of the
Common Stock without the prior written consent of the Representatives.
During and after the offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. The Underwriters also may impose
penalty bids, whereby selling concessions allowed to syndicate members or
other broker-dealers in respect of the Common Stock sold in the offering for
their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of Common Stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined by negotiation among the Company, representatives of the Selling
Shareholders and the Representatives. Among the factors expected to be
considered in such negotiations are the prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies that the Company,
the Selling Shareholders and the Representatives believe to be comparable to
the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors deemed relevant.
66
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
Hartford, Connecticut. Certain legal matters will be passed upon for the
Underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The audited consolidated financial statements and schedule included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all
amendments, exhibits, schedules and supplements thereto) on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and the exhibits thereto may be inspected and copied at prescribed rates at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.
67
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March
31, 1997 (unaudited) ................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996 and for the Three Month Period ended March 31, 1996
and 1997 (unaudited) ................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and for the Three Month Period ended March 31, 1996
and 1997 (unaudited).................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the Period
from January 1, 1994 through December 31, 1996 and for the Three Month
Period ended March 31, 1997 (unaudited)................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Information Management Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Information
Management Associates, Inc. (a Connecticut corporation) and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Information Management Associates, Inc. and subsidiary as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Hartford, Connecticut
March 6, 1997 (except with
respect to the matters discussed
in Notes 4 and 17, as to which
the dates are March 17, 1997
and July 1, 1997, respectively.)
F-2
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
(UNAUDITED)
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, DECEMBER 31, EQUITY
1995 1996 ACTUAL (NOTE 2)
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
ASSETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Current assets:
Cash and cash equivalents.. $ 1,543 $ 3,073 $ 2,541
Accounts receivable, net
of allowance for doubtful
accounts of
$425 in 1995, $482 in
1996 and $508 at March
31, 1997.................. 7,801 10,473 11,346
Other current assets....... 392 232 548
-------- -------- --------
Total current assets..... 9,736 13,778 14,435
Equipment, net.............. 2,263 2,222 2,435
Notes receivable from
officers................... 194 572 721
Other assets, net........... 326 709 974
-------- -------- --------
$ 12,519 $ 17,281 $18,565
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Bank line of credit........ $ 3,000 $ 4,860 $ 4,860
Current maturities of term
note payable to bank...... -- 83 208
Current maturities of
obligations under capital
leases.................... 371 251 249
Current maturities of
subordinated note payable
to shareholder............ 500 250 250
Accounts payable........... 2,788 2,308 2,607
Accrued sales tax payable.. 220 823 960
Accrued compensation....... 1,057 1,166 1,095
Accrued liabilities........ 769 1,122 1,030
Deferred revenues.......... 2,264 1,705 3,093
-------- -------- --------
Total current
liabilities............. 10,969 12,568 14,352
-------- -------- --------
Term note payable to bank,
less current maturities
included above............. 2,500 2,417 2,292
-------- -------- --------
Subordinated note payable to
shareholder, less current
maturities included above.. 246 -- --
-------- -------- --------
Obligations under capital
lease, less current
maturities included above.. 296 386 315
-------- -------- --------
Other long term liabilities. 572 520 504
-------- -------- --------
Commitments and
Contingencies (Notes 7, 8
and 12)
Series A senior redeemable
convertible preferred
stock, $1,000 stated value;
4,500 shares authorized,
issued and outstanding
(liquidation value of
$4,775, $5,169 and $5,272
at December 31, 1995 and
1996 and March 31, 1997)... 4,751 5,145 5,248
Series B senior redeemable
convertible preferred
stock, $1,000 stated value;
4,350 shares authorized,
issued and outstanding in
1996 (liquidation value of
$4,408 and $4,496 at
December 31, 1996 and March
31, 1997).................. -- 4,286 4,374
-------- -------- --------
Total preferred stock.... 4,751 9,431 9,622
-------- -------- --------
Redeemable common stock
warrants................... 2,480 2,865 2,865
-------- -------- --------
Shareholders' equity
(deficit):
Preferred stock,
undesignated, no par value,
500,000 shares authorized,
no shares issued and
outstanding pro forma...... $ --
Common stock, no par value;
4,255,197, 4,293,379 and
4,293,379 shares
outstanding at December 31,
1995 and 1996, and March
31, 1997, 6,395,782 shares
pro forma.................. 5,554 5,795 5,798 18,163
Cumulative translation
adjustment................. (41) (9) (114) (114)
Accumulated deficit......... (14,808) (16,692) (17,069) (17,069)
-------- -------- -------- --------
Total shareholders'
equity (deficit)........ (9,295) (10,906) (11,385) 980
-------- -------- -------- --------
$ 12,519 $ 17,281 $ 18,565 $ 18,443
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE (UNAUDITED)
AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.............. $ 7,393 $10,825 $ 13,022 $ 2,929 $ 3,802
Services and maintenance.. 10,959 12,984 13,255 3,160 3,654
------- ------- --------- --------- ---------
Total revenues.......... 18,352 23,809 26,277 6,089 7,456
------- ------- --------- --------- ---------
Cost of revenues:
Cost of license fees...... 462 700 709 166 71
Cost of services and
maintenance.............. 6,268 8,225 7,191 1,822 1,952
------- ------- --------- --------- ---------
Total cost of revenues.. 6,730 8,925 7,900 1,988 2,023
------- ------- --------- --------- ---------
Gross profit................ 11,622 14,884 18,377 4,101 5,433
------- ------- --------- --------- ---------
Operating expenses:
Sales and marketing....... 5,857 6,844 8,055 1,872 2,648
Product development....... 6,106 6,802 6,382 1,553 1,532
General and administra-
tive..................... 2,693 3,824 3,878 1,024 1,092
------- ------- --------- --------- ---------
Total operating ex-
penses................. 14,656 17,470 18,315 4,449 5,272
------- ------- --------- --------- ---------
Operating income (loss)..... (3,034) (2,586) 62 (348) 161
------- ------- --------- --------- ---------
Other income (expense):
Interest expense.......... (619) (764) (1,171) (281) (257)
Loss on disposal of prop-
erty and equipment....... (298) (113) -- -- --
Gain on sale of product
line..................... -- -- 92 -- --
Termination of operating
lease.................... -- (223) -- -- --
------- ------- --------- --------- ---------
Total other income
(expense).............. (917) (1,100) (1,079) (281) (257)
------- ------- --------- --------- ---------
Loss before provision for
income taxes............... (3,951) (3,686) (1,017) (629) (96)
Provision for income taxes.. 132 100 30 -- 90
------- ------- --------- --------- ---------
Net loss.................... (4,083) (3,786) (1,047) (629) (186)
Accretion of preferred stock
dividends.................. -- (275) (452) (96) (191)
Increase in fair market
value of redeemable common
stock warrants............. (458) (965) (385) (385) --
------- ------- --------- --------- ---------
Loss applicable to common
shareholders............... $(4,541) $(5,026) $ (1,884) $ (1,110) $ (377)
======= ======= ========= ========= =========
Pro forma net loss per share
(Note 2)................... $ (.17) $ (.10) $ (.03)
========= ========= =========
Pro forma shares used in net
loss per share
calculation (Note 2)....... 6,127,457 6,018,566 6,668,476
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activi-
ties:
Net loss........................... $(4,083) $(3,786) $(1,047) $ (629) $ (186)
Adjustments to Reconcile Net Loss
to Net Cash Provided By (Used In)
Operations:
Depreciation and amortization...... 816 948 1,155 198 342
Loss on disposal of property and
equipment......................... 298 113 -- -- --
Gain on sale of product line....... -- -- (92) -- --
Amortization of restricted stock
awards............................ 10 10 10 3 3
Changes in Operating Assets and Li-
abilities
Accounts receivable................ (2,315) 399 (3,001) (604) (873)
Other current assets............... (129) (236) 143 (115) (316)
Notes receivable from officers..... (71) 76 (378) (235) (149)
Other assets....................... (63) (182) (502) (129) (265)
Accounts payable................... 1,400 (288) (480) (539) 299
Accrued sales tax.................. 61 145 603 268 137
Accrued compensation............... (68) 537 109 (59) (71)
Accrued liabilities................ (275) 123 370 406 (92)
Other long term liabilities........ 213 260 (52) (71) (16)
Deferred revenues.................. 914 (10) (128) 907 1,388
------- ------- ------- ------ ------
Net Cash Provided By (Used In)
Operations...................... (3,292) (1,891) (3,290) (599) 201
------- ------- ------- ------ ------
Cash Flows from Investing Activi-
ties:
Acquisition of equipment........... (1,047) (951) (1,001) (134) (556)
Proceeds from sale of building..... -- 677 -- -- --
------- ------- ------- ------ ------
Net Cash Used in Investing Activ-
ities........................... (1,047) (274) (1,001) (134) (556)
------- ------- ------- ------ ------
Cash Flows from Financing Activi-
ties:
Net proceeds from sale of common
stock............................. 1,164 -- 231 -- --
Net proceeds from sale of preferred
stock............................. -- 4,475 4,228 -- --
Proceeds from bank term loan....... -- 2,500 -- 250 --
Proceeds from (repayment of) ad-
vances from shareholders.......... 1,008 (1,008) -- -- --
Net proceeds from (repayment of)
bank line of credit............... 1,555 (1,000) 1,860 -- --
Repayment of obligations under cap-
ital leases....................... (375) (1,376) (539) 343 (72)
Proceeds from sale leaseback....... -- -- 509 -- --
Repayment of subordinated note pay-
able to shareholder............... -- (250) (500) (250) --
------- ------- ------- ------ ------
Net Cash Provided By (Used In)
Financing Activities............ 3,352 3,341 5,789 343 (72)
------- ------- ------- ------ ------
Effect of Exchange Rate Changes..... 38 (79) 32 (46) (105)
------- ------- ------- ------ ------
Net Increase (Decrease) in Cash and
Cash Equivalents................... (949) 1,097 1,530 (436) (532)
Cash and Cash Equivalents, beginning
of period.......................... 1,395 446 1,543 1,543 3,073
------- ------- ------- ------ ------
Cash and Cash Equivalents, end of
period............................. $ 446 $ 1,543 $ 3,073 $1,107 $2,541
======= ======= ======= ====== ======
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for
interest.......................... $ 469 $ 714 $ 877 $ 162 $ 225
Cash paid during the period for
income taxes...................... 30 -- 16 -- 90
Supplemental Disclosure of Noncash
Activities:
Accretion of Series A preferred
stock in lieu of dividends........ $ -- $ 275 $ 394 $ 96 $ 103
Accretion of Series B preferred
stock in lieu of dividends........ -- -- 58 -- 88
Increase in fair market value of
redeemable common stock warrants.. 458 965 385 385 --
Equipment acquired pursuant to
capital lease obligation.......... 851 113 -- 631 --
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
---------------- TRANSLATION ACCUMULATED
SHARES AMOUNT ADJUSTMENT DEFICIT TOTAL
--------- ------ ----------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994.... 3,958,947 $4,370 $ -- $ (5,241) $ (871)
Sale of common stock, net
of issuance costs of $21.. 296,250 1,164 -- -- 1,164
Amortization of restricted
stock awards.............. -- 10 -- -- 10
Change in fair market value
of redeemable common stock
warrants.................. -- -- -- (458) (458)
Equity adjustment from for-
eign currency translation. -- -- 38 -- 38
Net loss................... -- -- -- (4,083) (4,083)
--------- ------ ----- -------- --------
Balance, December 31, 1994.. 4,255,197 5,544 38 (9,782) (4,200)
Amortization of restricted
stock awards.............. -- 10 -- -- 10
Change in fair market value
of redeemable common stock
warrants.................. -- -- -- (965) (965)
Accretion of Series A pre-
ferred stock dividends.... -- -- -- (275) (275)
Equity adjustment from for-
eign currency translation. -- -- (79) -- (79)
Net loss................... -- -- -- (3,786) (3,786)
--------- ------ ----- -------- --------
Balance, December 31, 1995.. 4,255,197 5,554 (41) (14,808) (9,295)
Sale of common stock....... 32,400 231 -- -- 231
Exercise of common stock
options................... 5,782 -- -- -- --
Amortization of restricted
stock awards.............. -- 10 -- -- 10
Change in fair market value
of redeemable common stock
warrants.................. -- -- -- (385) (385)
Accretion of Series A pre-
ferred stock dividends.... -- -- -- (394) (394)
Accretion of Series B pre-
ferred stock dividends.... -- -- -- (58) (58)
Equity adjustment from for-
eign currency translation. -- -- 32 -- 32
Net loss................... -- -- -- (1,047) (1,047)
--------- ------ ----- -------- --------
Balance, December 31, 1996.. 4,293,379 5,795 (9) (16,692) (10,906)
Amortization of restricted
stock awards (unaudited).. -- 3 -- -- 3
Accretion of Series A
preferred stock dividends
(unaudited)............... -- -- -- (103) (103)
Accretion of Series B
preferred stock dividends
(unaudited)............... -- -- -- (88) (88)
Equity adjustment from
foreign currency
translation (unaudited)... -- -- (105) -- (105)
Net loss (unaudited)....... -- -- -- (186) (186)
--------- ------ ----- -------- --------
Balance, March 31, 1997 (un-
audited)................... 4,293,379 $5,798 $(114) $(17,069) $(11,385)
========= ====== ===== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) NATURE OF OPERATIONS
Information Management Associates, Inc. and subsidiary (the Company) are
primarily engaged in the development, marketing and support of software that
automates customer interaction including telemarketing, telesales, contact
management, sales, marketing and customer service functions of business
organizations in a variety of industries. The Company markets its software
products in North and South America as well as Western Europe, Asia, Australia
and New Zealand.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned foreign
subsidiary, Information Management Associates Limited, which is located in the
United Kingdom. All material intercompany balances and transactions have been
eliminated in consolidation.
Foreign currency transactions. The functional currency of the Company's
subsidiary is the local currency. Accordingly, the Company applies the current
rate method to translate the subsidiary's financial statements into U.S.
dollars. Translation adjustments are included as a separate component of
shareholders' equity (deficit) in the accompanying consolidated financial
statements.
Cash and cash equivalents. The Company considers all highly liquid
investments with original maturities of three months or less to be the
equivalent of cash. As of December 31, 1995 and 1996 and March 31, 1997, the
Company's cash and cash equivalents are deposited with principally one
financial institution.
Equipment. Equipment is recorded at cost and is depreciated or amortized,
using the straight-line method, over their estimated useful life of three to
ten years.
At December 31, 1995 and 1996 and March 31, 1997, property and equipment,
net, consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Equipment............................................ $1,504 $2,606 $3,738
Furniture and fixtures............................... 1,219 1,499 1,152
Leasehold improvements............................... 425 451 515
Equipment under capital lease........................ 1,338 931 910
------ ------ ------
4,486 5,487 6,315
Less--Accumulated depreciation and amortization...... 2,223 3,265 3,880
------ ------ ------
$2,263 $2,222 $2,435
====== ====== ======
</TABLE>
Expenditures for repairs and maintenance are charged against income as
incurred while renewals and betterments are capitalized.
Software development costs. The Company expenses research and development
costs as incurred. The Company has evaluated the establishment of
technological feasibility of its products in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
F-7
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Marketed. The Company defines technological feasibility as the completion of a
working model. The Company sells products in a market that is subject to rapid
technological change, new product development and changing customer needs. The
Company has concluded that technological feasibility is not established until
the development stage of the product is nearly complete. The time period
during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or results of operations.
Therefore, the Company has charged all such costs to research and development
in the period incurred.
Revenue recognition. The Company generates revenues from licensing the
rights to use its software products directly to end users and indirectly
through sublicense fees from resellers. The Company also generates revenues
from sales of software maintenance contracts, and from consulting and training
services performed for customers who license its products.
Revenues from software license agreements are recognized upon the delivery
of the software to the customer if there are no significant post-delivery
obligations and collection is probable. Service revenues consist of
professional consulting, implementation and training services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of the Company's software products. Revenues from consulting
and training services are recognized as services are performed. The Company
enters into transactions which include both license and service elements. As
such service elements do not include more than minor alteration of the
software, the license fees are recognized upon delivery and the service
revenues are recognized when performed.
Software maintenance fees are recognized ratably over the term of the
maintenance period. If software maintenance fees are provided for in the
license fee or at a discount in a license agreement, a portion of the license
fee equal to the fair market value of these amounts is allocated to software
maintenance revenue based on the value established by independent sales of
such maintenance services to customers.
Cost of license revenues consists primarily of the cost of media on which
the product is delivered and third party software products which are resold by
the Company. Cost of service and maintenance revenues consists primarily of
salaries, benefits, subcontracted consulting costs and allocated overhead
costs related to consulting personnel and the customer support group.
Deferred revenues primarily relate to post-contract customer support which
has been paid by customers prior to the performance of the services.
Income taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This statement requires the Company to recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and the tax
basis of the assets and liabilities and the net operating loss carryforwards
available for tax reporting purposes, using applicable tax rates for the years
in which the differences are expected to reverse.
Pro forma net loss per common share. Pro forma net loss per common share
assumes, in connection with the closing of the initial public offering,
numbers of shares issuable upon the conversion of the Series A senior
redeemable convertible preferred stock, the cashless exercise of the
F-8
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
redeemable common stock warrants at an offering price of $12.00 per share and
the exercise of 154,934 options as if such conversion or exercise occurred on
January 1, 1996, and the number of shares issuable upon the conversion of the
Series B senior redeemable convertible preferred stock as if such conversion
occurred upon issuance of such stock on November 1, 1996 (see Notes 7, 8 and
17). In addition, pursuant to the requirements of the Securities and Exchange
Commission, common stock equivalents issued at prices below the anticipated
public offering price during the twelve months immediately preceding the
initial public offering filing date have been included in the calculation of
weighted average number of common shares outstanding (using the treasury stock
method and the anticipated public offering price).
Pro forma net loss per share is calculated as follows (dollar amounts in
thousands except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net loss............................... $ (1,047) $ (629) $ (186)
Pro forma shares used in net loss per
share calculation..................... 6,127,457 6,018,566 6,668,476
Pro forma net loss per share........... $ (.17) $ (.10) $ (.03)
</TABLE>
Historical net loss per share is not presented in the accompanying financial
statements as such amounts are not meaningful.
Long-lived assets. In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
(SFAS 121). SFAS 121 requires a company to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
standard did not have a material impact on the Company's results of operations
or financial position.
Concentration of credit risk. Financial instruments which potentially
subject the Company to concentration of credit risk consists principally of
cash and trade receivables. As of December 31, 1995 and 1996 one customer
accounted for 14% and 10%, respectively, of accounts receivable.
Use of estimates in the preparation of financial statements. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to the 1994 and
1995 consolidated financial statements in order for them to be presented in
conformity with the 1996 consolidated financial statements.
Interim Financial Statements. The unaudited financial statements as of March
31, 1997 and for the three months ended March 31, 1996 and 1997 are unaudited
and include all adjustments (consisting of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
results for such interim periods. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the results to
be expected for any future period.
F-9
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Pro forma presentation. As discussed in Note 17, the Company's Series A
convertible preferred stock and Series B convertible preferred stock will be
converted into shares of common stock and the redeemable common stock warrants
will be exercised upon the closing of the Company's initial public offering
contemplated herein. In addition, 154,934 options to purchase common stock are
expected to be exercised in connection with the initial public offering. The
unaudited pro forma shareholders' equity as of March 31, 1997 reflects the
conversion of the Series A and Series B preferred stock into 1,532,161 shares
of common stock, the issuance of 415,308 shares of common stock pursuant to
the cashless exercise of outstanding redeemable common stock warrants and the
exercise of 154,934 options.
Recently Issued Accounting Standard. In March 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share", which establishes
new standards for computing and presenting earnings per share. SFAS 128 is
effective for financial statements issued for periods ending after December
31, 1997 and earlier adoption is not permitted. The Company has not quantified
the effect of adopting the new standard.
(3) RESTRUCTURING OF OPERATIONS
Effective September 1, 1996, the Company sold its assets related to the
Telemar product line to a third party buyer, Telemar Software International,
LLC (TSI). TSI also assumed certain liabilities of the Company related to the
Telemar product line. As a result of the sale, the Company was relieved of
liabilities in excess of assets sold and, accordingly, recognized a net gain
of approximately $92,000. Concurrent with the sale, certain employees who were
dedicated to the Telemar product line were terminated by the Company and
rehired by TSI.
In connection with the sale, TSI also gave the Company a promissory note in
the principal amount of $650,000, which is payable in five equal annual
installments of $130,000 and bears interest at 8.0%. The Company has fully
reserved for the $650,000 note receivable because collectibility, based on the
start up nature of TSI operations, was not ascertainable at the time of sale.
The note is secured by substantially all of the assets of TSI.
(4) BANK INDEBTEDNESS
In February 1997, the Company entered into an amended Loan and Security
Agreement (the Credit Agreement) with a bank. The Credit Agreement consists of
a $6,000,000 line of credit and a $2,500,000 Term Note Payable (the Term
Note). The Credit Agreement was further amended on March 17, 1997 (the March
1997 Amendment) to extend the maturity date of the line of credit to February
1, 1998.
Line of credit. Borrowings under the line of credit bear interest at prime
(8.25% at December 31, 1996) plus 1.0% and are limited to 75% of qualified
accounts receivable, as defined. At December 31, 1996 and March 31, 1997,
borrowings outstanding under the line of credit were $4,860,000 and additional
borrowings of approximately $1,140,000 were available at March 31, 1997.
Term Note Payable. The Term Note is payable in equal monthly principal
installments of $41,667, commencing November 1, 1997 through October 2002. In
the event of an initial public offering, the balance of the Term Note is due
and payable.
In addition to an 11.0% per annum interest which is payable on a current
basis, the Company is required to accrue additional interest based upon a
formula which approximates 9.0% (the Additional Interest). The Additional
Interest is payable at the earlier of November 1, 1998 or upon full repayment
of
F-10
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) BANK INDEBTEDNESS--(CONTINUED)
the Term Note. The Company is accruing for the Additional Interest and at
December 31, 1995 and 1996 and March 31, 1997 approximately $33,000, $233,000
and $319,000, respectively, is included in accrued liabilities in the
accompanying consolidated balance sheets.
Aggregate maturities of the Term Note for each of the succeeding five years
subsequent to December 31, 1996 and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
<S> <C>
1997............................................................. $ 83
1998............................................................. 500
1999............................................................. 500
2000............................................................. 500
2001............................................................. 500
thereafter....................................................... 417
------
$2,500
======
</TABLE>
Upon the closing of an initial public offering, the Company is required to
repay the outstanding principal balance of, and accrued interest on, the line
of credit and Term Note, provided however that the March 1997 Amendment
provides for subsequent re-borrowings under the line of credit through the
February 1, 1998 maturity date.
The Credit Agreement contains financial and other covenants requiring the
Company to maintain, among other requirements, a minimum level of working
capital and tangible net worth, as defined. As of and during the year ended
December 31, 1996, the Company was in violation of certain covenants for which
it has received a waiver from its bank. In addition, in connection with an
amendment to the Credit Agreement the lender adjusted the financial covenants
for 1997. Borrowings under the Credit Agreement are secured by substantially
all assets of the Company and are personally guaranteed by certain members of
management. The March 1997 Amendment provides for the release of management's
personal guarantees upon the closing of an initial public offering.
(5) OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under capital leases which expire at
varying dates through 2000.
The following is a schedule of future minimum lease payments for capital
leases as of December 31, 1996 and thereafter, (in thousands):
<TABLE>
<S> <C>
1997................................................................ $311
1998................................................................ 274
1999................................................................ 85
2000................................................................ 48
----
718
Less--Amount representing interest.................................. 81
----
Present value of future minimum lease payments...................... 637
Less--Current maturities............................................ 251
----
$386
====
</TABLE>
F-11
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) OBLIGATIONS UNDER CAPITAL LEASES--(CONTINUED)
In February 1996 the Company sold certain equipment and simultaneously leased
back the equipment under a Master Lease Agreement (the Lease Agreement). The
Lease Agreement was accounted for as a financing lease and accordingly the
proceeds from the sale were reflected as a debt obligation which is being
amortized over the term of the lease. In connection with the Lease Agreement,
the Company issued to the lessor warrants to purchase 6,750 shares of common
stock at a price of $4.89 per share which was based upon the sale price of the
Company's securities in the last transaction prior to the time the financing
arrangement was negotiated. In accordance with the terms and conditions of the
capital lease, the Company has a repurchase option whereby the equipment can be
repurchased at fair market value, as defined. As the equipment was sold at its
net book value there was no gain or loss as a result of the Lease Agreement.
During 1993 and 1994 the Company leased a facility in Trumbull, Connecticut,
from Information Management Associates (the Partnership), a related party whose
partners are the same as certain of the Company's shareholders. This facility
served as the Company's headquarters until April 1994 (see Note 12). As a
result of the mortgage on the facility being guaranteed by both the partners of
the Partnership and the Company, the related lease had been accounted for as a
capital lease. As of December 31, 1994, there was outstanding mortgage
indebtedness on the facility of approximately $976,000. During 1995, the
Partnership sold the facility in Trumbull, Connecticut. The sale resulted in a
loss of $376,000, of which $298,000 and $78,000 was provided for in the
accompanying consolidated statements of operations for the years ended December
31, 1994 and 1995, respectively. The net proceeds from the sale, which were
received in 1995, were used to reduce the mortgage indebtedness and the
remaining indebtedness of $475,000 was repaid by the Company during 1995.
(6) SUBORDINATED NOTE PAYABLE TO SHAREHOLDER
The Subordinated Note Payable to Shareholder (the Shareholder Note) was
payable in four annual, equal installments of $250,000, commencing in December
1994 and bears interest at 12.0% per annum. The installments of $250,000 due in
December 1994 and 1995 were paid in 1995 and 1996, respectively. As of December
31, 1996 and March 31, 1997, the balance of the Shareholder's Note was
$250,000. The outstanding principal balance of the Shareholder Note is stated
net of approximately $4,000 of related unamortized debt discount costs at
December 31, 1995. These costs were being amortized over the life of the debt.
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Amended and Restated Certificate of Incorporation has
authorized 500,000 shares of preferred stock, of which 4,500 shares have been
designated as Series A senior redeemable convertible preferred stock (Series A
preferred) and of which 4,350 shares have been designated as Series B senior
redeemable convertible preferred stock (Series B preferred). In March 1995, the
Company issued the Series A preferred, with a stated value of $1,000, to
certain common shareholders for proceeds of approximately $4,475,000, net of
issuance costs of approximately $25,000. In November 1996, the Company issued
the Series B preferred, with a stated value of $1,000, to certain common
shareholders for proceeds of approximately $4,228,000, net of issuance costs of
approximately $122,000.
Dividends. The Series A preferred and Series B preferred accrue dividends at
a rate of 8% per annum. Through June 30, 1999, the Company can elect to pay
such dividends in additional shares of preferred stock in lieu of cash. As of
December 31, 1995 and 1996 and March 31, 1997, the carrying value
F-12
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
of the Series A preferred included $275,000, $669,000 and $772,000,
respectively, of accrued but unpaid dividends. As of December 31, 1996 and
March 31, 1997, the carrying value of the Series B preferred included $58,000
and $146,000, respectively, of accrued but unpaid dividends. Provided there are
shares of preferred stock outstanding, the Company shall not declare any
dividends on the Company's common stock.
Conversion. Holders of the Series A preferred and Series B preferred are
entitled to convert such shares into common stock at a rate of $4.89 and $7.11
per share, respectively, with such conversion rate subject to adjustment, as
defined.
If the holders of the Series A preferred elect to convert such stock and
there has not been either (i) an initial public offering with aggregate
proceeds in excess of $20,000,000, and a per share price less than $8.22
through September 30, 1997 and increasing thereafter, or (ii) a Mandatory
Redemption (see below) in which the appraised value of the common stock, as
defined, is less than $31.11 per share as of March 31, 2003 and $39.11 per
share as of March 31, 2004, then the conversion price shall be based on a
$1,000 stated value and the Company shall have no obligation to pay the holder
any accrued but unpaid dividends.
If the holders of the Series B preferred elect to convert such stock and
there has not been either (i) an initial public offering with aggregate
proceeds in excess of $20,000,000, and a per share price less than $12.89
through March 31, 1998 and increasing thereafter, or (ii) a Mandatory
Redemption (see below) in which the appraised value of the common stock, as
defined, is less than $67.56 per share as of March 31, 2004 and $91.11 per
share as of March 31, 2005, then the conversion price shall be based on a
$1,000 stated value and the Company shall have no obligation to pay the holder
any accrued but unpaid dividends.
Upon the occurrence of an initial public offering with aggregate proceeds in
excess of $20,000,000, and a per share price greater than $8.22 per share
through September 30, 1997 for Series A preferred and a per share price greater
than $12.89 per share through March 31, 1998 for Series B preferred, and
increasing thereafter, the Company can require that the holder convert the
Series A preferred and Series B preferred into common stock at the then
conversion price based on a $1,000 stated value, and the Company shall have no
obligation to pay any previously accrued but unpaid dividends (see Notes 2 and
17).
Redemption. If the Series A preferred is not converted into common stock, the
Company shall redeem 2,250 shares on each of March 31, 2003 and 2004 (Mandatory
Redemption), at the $1,000 stated value per share plus all accrued but unpaid
dividends. If the Series B preferred is not converted into common stock, the
Company shall redeem 2,175 shares on each of March 31, 2004 and 2005 (Mandatory
Redemption) at the $1,000 stated value per share plus all accrued but unpaid
dividends.
If within 150 days prior to a Mandatory Redemption there has not been an
initial public offering with aggregate proceeds exceeding $20,000,000, then the
holders of the Series A preferred and Series B preferred can require that the
Company obtain a financial valuation, as defined, of the value of the common
stock into which such Series A preferred and Series B preferred would be
convertible.
Liquidation. In the case of a voluntary or involuntary liquidation or
dissolution of the Company, the holders of the Series A preferred and Series B
preferred shall receive a liquidation value of $1,000 per share plus any
accrued but unpaid dividends.
F-13
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) REDEEMABLE COMMON STOCK WARRANTS
During 1990 and 1991, the Company issued redeemable warrants to purchase
433,372 shares of common stock, with exercise prices ranging from $.40 per
share to $1.33 per share, which are exercisable through December 21, 2002. As
of December 31, 1996 and March 31, 1997, these warrants were outstanding.
All of the outstanding warrant holders have the right to put the warrants to
the Company after November 1, 1998, in the event that there has not been a
public offering of the Company's common stock. The put option requires that the
Company repurchase the warrants at the fair market value of the Company's
common stock, net of the associated warrant exercise price, at the time the put
option is exercised.
The Company accounted for the initial value of the warrants based on their
fair market values at the time the warrants were originally issued. Subsequent
increases in the fair market value of the warrants, as determined by sales of
the Company's common stock, results in adjustments to the carrying value of the
warrants through direct charges to accumulated deficit. As of December 31, 1995
and 1996 and March 31, 1997, the redeemable common stock warrants were
reflected in the accompanying consolidated financial statements based on the
estimated fair market values of $6.22, $7.11 and $7.11 per share, respectively.
(9) SHAREHOLDERS' EQUITY
Common stock. The Company's Amended and Restated Certificate of Incorporation
authorizes 20,000,000 shares of common stock (see Note 17).
The Company sold 296,250 shares of common stock in November 1994 at a per
share price of $4.00 for aggregate proceeds of approximately $1,164,000, net of
issuance costs of approximately $21,000.
The Company sold 32,400 shares of common stock in December 1996 at a per
share price of $7.11 for aggregate proceeds of approximately $231,000.
Restricted stock awards. During 1990, the Company granted 160,875 shares of
common stock to certain key employees in consideration of future services to be
performed. The awards require the recipients to be employed or engaged as a
consultant by the Company for seven years in order to retain ownership of the
stock. The related compensation is being recognized ratably over the 7-year
vesting period. During each of 1994, 1995 and 1996, $10,000 of compensation
expense was recognized in connection with these restricted stock awards.
Stock option plans. The Company has stock option plans which provide for the
issuance of both incentive and nonqualified stock options. In March 1996, the
Company adopted both the 1996 Employee and Consultant Stock Option Plan, which
provides for the issuance of up to 900,000 shares of common share for both
incentive and nonqualified stock options, and the 1996 Non-Employee Directors'
Stock Option Plan, which provides for the issuance of up to 135,000 shares of
common stock (collectively, The 1996 Plans). Under the provisions of The 1996
Plans, the exercise price of each option shall not be less than 100% of the
fair market value of a share of common stock at the time of grant, as defined,
and the options may vest immediately or over time. The 1996 Plans shall be
adjusted for future changes in the capitalization of the Company or as
designated by the Board of Directors.
F-14
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) SHAREHOLDERS' EQUITY--(CONTINUED)
Previous to The 1996 Plans, the Company had established a stock option plan
which provided for the issuance of up to 900,000 shares of common stock for
both incentive and nonqualified stock options. Under the provisions of this
plan, the exercise price of each option was not to be less than 100% of the
fair market value of a share of common stock, as defined, and the options could
vest immediately or over time.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 requires the measurement of the fair value of
stock options or warrants to be included in the statement of income or
disclosed in the notes to financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS 123. The Company has computed the pro forma disclosures
required under SFAS 123 for options granted in 1995 and 1996 using the Black-
Scholes option pricing model prescribed by SFAS 123. The weighted average
assumptions used are as follows:
<TABLE>
<CAPTION>
1995 1996
------- -----------
<S> <C> <C>
Risk free interest rate............................... 5.77% 6.15%-6.94%
Expected dividend yield............................... None None
Expected lives........................................ 8 years 8 years
Expected volatility................................... 72% 72%
</TABLE>
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net loss and pro forma
net loss per common share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Net loss:
As reported............................................. (3,786) (1,047)
Pro forma............................................... (3,806) (2,563)
Pro forma net loss per common share:
As reported............................................. -- (.17)
Pro forma............................................... -- (.43)
</TABLE>
Because SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
F-15
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) SHAREHOLDERS' EQUITY--(CONTINUED)
A summary of the status of the Company's two stock option plans at December
31, 1994, 1995 and 1996 and changes during the years then ended is presented in
the table and narrative below (shares in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---------------- ----------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning 359,464 $ .74 771,754 $2.48 894,606 $2.97
of year................
Granted................. 412,290 4.00 144,751 5.57 502,875 7.51
Exercised............... -- -- -- -- (5,782) .04
Expired................. -- -- (21,899) 3.08 (55,350) 4.61
------- ------- ---------
Outstanding, end of 771,754 2.48 894,606 2.97 1,336,349 4.62
year...................
======= ======= =========
Exercisable, end of 558,306 $1.90 632,572 $2.18 854,282 $3.42
year...................
======= ======= =========
Weighted average fair
value of options grant- $4.40 $5.80
ed.....................
</TABLE>
Of the 1,336,349 options outstanding at December 31, 1996, 254,833 have a
$.04 exercise price, a weighted average contractual life of 4 years and are all
exercisable. There are also 71,849 options which have exercise prices between
$2.25 and $2.94, a weighted average exercise price of $2.60, a weighted average
contractual life of 5.5 years and are all exercisable. In addition, there are
513,542 options which have exercise prices between $4.00 and $6.22, a weighted
average exercise price of $4.39, a weighted average contractual life of 7.3
years and 348,725 are exercisable at a weighted average exercise price of
$4.18. Lastly, there are 496,125 options which have exercise prices between
$6.22 and $8.00, a weighted average exercise price of $7.51, a weighted average
contractual life of 9.5 years and 178,875 are exercisable at a weighted average
exercise price of $7.08.
On January 9, 1997, the Company granted 207,576 options under its 1996 Plans
at an exercise price of $7.11 per share. At March 31, 1997, 1,537,175 and
933,987 options were outstanding and exercisable, respectively.
(10) INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Foreign............................................ $ 120 $ 75 $ --
Federal............................................ -- -- --
State.............................................. 12 25 30
------- ------- -------
$132 $ 100 $ 30
======= ======= =======
</TABLE>
F-16
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial reporting and income
tax purposes. Gross deferred tax assets of $4,168,000, $3,944,000 and
$3,892,000, gross deferred tax liabilities of $9,000, $0 and $0, and a
valuation allowance of $4,159,000, $3,944,000 and $3,892,000 are included in
the deferred tax balance as of December 31, 1995 and 1996, and March 31, 1997
respectively. A valuation allowance has been recorded for the deferred tax
assets as a result of uncertainties regarding the realization of the asset,
including the lack of profitability to date and the variability of operating
results.
The approximate tax effects of temporary differences which give rise to
deferred tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------- ---------
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Current:
Allowance for doubtful accounts.................... $ 153 $ 178 $ 193
Accrued vacation and payroll....................... 14 57 67
Loss on sale of property held for sale............. 40 -- --
Other.............................................. 174 216 279
Valuation allowance................................ (381) (451) (539)
------ ------ -----
$ 0 $ 0 $ 0
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- ---------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Non-current:
Acquired software................................ $ 188 $ -- $ --
Depreciation..................................... (9) 51 56
Deferred compensation............................ 20 23 25
Rental obligations............................... 167 154 150
Other............................................ 39 -- --
Net operating losses............................. 3,373 3,265 3,122
Valuation allowance.............................. (3,778) (3,493) (3,353)
------- ------- -------
$ 0 $ 0 $ 0
======= ======= =======
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Income tax benefit at statutory rate........ (34)% (34)% (34)%
Other....................................... (3) (3) (3)
Net operating loss not benefited............ 37 37 37
------- ------- -------
Effective tax rate.......................... 0% 0% 0%
======= ======= =======
</TABLE>
F-17
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) INCOME TAXES--(CONTINUED)
At December 31, 1996, the Company had approximately $8,900,000 of U.S.
Federal net operating loss carryforwards and approximately $2,000,000 of state
net operating loss carryforwards which can be used, subject to certain
limitations, to offset future taxable income, if any. These U.S. Federal net
operating loss carryforwards expire through 2011 and the State net operating
loss carryforwards expire through 2002. The Company's ability to utilize these
carryforwards may be limited by a change in ownership, as defined by Federal
income tax laws and regulations, which may occur upon completion of the
proposed initial public offering.
(11) RELATED PARTY TRANSACTIONS
Notes Receivable from officers at December 31, 1995 and 1996 and March 31,
1997 consist of net advances to shareholders of $194,000, $572,000 and
$721,000, respectively. These notes will be due and payable at the earlier of
(i) an initial public offering or (ii) June 30, 1999. Commencing January 1,
1997, the notes bear interest at 8.25% per annum.
The Company has entered into agreements with its principal shareholder and
its general partner which provides for the Company to receive financial
advisory services. The agreement called for an annual advisory fee to be paid
to this shareholder. In addition, an annual advisory fee is to be paid to an
affiliate of the shareholder until the earlier to occur of January 2, 1998, the
date of an initial public offering of common stock with gross proceeds to the
Company of at least $10.0 million or the sale by the Company of substantially
all of its stock or assets. Included in the accompanying consolidated
statements of operations is $40,000 of financial advisory fees in 1996 and
$50,000 in each of 1994 and 1995. In addition, the Company paid $100,000 to an
affiliate of this shareholder in November 1996 in connection with the issuance
of Series B Preferred Stock (See Note 7).
(12) COMMITMENTS AND CONTINGENCIES
Leases. During 1994 the Company entered into an agreement to lease office
space in Shelton, Connecticut, which became the corporate headquarters of the
Company. This lease commenced April 1, 1994, and has a term of 10 years. Under
the terms of this lease, the Company paid only operating expenses until the
sale of its former corporate headquarters (see Note 5). Total aggregate lease
payments of approximately $2,176,000 are being amortized on a straight line
basis over the term of the operating lease, beginning in April 1994.
Accordingly, approximately $218,000 and $38,000 of deferred rent expense was
recorded during 1995 and 1996, respectively, related to this lease and is
included in accrued liabilities and other long term liabilities in the
accompanying consolidated balance sheets.
During 1995, the Company entered into an agreement to lease office space in
Irvine, California, which is used as a sales, service and product development
facility. The lease commenced January 5, 1995, and has a term of 6 years. Under
the terms of the lease, the Company is committed to pay aggregate lease
payments of approximately $2,961,000. In connection with entering into this
lease, the Company terminated the lease for its previous California facility.
As a result of the termination of such lease, the Company incurred a $223,000
lease termination cost which is reflected as other expense in the accompanying
1995 consolidated statement of operations. The termination charge, which is
being paid in monthly installments of approximately $5,000 through October 31,
1998, is included in accrued expenses and other long-term liabilities in the
accompanying 1995 consolidated balance sheet.
The Company leases other property and equipment under a number of operating
leases extending for varying periods of time.
F-18
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(13) EMPLOYEE BENEFIT PLAN--(CONTINUED)
Operating lease rental expense approximated $661,000, $1,054,000 and $858,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Minimum
future rental commitments under all operating leases for each of the succeeding
five years subsequent to December 31, 1996, and thereafter, are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1997............................................................... $1,237
1998............................................................... 1,131
1999............................................................... 1,070
2000............................................................... 934
2001............................................................... 977
Thereafter......................................................... 915
</TABLE>
Litigation. The Company is a party to litigation arising in the normal course
of business. In the opinion of management, any claims are not expected to have
a material adverse effect on the Company's operations or financial position.
(13) EMPLOYEE BENEFIT PLAN
The Company has a voluntary 401(k) plan. All full-time employees who have
completed six months of service are eligible to participate in the plan. The
plan provides for matching contributions and an annual profit sharing
contribution made at the discretion of the Company's Board of Directors. No
matching or profit sharing contributions were made to the plan during 1994.
During 1995 and 1996, $12,000 and $33,000 of matching contributions were made
to the Plan by the Company.
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of its notes payable, bank indebtedness and capital
lease obligations also approximate fair value.
F-19
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(15) GEOGRAPHIC INFORMATION AND INDUSTRY SEGMENTS
The Company operates in two major geographic areas and a single industry
segment. The United States charges the European segment a 50% royalty on
license fees recognized, which approximates the royalty fee charged to
unaffiliated resellers. In addition, certain direct costs incurred by the
United States segment, primarily related to research and development and
customer support costs, are charged to the European segment. The elimination in
the identifiable assets is for intercompany receivables.
The following tables summarize the Company's activities by geographic area
for 1994, 1995 and 1996 (in thousands).
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ELIMINATION CONSOLIDATED
------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Revenues......................... $22,762 $4,680 $(1,165) $26,277
======= ====== ======= =======
Income (loss) from operations.... $ 802 $ (740) $ -- $ 62
======= ====== ======= =======
Identifiable assets.............. $17,483 $2,648 $(2,850) $17,281
======= ====== ======= =======
Year Ended December 31, 1995
Revenues......................... $20,093 $4,332 $ (616) $23,809
======= ====== ======= =======
Income (loss) from operations.... $(2,520) $ (66) $ -- $(2,586)
======= ====== ======= =======
Identifiable assets.............. $11,929 $2,710 $(2,120) $12,519
======= ====== ======= =======
Year Ended December 31, 1994
Revenues......................... $14,654 $4,515 $ (817) $18,352
======= ====== ======= =======
Income (loss) from operations.... $(3,007) $ (27) $ -- $(3,034)
======= ====== ======= =======
Identifiable assets.............. $10,460 $3,039 $(1,349) $12,150
======= ====== ======= =======
</TABLE>
The following table summarizes the Company's revenues by major worldwide
regions (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
United States.............................. $ 13,192 $ 14,792 $ 19,483
Canada..................................... 39 1,018 546
Mexico and Latin America................... 195 256 277
Europe..................................... 4,515 6,390 4,798
Pacific Rim................................ 411 1,353 1,173
---------- ---------- ----------
$ 18,352 $ 23,809 $ 26,277
========== ========== ==========
</TABLE>
F-20
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(16) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1994, 1995 and 1996, approximately 14%, 24%
and 8%, respectively, of the Company's revenues resulted from sales to a single
customer.
(17) SUBSEQUENT EVENTS
The Company has filed a Registration Statement with the Securities and
Exchange Commission related to an initial public offering (the Offering)
relating to 2,800,000 shares of the Company's unissued common stock and
1,100,000 shares of common stock being offered by certain selling shareholders.
If the Offering is consummated under the terms presently anticipated, the
Company's Series A preferred and Series B preferred will be converted into
1,532,161 shares of common stock, 415,308 shares of common stock will be issued
in connection with the cashless exercise of the redeemable common stock
warrants and 154,934 options will be exercised (See Note 2).
The Company has amended its Certificate of Incorporation in connection with
the Offering to increase the number of authorized shares of common stock from
5,000,000 to 20,000,000, to give effect to a 2.25-for-1 split of the Company's
common stock and to remove the Company's existing series of preferred stock.
The accompanying financial statements have been restated to reflect this
anticipated share split and change in authorized shares.
On March 1, 1997, the Board of Directors approved the adoption of an employee
stock purchase plan designed to allow eligible employees of the Company to
purchase shares of common stock. The Board of Directors has reserved 450,000
shares of Common Stock to be available under this plan.
F-21
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
The unaudited pro forma consolidated statement of operations that follows is
presented to give effect to the sale of the Telemar product line on September
1, 1996 to a third party buyer, Telemar Software International (TSI), as if
such event occurred on January 1, 1996. The unaudited pro forma information,
which reflects the elimination of identifiable revenues and expenses of the
Telemar product line, does not purport to be indicative of the actual results
that would have been achieved had the sale taken place on January 1, 1996 or
the results which may be achieved in the future.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
License fees:
EDGE product line........................... $12,180 $ -- $12,180
Telemar product line........................ 842 (842)(1) --
------- -------
Total license fees........................ 13,022 12,180
------- -------
Services and maintenance:
EDGE product line........................... 11,643 11,643
Telemar product line........................ 1,612 (1,612)(2) --
------- -------
Total services and maintenance............ 13,255 11,643
------- -------
Total revenues.......................... 26,277 23,823
------- -------
Cost of revenues:
License fees................................ 709 (93)(3) 616
Services and maintenance.................... 7,191 (520)(4) 6,671
------- -------
Total cost of revenues.................... 7,900 7,287
------- -------
Gross profit.................................. 18,377 16,536
------- -------
Operating expenses:
Sales and marketing......................... 8,055 (823)(5) 7,232
Product development......................... 6,382 (1,070)(6) 5,312
General and administrative.................. 3,878 (244)(7) 3,634
------- -------
Total operating expenses.................. 18,315 16,178
------- -------
Operating income.............................. 62 358
Other income (expense)........................ (1,079) (92)(8) (1,171)
------- -------
Loss before provision for income taxes........ (1,017) (813)
Provision for income taxes.................... 30 30
------- -------
Net loss...................................... $(1,047) $ (843)
======= =======
</TABLE>
- --------
(1) Represents the elimination of Telemar license fees.
(2) Represents the elimination of Telemar services and maintenance revenues.
(3) Represents the elimination of payroll, taxes and benefits of $66,000
related to employees dedicated to Telemar, as well as the elimination of
$27,000 of direct license costs.
G-1
<PAGE>
(4) Represents the elimination of payroll, taxes and benefits of $455,000
related to employees dedicated to Telemar, as well as $20,000 of outside
consulting costs and $45,000 of other direct costs related to Telemar.
(5) Represents the elimination of payroll, taxes and benefits of $466,000
related to employees dedicated to Telemar, as well as $295,000 of related
travel costs, $49,000 of advertising and promotional costs and $13,000 of
other direct costs related to Telemar.
(6) Represents the elimination of payroll, taxes and benefits of $1,002,000
related to employees dedicated to Telemar, as well as $68,000 of direct
costs used in the research and development efforts related to Telemar.
(7) Represents the elimination of $28,000 of legal costs, $69,000 of equipment
depreciation expense, $60,000 of provision for doubtful accounts and
$87,000 of other direct costs related to Telemar.
(8) Represents the elimination of the gain on sale of Telemar.
G-2
<PAGE>
INSIDE BACK COVER
[DIAGRAM OF INFORMATION MANAGEMENT ASSOCIATES, INC. PRODUCTS AND SERVICES.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDERS, ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION WHICH IT IS UN-
LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Pro Forma Consolidated Statement of Operations............................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 33
Management................................................................ 49
Certain Transactions...................................................... 55
Principal and Selling Shareholders........................................ 59
Description of Capital Stock.............................................. 61
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 65
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 67
Index to Consolidated Financial Statements................................ F-1
Pro Forma Consolidated Statement of Operations............................ G-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,900,000 Shares
[IMA Logo]
Common Stock
-----------
PROSPECTUS
-----------
Alex. Brown & Sons
INCORPORATED
Robertson, Stephens & Company
SoundView Financial Group, Inc.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee....................................... $ 20,387.00
NASD filing fee............................................ 7,228.00
Nasdaq National Market listing fee......................... 39,752.00
Transfer agent fees........................................ 3,500.00
Accounting fees and expenses............................... 470,000.00
Legal fees and expenses.................................... 455,000.00
Printing and mailing expenses.............................. 100,000.00
Miscellaneous.............................................. 104,133.00
-------------
Total.................................................... $1,200,000.00
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 33-771 of the Connecticut Business Corporation Act (the "CBCA")
permits a corporation generally to indemnify any individual made a party to a
proceeding because he is or was a director or officer of the corporation
against any liabilities incurred by such person in such proceedings if: (i) he
conducted himself in good faith; and (ii) he reasonably believed (A) in the
case of conduct in his official capacity with the corporation, that his
conduct was in its best interests and (B) in all other cases, that his conduct
was at least not opposed to its best interests; and (iii) in the case of any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful; provided, however, a corporation may not indemnify a director or
officer under such section if: (i) in connection with a proceeding by or in
the right of the corporation in which the director was adjudged liable to the
corporation; or (ii) in connection with any other proceeding charging improper
personal benefit to him, whether or not involving action in his official
capacity, in which he was adjudged liable on the basis that personal benefit
was improperly received by him. In addition, Sections 33-772 and 33-776 of the
CBCA provide that, unless limited by its certificate of incorporation, a
corporation shall indemnify each officer and director who is wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which he was a party because he is or was a director or officer of the
corporation against reasonable expenses incurred by him in connection with the
proceeding.
Article VIII of the Certificate of Incorporation and Section 7.2 of the
Bylaws provide that the Company shall indemnify all directors and officers to
the fullest extent permitted by the CBCA.
Section 7.2 of the Bylaws also provides that the Board of Directors may
cause the Company to indemnify an employee or agent to the same extent as an
officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding the number of
shares of Common Stock, Preferred Stock, and Common Stock purchase warrants
issued and the number of options granted by the Registrant since January 1994.
Further included is the consideration, if any, received by the Registrant for
such shares and options, and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), and rule of the
Securities and Exchange Commission under which exemption from
II-1
<PAGE>
registration was claimed. All awards of options did not involve any sale under
the Securities Act. None of these securities were registered under the
Securities Act. No sale of securities involved the use of an underwriter and
no commissions were paid in connection with the sales of any securities. The
information set forth in this Item 15 reflects the Company's 2.25-for-1 split
in Common Stock to be effected prior to the closing of this offering.
(a)Issuances of Common Stock:
(1) In November 1994, the Company issued to Wand/IMA Investments, L.P.
250,000 shares of Common Stock at $4.00 per share for a total
consideration received of $999,999.
(2) In November 1994, the Company issued to Gregory Collins and Victor Nesi
an aggregate of 46,248 shares of Common Stock at $4.00 per share for a
total consideration received of $184,995.
(3) In August 1996, the Company issued to Craig Lund 5,783 shares of Common
Stock upon the exercise of a stock option with an exercise price of
$0.04 per share. The Company received total consideration of $257.
(4) In December 1996, the Company issued to Gregory Collins and Victor Nesi
32,400 shares of Common Stock at $7.11 per share for a total
consideration received of $230,400.
(b)Issuances of Preferred Stock:
(1) In March 1995, the Company issued to Wand/IMA Investments, L.P. and
Wand/IMA Investments II L.P. a total of 4,500 shares of Series A Senior
Convertible Preferred Stock with a stated value of $1,000 per share for
a total consideration received of $4,500,000.
(2) In November 1996, the Company issued to Wand/IMA Investments II L.P.
and Wand/IMA Investments III L.P. a total of 4,350 shares of Series B
Senior Convertible Preferred Stock with a stated value of $1,000 per
share for a total consideration received of $4,350,000. Wand (IMA) Inc.
received a financial advisory fee of $100,000 in connection with this
transaction.
(c)Issuance of Warrants to Purchase Common Stock:
(1) In February and March of 1996, the Company issued warrants to Howard
Siegel to purchase 6,750 shares of Common Stock with an exercise price
of $4.89 per share in connection with a financing transaction. The
Company received no monetary consideration for the warrants.
(d)Certain Grants and Exercises of Stock Options:
(1) Since January 1, 1994 the Company has issued options under its (i)
Amended and Restated 1991 Stock Option Plan to purchase an aggregate of
513,542 shares of Common Stock at a weighted average exercise price of
$4.39, (ii) the 1996 Employee and Consultant Stock Option Plan to
purchase an aggregate of 653,076 shares of Common Stock at a weighted
average exercise price of $7.41, and (iii) the 1996 Non-Employee
Directors Stock Option Plan to purchase an aggregate of 50,625 shares
of Common Stock at an exercise price of $7.11.
The shares of capital stock and other securities issued in the above
transactions were offered and sold in reliance upon the exemptions from
registration under Section 4(2) of the Securities Act, Regulation D or Rule
701 promulgated under the Securities Act, relative to sales by an issuer not
involving any public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation of the Registrant, as amended.*
3.2 Amended and Restated Certificate of Incorporation of the Registrant
(to be filed upon closing of this offering).*
3.3 Amended and Restated By-Laws of the Registrant.*
3.4 Amended and Restated By-Laws of the Registrant (to be effective upon
the closing of this offering).**
4.1 Specimen Certificate for shares of Common Stock, no par value, of the
Registrant.*
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. with respect to the
validity of the securities being offered.*
10.1 Amended and Restated 1991 Stock Option Plan.*
10.2 Original Form of Non-Qualified Stock Option Agreement (Amended and
Restated 1991 Stock Option Plan).*
10.3 Amended Form of Non-Qualified Stock Option Agreement (Amended and
Restated 1991 Stock Option Plan).*
10.4 1996 Employee and Consultant Stock Option Plan.*
10.5 Form of Non-Qualified Stock Option Agreement (1996 Employee and
Consultant Stock Option Plan).*
10.6 1996 Non-Employee Directors Stock Option Plan.*
10.7 Form of Non-Qualified Stock Option Agreement (1996 Non-Employee
Directors Stock Option
Plan ).*
10.8 Employee Stock Purchase Plan.*
10.9 Note and Warrant Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated December 21, 1990.*
10.10 Amendment to Note and Warrant Purchase Agreement between the Company
and Wand/IMA Investments, L.P., dated March 1, 1993.*
10.11 Amendment No. 2 to Note and Warrant Agreement between the Company and
Wand/IMA Investments, L.P., dated June 1, 1994.*
10.12 Common Stock Purchase Warrant No. W-3 issued to Thomas F. Hill, dated
December 21, 1990.*
10.13 Amendment No. 1 to Common Stock Purchase Warrant No. W-3, dated June
1, 1994.*
10.14 Amendment No. 2 to Common Stock Purchase Warrant No. W-3, dated
November 16, 1994.*
10.15 Amendment No. 3 to Common Stock Purchase Warrant No. W-3, dated
September 20, 1996.*
10.16 Stock Purchase Agreement between the Company and Wand/IMA Investments,
L.P., dated September 4, 1991.*
10.17 Amendment No. 1 to Stock Purchase Agreement dated September 4, 1991
between the Company and Wand/IMA Investments, L.P., dated June 1,
1994.*
10.18 Stock Purchase Agreement between the Company and Wand/IMA Investments,
L.P., dated October 29, 1991.*
10.19 Amendment No. 1 to Stock Purchase Agreement dated October 29, 1991
between the Company and Wand/IMA Investments, L.P., dated June 1,
1994.*
10.20 Exchange and Note Modification Agreement between the Company and
Wand/IMA Investments, L.P., dated October 29, 1991.*
10.21 12% Senior Subordinated Note due 1997 for $1,000,000 issued to
Wand/IMA Investments, L.P., dated October 29, 1991.*
10.22 Common Stock Purchase Warrant No. W-4 issued to Wand/IMA Investments,
L.P., dated October 29, 1991.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.23 Amendment No. 1 to Common Stock Purchase Warrant No. W-4, dated June
1, 1994.*
10.24 Amendment No. 2 to Common Stock Purchase Warrant No. W-4, dated
November 16, 1994.*
10.25 Amendment No. 3 to Common Stock Purchase Warrant No. W-4, dated
September 20, 1996.*
10.26 Common Stock Purchase Warrant No. W-5 issued to Wand Partners Inc.,
dated October 29, 1991.*
10.27 Amendment No. 1 to Common Stock Purchase Warrant No. W-5, dated June
1, 1994.*
10.28 Amendment No. 2 to Common Stock Purchase Warrant No. W-5, dated
November 16, 1994.*
10.29 Amendment No. 3 to Common Stock Purchase Warrant No. W-5, dated
September 20, 1996.*
10.30 Stock Purchase Agreement between the Company and certain Purchasers,
dated March 26, 1993.*
10.31 Stock Purchase Agreement between the Company, certain Selling
Shareholders and Mercury Asset Management plc, dated June 1, 1994.*
10.32 Stock Purchase Agreement between the Company, certain Selling
Shareholders and D. Callard, B. Schnitzer and M. Appelbaum as
Purchasers, dated June 1, 1994.*
10.33 Stock Purchase Agreement between the Company, V. Nesi and G. Collins,
dated November 14, 1994.*
10.34 Stock Purchase Agreement between the Company and Wand/IMA Investments,
L.P., dated as of November 16, 1994.*
10.35 Stock Purchase Agreement among the Company, Wand/IMA Investments, L.P.
and Wand/IMA Investments II L.P., dated as of March 31, 1995.*
10.36 Stock Purchase Agreement among the Company, Wand/IMA Investments II
L.P. and Wand/IMA Investments L.P. III, dated October 31, 1996.*
10.37 Stock Purchase Agreement among the Company, V. Nesi and G. Collins,
dated December 18, 1996.*
10.38 Loan and Security Agreement between the Company and People's Bank,
dated October 26, 1995.*
10.39 Promissory Note (Term) for $2.5 million issued to People's Bank, dated
October 26, 1995.*
10.40 Promissory Note (Revolver) for $6.0 million issued to People's Bank,
dated October 26, 1995.*
10.41 Subordination Agreement among the Company, People's Bank and Wand/IMA
Investments, L.P., dated October 26, 1995.*
10.42 Subordination Agreement among the Company, Albert R. Subbloie, Jr.,
Information Management Associates Limited and People's Bank, dated
October 26, 1995.*
10.43 Subordination Agreement among the Company, Gary R. Martino,
Information Management Associates Limited and People's Bank, dated
October 26, 1995.*
10.44 Subordination Agreement among the Company, Andrei Poludnewycz,
Information Management Associates Limited and People's Bank, dated
October 26, 1995.*
10.45 First Amendment to Loan and Security Agreement between the Company and
People's Bank, dated December 31, 1996.*
10.46 Asset Purchase Agreement between the Company and Telemar Software
International LLC, dated as of July 31, 1996.*
10.47 Sublease between the Company and Telemar Software International, LLC,
dated as of September 1, 1996.*
10.48 8% Promissory Note due 2002 from Telemar Software International, LLC
to the Company, dated as of September 1, 1996.*
10.49 Security Agreement between the Company and Telemar Software
International, LLC, dated September 16, 1996.*
10.50 Promissory Note from Albert R. Subbloie, Jr. to the Company, dated
December 31, 1996.*
10.51 Promissory Note from Gary R. Martino to the Company, dated December
31, 1996.*
10.52 Promissory Note from Andrei Poludnewycz to the Company, dated December
31, 1996.*
10.53 Promissory Note from Albert R. Subbloie, Jr. to the Company, dated
February 28, 1997.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.54 Promissory Note from Gary R. Martino to the Company, dated February
28, 1997.*
10.55 Promissory Note from Andrei Poludnewycz to the Company, dated February
28, 1997.*
10.56 Monitoring Agreement between the Company and Wand Partners LP, dated
as of January 2, 1995.*
10.57 Lease Agreement between the Company and Robert D. Scinto, dated as of
October 6, 1993.*
10.58 First Amendment to Lease Agreement between the Company and Robert D.
Scinto, dated January 30, 1996.*
10.59 Full Service Office Lease between the Company and Lakeshore Towers
Limited Partnership Phase I and the Company, dated November 4, 1994.*
10.60 Amendment to Lease between the Company and Lakeshore Towers Limited
Partners, Phase I, dated July 15, 1996.*
10.61 Amendment No. 2 to Loan and Security Agreement between the Company and
People's Bank, dated March 17, 1997.*
10.62 Letter Agreement among the Company, Wand/IMA Investments, L.P. and
certain Shareholders, dated December 21, 1990.*
10.63 Amendment to Letter Agreement among the Company, Wand/IMA Investments,
L.P. and certain Shareholders, dated October 29, 1991.*
10.64 Second Amendment to Letter Agreement among the Company, Wand/IMA
Investments, L.P. and certain Shareholders, dated June 1, 1994.*
10.65 Letter Agreement among the Company, Mercury Asset Management plc and
certain Shareholders, dated as of June 1, 1994.*
10.66 Restricted Stock Award Agreement between the Company and Paul J.
Schmidt, dated December 21, 1990.*
10.67 Restricted Stock Award Agreement between the Company and Joseph R.
LeMay, as amended.*
10.68 Consulting Service Agreement between the Company and Clifton Myers
Enterprise, Inc., dated January 1, 1996.*
10.69 Equipment Lease Agreement between the Company and Tal Financial
Corporation, dated February 1, 1996.*
10.70 Amendment No. 4 to Common Stock Purchase Warrant No. W-3, dated April
29, 1997.*
10.71 Amendment No. 4 to Common Stock Purchase Warrant No. W-4, dated April
29, 1997.*
10.72 Amendment No. 4 to Common Stock Purchase Warrant No. W-5, dated April
29, 1997.*
10.73 Amendment No. 3 to Loan and Security Agreement between the Company and
People's Bank, dated April 16, 1997.*
10.74 Waiver and Consent Agreement, dated November 1, 1996*
10.75 Letter Agreement regarding conversion of Preferred Stock and Warrants,
dated July 1, 1997.**
11.1 Computation of income per common share.**
21.1 Subsidiaries of the Registrant.*
23.1 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in Exhibit
5.1).*
23.2 Consent of Arthur Andersen LLP.**
23.3 Consent of Aberdeen Group, Inc., dated April 9, 1997.*
24.1 Power of Attorney for Messrs. Albert R. Subbloie, Jr., Gary R.
Martino, Paul J. Schmidt, Andrei Poludnewycz, Donald P. Miller and
David J. Callard.*
24.2 Power of Attorney for Thomas F. Hill.*
27.1 Financial Data Schedule.*
</TABLE>
- --------
*Previously filed.
**Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule No. II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
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 contained in the Certificate
II-5
<PAGE>
of Incorporation, as amended, and By-Laws, as amended, of the Registrant and
the laws of the State of Connecticut or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matters have 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 to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Hartford, State of Connecticut, on this 1st day of July, 1997.
Information Management Associates,
Inc.
By /s/ Albert R. Subbloie, Jr.
------------------------------
Albert R. Subbloie, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Albert R. Subbloie, Jr. President, Chief
- ------------------------------------ Executive Officer July 1, 1997
ALBERT R. SUBBLOIE, JR. and Director
(Principal
Executive Officer)
/s/ Gary R. Martino Chairman of the
- ------------------------------------ Board of July 1, 1997
GARY R. MARTINO Directors, Chief
Financial Officer,
Treasurer and
Director
(Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------ July 1, 1997
PAUL J. SCHMIDT
* Director
- ------------------------------------ July 1, 1997
THOMAS F. HILL
* Director
- ------------------------------------ July 1, 1997
ANDREI POLUDNEWYCZ
* Director
- ------------------------------------ July 1, 1997
DONALD P. MILLER
* Director
- ------------------------------------ July 1, 1997
DAVID J. CALLARD
/s/ Gary R. Martino
*By: _______________________________
Attorney-in-fact, pursuant to
power of attorneypreviously filed
as part of this Registration
Statement
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders of
Information Management Associates, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated balance sheets of Information Management Associates, Inc. and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for the three years then ended included in this registration statement,
and have issued our report thereon dated March 6, 1997 except with respect to
the matters discussed in Notes 4 and 17, as to which the dates are March 17,
1997 and July 1, 1997, respectively. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
accompanying schedule on page S-2 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Hartford, Connecticut
March 6, 1997
S-1
<PAGE>
SCHEDULE II
INFORMATION MANAGEMENT ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO COST BALANCE AT
OF PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
---------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Ac-
counts
January 1, 1994-December
31, 1994................ 287,574 607,935 (425,529) 469,980
January 1, 1995-December
31, 1995................ 469,980 996,701 (1,041,353) 425,328
January 1, 1996-December
31, 1996................ 425,328 390,224 (333,578) 481,974
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation of the Registrant, as amended.*
3.2 Amended and Restated Certificate of Incorporation of the
Registrant (to be filed upon closing of this offering).*
3.3 Amended and Restated By-Laws of the Registrant.*
3.4 Amended and Restated By-Laws of the Registrant (to be effective
upon the closing of this offering).**
4.1 Specimen Certificate for shares of Common Stock, no par value,
of the Registrant.*
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. with respect
to the validity of the securities being offered.*
10.1 Amended and Restated 1991 Stock Option Plan.*
10.2 Original Form of Non-Qualified Stock Option Agreement (Amended
and Restated 1991 Stock Option Plan).*
10.3 Amended Form of Non-Qualified Stock Option Agreement (Amended
and Restated 1991 Stock Option Plan).*
10.4 1996 Employee and Consultant Stock Option Plan.*
10.5 Form of Non-Qualified Stock Option Agreement (1996 Employee and
Consultant Stock Option Plan).*
10.6 1996 Non-Employee Directors Stock Option Plan.*
10.7 Form of Non-Qualified Stock Option Agreement (1996 Non-Employee
Directors Stock Option Plan).*
10.8 Employee Stock Purchase Plan.*
10.9 Note and Warrant Purchase Agreement between the Company and
Wand/IMA Investments, L.P., dated December 21, 1990.*
10.10 Amendment to Note and Warrant Purchase Agreement between the
Company and Wand/IMA Investments, L.P., dated March 1, 1993.*
10.11 Amendment No. 2 to Note and Warrant Agreement between the
Company and Wand/IMA Investments, L.P., dated June 1, 1994.*
10.12 Common Stock Purchase Warrant No. W-3 issued to Thomas F. Hill,
dated December 21, 1990.*
10.13 Amendment No. 1 to Common Stock Purchase Warrant No. W-3, dated
June 1, 1994.*
10.14 Amendment No. 2 to Common Stock Purchase Warrant No. W-3, dated
November 16, 1994.*
10.15 Amendment No. 3 to Common Stock Purchase Warrant No. W-3, dated
September 20, 1996.*
10.16 Stock Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated September 4, 1991.*
10.17 Amendment No. 1 to Stock Purchase Agreement dated September 4,
1991 between the Company and Wand/IMA Investments, L.P., dated
June 1, 1994.*
10.18 Stock Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated October 29, 1991.*
10.19 Amendment No. 1 to Stock Purchase Agreement dated October 29,
1991 between the Company and Wand/IMA Investments, L.P., dated
June 1, 1994.*
10.20 Exchange and Note Modification Agreement between the Company and
Wand/IMA Investments, L.P., dated October 29, 1991.*
10.21 12% Senior Subordinated Note due 1997 for $1,000,000 issued to
Wand/IMA Investments, L.P., dated October 29, 1991.*
10.22 Common Stock Purchase Warrant No. W-4 issued to Wand/IMA
Investments, L.P., dated October 29, 1991.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.23 Amendment No. 1 to Common Stock Purchase Warrant No. W-4, dated
June 1, 1994.*
10.24 Amendment No. 2 to Common Stock Purchase Warrant No. W-4, dated
November 16, 1994.*
10.25 Amendment No. 3 to Common Stock Purchase Warrant No. W-4, dated
September 20, 1996.*
10.26 Common Stock Purchase Warrant No. W-5 issued to Wand Partners
Inc., dated October 29, 1991.*
10.27 Amendment No. 1 to Common Stock Purchase Warrant No. W-5, dated
June 1, 1994.*
10.28 Amendment No. 2 to Common Stock Purchase Warrant No. W-5, dated
November 16, 1994.*
10.29 Amendment No. 3 to Common Stock Purchase Warrant No. W-5, dated
September 20, 1996.*
10.30 Stock Purchase Agreement between the Company and certain
Purchasers, dated March 26, 1993.*
10.31 Stock Purchase Agreement between the Company, certain Selling
Shareholders and Mercury Asset Management plc, dated June 1,
1994.*
10.32 Stock Purchase Agreement between the Company, certain Selling
Shareholders and D. Callard, B. Schnitzer and M. Appelbaum as
Purchasers, dated June 1, 1994.*
10.33 Stock Purchase Agreement between the Company, V. Nesi and G.
Collins, dated November 14, 1994.*
10.34 Stock Purchase Agreement between the Company and Wand/IMA
Investments, L.P., dated as of November 16, 1994.*
10.35 Stock Purchase Agreement among the Company, Wand/IMA
Investments, L.P. and Wand/IMA Investments II L.P., dated as of
March 31, 1995.*
10.36 Stock Purchase Agreement among the Company, Wand/IMA Investments
II L.P. and Wand/IMA Investments L.P. III, dated October 31,
1996.*
10.37 Stock Purchase Agreement among the Company, V. Nesi and G.
Collins, dated December 18, 1996.*
10.38 Loan and Security Agreement between the Company and People's
Bank, dated October 26, 1995.*
10.39 Promissory Note (Term) for $2.5 million issued to People's Bank,
dated October 26, 1995.*
10.40 Promissory Note (Revolver) for $6.0 million issued to People's
Bank, dated October 26, 1995.*
10.41 Subordination Agreement among the Company, People's Bank and
Wand/IMA Investments, L.P., dated October 26, 1995.*
10.42 Subordination Agreement among the Company, Albert R. Subbloie,
Jr., Information Management Associates Limited and People's
Bank, dated October 26, 1995.*
10.43 Subordination Agreement among the Company, Gary R. Martino,
Information Management Associates Limited and People's Bank,
dated October 26, 1995.*
10.44 Subordination Agreement among the Company, Andrei Poludnewycz,
Information Management Associates Limited and People's Bank,
dated October 26, 1995.*
10.45 First Amendment to Loan and Security Agreement between the
Company and People's Bank, dated December 31, 1996.*
10.46 Asset Purchase Agreement between the Company and Telemar
Software International LLC, dated as of July 31, 1996.*
10.47 Sublease between the Company and Telemar Software International,
LLC, dated as of September 1, 1996.*
10.48 8% Promissory Note due 2002 from Telemar Software International,
LLC to the Company, dated as of September 1, 1996.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.49 Security Agreement between the Company and Telemar Software
International, LLC, dated September 16, 1996.*
10.50 Promissory Note from Albert R. Subbloie, Jr. to the Company,
dated December 31, 1996.*
10.51 Promissory Note from Gary R. Martino to the Company, dated
December 31, 1996.*
10.52 Promissory Note from Andrei Poludnewycz to the Company, dated
December 31, 1996.*
10.53 Promissory Note from Albert R. Subbloie, Jr. to the Company,
dated February 28, 1997.*
10.54 Promissory Note from Gary R. Martino to the Company, dated
February 28, 1997.*
10.55 Promissory Note from Andrei Poludnewycz to the Company, dated
February 28, 1997.*
10.56 Monitoring Agreement between the Company and Wand Partners LP,
dated as of January 2, 1995.*
10.57 Lease Agreement between the Company and Robert D. Scinto, dated
as of October 6, 1993.*
10.58 First Amendment to Lease Agreement between the Company and
Robert D. Scinto, dated January 30, 1996.*
10.59 Full Service Office Lease between the Company and Lakeshore
Towers Limited Partnership Phase I and the Company, dated
November 4, 1994.*
10.60 Amendment to Lease between the Company and Lakeshore Towers
Limited Partners, Phase I, dated July 15, 1996.*
10.61 Amendment No. 2 to Loan and Security Agreement between the
Company and People's Bank, dated March 17, 1997*
10.62 Letter Agreement among the Company, Wand/IMA Investments, L.P.
and certain Shareholders, dated December 21, 1990.*
10.63 Amendment to Letter Agreement among the Company, Wand/IMA
Investments, L.P. and certain Shareholders, dated October 29,
1991.*
10.64 Second Amendment to Letter Agreement among the Company, Wand/IMA
Investments, L.P. and certain Shareholders, dated June 1, 1994.*
10.65 Letter Agreement among the Company, Mercury Asset Management plc
and certain Shareholders, dated as of June 1, 1994.*
10.66 Restricted Stock Award Agreement between the Company and Paul J.
Schmidt, dated December 21, 1990.*
10.67 Restricted Stock Award Agreement between the Company and Joseph
R. LeMay, as amended.*
10.68 Consulting Service Agreement between the Company and Clifton
Myers Enterprise, Inc., dated January 1, 1996.*
10.69 Equipment Lease Agreement between the Company and Tal Financial
Corporation, dated February 1, 1996.*
10.70 Amendment No. 4 to Common Stock Purchase Warrant No. W-3, dated
April 29, 1997*
10.71 Amendment No. 4 to Common Stock Purchase Warrant No. W-4, dated
April 29, 1997*
10.72 Amendment No. 4 to Common Stock Purchase Warrant No. W-5, dated
April 29, 1997*
10.73 Amendment No. 3 to Loan and Security Agreement between the
Company and People's Bank, dated April 16, 1997*
10.74 Waiver and Consent Agreement, dated November 1, 1996.*
10.75 Letter Agreement regarding conversion of Preferred Stock and
Warrants, dated July 1, 1997.**
11.1 Computation of income per common share.**
21.1 Subsidiaries of the Registrant.*
23.1 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in
Exhibit 5.1).*
23.2 Consent of Arthur Andersen LLP.**
23.3 Consent of Aberdeen Group, Inc., dated April 9, 1997.*
24.1 Power of Attorney for Messrs. Albert R. Subbloie, Jr., Gary R.
Martino, Paul J. Schmidt, Andrei Poludnewycz, Donald P. Miller
and David J. Callard.*
24.2 Power of Attorney for Thomas F. Hill.*
27.1 Financial Data Schedule.*
</TABLE>
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*Previously filed.
**Filed herewith.
<PAGE>
EXHIBIT 1.1
3,900,000 Shares
INFORMATION MANAGEMENT
ASSOCIATES, INC.
Common Stock
(No Par Value)
UNDERWRITING AGREEMENT
----------------------
__________, 1997
Alex. Brown & Sons Incorporated
Robertson, Stephens & Company, LLC
Soundview Financial Group, Inc.
As Representatives of the Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Information Management Associates, Inc., a Connecticut corporation (the
"Company"), and certain shareholders of the Company (the "Selling Shareholders")
propose to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 3,900,000 shares of the Company's Common
Stock, no par value (the "Firm Shares"), of which 2,800,000 shares will be sold
by the Company and 1,100,000 shares will be sold by the Selling Shareholders.
The respective amounts of the Firm Shares to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto, and the
respective amounts to be sold by the Selling Shareholders are set forth opposite
their names in Schedule II hereto. The Company and the Selling Shareholders are
sometimes referred to herein collectively as the "Sellers." The Selling
Shareholders also propose to sell at the Underwriters' option an aggregate of up
to 585,000 additional shares of the Company's Common Stock (the "Option Shares")
as set forth below.
<PAGE>
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Underwriting
Agreement (this "Agreement") on behalf of the several Underwriters, and (b)
that the several Underwriters are willing, acting severally and not jointly, to
purchase the numbers of Firm Shares set forth opposite their respective names in
Schedule I, plus their pro rata portion of the Option Shares if you elect to
exercise the over-allotment option, in whole or in part, for the accounts of the
several Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and the Selling Shareholders.
--------------------------------------------------------------------------
(a) The Company represents and warrants to each of the Underwriters
as follows:
(i) A registration statement on Form S-1 (File No. 333-_____)
with respect to the Shares has been carefully prepared by the Company
in conformity with the requirements of the Securities Act of 1933,
as amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and has been filed with the Commission.
Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the
Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have
heretofore been delivered by the Company to you and, to the extent
applicable, were identical to the electronically transmitted copies
thereof filed with the Commission on the Commission's Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR"), except to the
extent permitted by Regulation S-T. Such registration statement,
together with any registration statement filed by the Company pursuant
to Rule 462(b) under the Act, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-
effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act, (b) if no filing pursuant to Rule 424(b) is required
and a term sheet in accordance with Rules 434 and 424(b)(7) is not
used, the form of prospectus included in the Registration Statement at
the time of effectiveness or (c) if a term sheet is used, the form of
preliminary prospectus included in the Registration Statement at the
time of effectiveness that is delivered by the Company to the
Underwriters for delivery to purchasers of the Shares, together with
the term sheet or abbreviated term sheet filed with the Commission in
accordance with the provisions of Rule 434 and Rule 424(b)(7) under
the Act. Each
-2-
<PAGE>
preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus." Any reference herein to the Registration Statement, any
Preliminary Prospectus or the Prospectus shall be deemed to include
any supplements or amendments thereto filed with the Commission after
the date of filing of the Prospectus under Rules 424(b) or 430A, and
prior to the termination of the offering of the Shares by the
Underwriters. Any reference herein to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
to any of the foregoing, shall be deemed to include the respective
copies thereof filed with the Commission on EDGAR.
(ii) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Connecticut, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement. Each of the subsidiaries of the Company as listed in
Exhibit 21 to Item 16(a) of the Registration Statement (collectively,
the "Subsidiaries") has been duly organized and is validly existing as
a corporation in good standing under the laws of the jurisdiction of
its incorporation, with corporate power and authority to own or lease
its properties and conduct its business as described in the
Registration Statement. The Subsidiaries are the only subsidiaries,
direct or indirect, of the Company. The Company and each of the
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, except where the failure to be qualified would not have
a material adverse effect on the earnings, business, management,
assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole (a
"Material Adverse Effect"). The outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued,
are fully paid and non-assessable and are owned by the Company free
and clear of all liens, encumbrances and equities and claims; and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been
duly authorized and validly issued and are fully paid and non-
assessable; the portion of the Shares to be issued and sold by the
Company have been duly authorized and, when issued and paid for as
contemplated herein, will be validly issued, fully paid and non-
assessable; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of
the Shares as contemplated by this Agreement
-3-
<PAGE>
gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common
Stock.
(iv) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the
Shares conform to the description thereof contained in the
Registration Statement. The form of certificates for the Shares
conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares nor instituted proceedings for that purpose. The
Registration Statement contains, and the Prospectus will contain, all
statements which are required to be stated therein by, and will
conform, to the requirements of the Act and the Rules and Regulations.
The Registration Statement does not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The
Prospectus does not contain, and will not contain, any untrue
statement of material fact and do not omit, and will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information
contained in or omitted from the Registration Statement or the
Prospectus, in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any
Underwriter through the Representatives, specifically for use in the
preparation thereof.
(vi) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set
forth in the Registration Statement, present fairly the financial
position and the results of operations and cash flows of the Company
and the Subsidiaries, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been
prepared in accordance with generally accepted accounting principles
("GAAP"), consistently applied throughout the periods involved, except
as disclosed therein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
financial data included in the Registration Statement presents fairly
the information shown therein and such data has been compiled on a
basis consistent with the financial statements presented therein and
the books and records of the Company. The pro forma financial
statements and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases
-4-
<PAGE>
described therein, and, in the opinion of the Company, the assumptions
used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(vii) Arthur Andersen LLP, who have certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending or,
to the knowledge of the Company, threatened or contemplated against
the Company or any of the Subsidiaries before any court or
administrative agency or otherwise which, if determined adversely to
the Company or any of its Subsidiaries, might result in a Material
Adverse Effect or prevent the consummation of the transactions
contemplated hereby, except as set forth in the Registration
Statement.
(ix) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance
of any kind except those reflected in such financial statements (or as
described in the Registration Statement) or which are not material in
amount. The Company and the Subsidiaries occupy or have validly
subleased their leased properties under valid and binding leases
conforming in all material respects to the description thereof set
forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all Federal,
state, local and foreign income tax returns which have been required
to be filed and have paid all taxes indicated by said returns and all
assessments received by them or any of them to the extent that such
taxes have become due, except for assessments being contested in good
faith and filings and payments not yet made, but in each case for
which adequate reserves have been provided to the extent required by
GAAP. All tax liabilities have been adequately provided for in the
financial statements of the Company.
(xi) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or
supplemented, there has not been any material adverse change or any
development involving a prospective material adverse change in or
affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise), or prospects
of the Company and the Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, and there has not been
any material transaction entered into or any material transaction that
is probable of being entered into by the Company or
-5-
<PAGE>
the Subsidiaries, other than transactions in the ordinary course of
business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company and the
Subsidiaries have no material contingent obligations which are not
disclosed in the Company's financial statements which are included in
the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with
the giving of notice or lapse of time or both, will be, in violation
of or in default under its Certificate of Incorporation ("Charter") or
By-Laws or under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any
of its properties, is bound and which default could have a Material
Adverse Effect. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a party, or of
the Charter or By-laws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body
having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may
be required by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or such additional steps as may be
necessary to qualify the Shares for public offering by the
Underwriters under state securities or Blue Sky laws) has been
obtained or made and is in full force and effect.
(xiv) The Company and the Subsidiaries possess such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate Federal, state,
local or foreign regulatory agencies or bodies necessary to the
conduct of their business, and are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
to possess or comply with such Governmental Licenses would not, singly
or in the aggregate, have a Material Adverse Effect neither the
Company nor any Subsidiary has received any notice of proceedings
relating to or is otherwise aware of a revocation or modification of
any Governmental License which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or funding, would have a
Material Adverse Effect.
-6-
<PAGE>
(xv) The Company and the Subsidiaries own or possess adequate
licenses or other rights to use the patents, patent rights,
inventions, copyrights, trademarks, service marks, trade names, trade
secrets, know-how or other intellectual property (collectively,
"Intellectual Property") described in the Prospectus as owned or used
by them or which is necessary to the conduct of their business as
described in the Prospectus. To the knowledge of the Company, none of
the Intellectual Property rights owned or licensed by the Company are
unenforceable or invalid. Neither the Company nor any Subsidiary is
aware of any infringement of or conflict with asserted rights or
claims of others with respect to any of the Company's products or
Intellectual Property which, if the subject of any unfavorable
decision, ruling or funding, could have a Material Adverse Effect.
Neither the Company nor any Subsidiary is aware of any infringement of
any of the Intellectual Property rights by any third party.
(xvi) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company
Act of 1940, as amended and the rules and regulations of the
Commission thereunder (the "1940 Act").
(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP 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.
(xviii) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
prudent for the conduct of their respective businesses and the value
of their respective properties and as is customary for companies
engaged in similar industries.
(xix) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of
the Internal
-7-
<PAGE>
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension
plan for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by action or
by failure to act, which would cause the loss of such qualification.
(xx) Except as would not, singly or in the aggregate, have a
Material Adverse Effect, (A) neither the Company nor any Subsidiary is
in violation of any Federal, state, local or foreign statute, law,
rule, regulation, ordinance, code, policy or rule of common law or any
judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment,
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (B) the Company and the Subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any
Subsidiary and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any
Subsidiary relating to any Environmental Laws.
(xxi) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of doing Business with
----------------------------------------------------
Cuba, and the Company further agrees that if it commences engaging in
----
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or
has become effective with the Commission or with the Florida
Department of Banking and Finance (the "Department"), whichever date
is later, or if the information reported or incorporated by reference
in the Prospectus, if any, concerning the Company's business with Cuba
or with any person or affiliate located in Cuba changes in any
material way, the Company will provide the Department notice of such
business or change, as appropriate, in a form acceptable to the
Department.
(xxii) No contract or document of a character required to be
described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement is not so described
or filed as required.
-8-
<PAGE>
(b) Each of the Selling Shareholders severally and not jointly
represents and warrants as to each such Selling Shareholder as follows:
(i) On the Closing Date and the Option Closing Date (as such
dates are hereinafter defined), each Underwriter that is a bona fide
purchaser within the meaning of the Uniform Commercial Code (the
"Code") will acquire, upon payment therefor, the interest of such
Selling Shareholder in the Firm Shares or the Option Shares, as the
case may be, free and clear of any adverse claim, as defined in the
Code.
(ii) Such Selling Shareholder has full right, power and
authority to execute and deliver this Agreement, the power of attorney
appointing certain individuals as such Selling Shareholder's attorney-
in-fact (the "Attorney-in-Fact") relating to the transactions
contemplated hereby (the "Power of Attorney") and the custody
agreement signed by such Selling Shareholder and the Company, as
custodian, relating to the deposit of the Shares to be sold by such
Selling Shareholder (the "Custody Agreement") and to perform its
obligations under such agreements. The execution and delivery of this
Agreement, the Power of Attorney and the Custody Agreement, and the
consummation by such Selling Shareholder of the transactions
contemplated hereby and thereby and the fulfillment by such Selling
Shareholder of the terms hereof and thereof will not require any
consent, approval, authorization, or other order of any court,
regulatory body, administrative agency or other governmental body
(except as may be required under the Act, state securities laws or
Blue Sky laws) and will not result in a breach of any of the terms and
provisions of, or constitute a default under, organizational documents
of such Selling Shareholder, if not an individual, or any indenture,
mortgage, deed of trust or other agreement or instrument to which such
Selling Shareholder is a party, or of any order, rule or regulation
applicable to such Selling Shareholder of any court or of any
regulatory body or administrative agency or other governmental body
having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of the Common Stock
of the Company and, other than as permitted by the Act, such Selling
Shareholder will not distribute any prospectus or other offering
material in connection with the offering of the Shares.
(iv) (A) Each such Selling Shareholder that is a Management
Selling Shareholder (the Management Selling Shareholders being defined
as the Selling Shareholders marked with an "+" on Schedule II) has no
reason to believe that the representations and warranties of the
Company contained in this Section 1 are not
-9-
<PAGE>
true and correct, and is familiar with the Registration Statement and
has no knowledge of any material fact, condition or information not
disclosed in the Registration Statement which has adversely affected
or may adversely affect the Company or any of the Subsidiaries.
(B) Each such Selling Shareholder other than the Management
Selling Shareholders is familiar with the Registration Statement and
has no actual knowledge that the representations and warranties of the
Company contained in this Section 1 are not true and correct, and has
no actual knowledge of any material fact, condition or information not
disclosed in the Registration Statement which has adversely affected
the Company or any of the Subsidiaries.
(v) The sale of the Shares by such Selling Shareholder pursuant
hereto is not prompted by any information concerning the Company or
any of the Subsidiaries which is not set forth in the Registration
Statement.
(vi) The information pertaining to such Selling Shareholder in
the Prospectus, including without limitation under the caption
"Principal and Selling Shareholders," is complete and accurate in all
material respects.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Sellers agree to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $___ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9
hereof. The number of Firm Shares to be purchased by each Underwriter from
each Seller shall be as nearly as practicable in the same proportion to the
total number of Firm Shares being sold by each Seller as the number of Firm
Shares being purchased by each Underwriter bears to the total number of
Firm Shares to be sold hereunder. The obligations of the Company and of
each of the Selling Shareholders shall be several and not joint.
(b) Payment for the Firm Shares to be sold hereunder is to be made by
wire transfer of same-day funds to an account for the Company for the
Shares to be sold by it and to an account of the Company "as Custodian" for
the Shares to be sold by the Selling Shareholders, in each case against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at
the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the fourth business
day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you
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<PAGE>
and the Company shall agree upon, such time and date being herein referred
to as the "Closing Date." (As used herein, "business day" means a day on
which the New York Stock Exchange is open for trading and on which banks in
New York are open for business and not permitted by law or executive order
to be closed.) The certificates for the Firm Shares will be delivered in
such denominations and in such registrations as the Representatives request
in writing not later than the second full business day prior to the Closing
Date, and will be made available for inspection by the Representatives at
least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Selling Shareholders hereby grant an option to the several Underwriters
to purchase the Option Shares at the price per share as set forth in the
first paragraph of this Section 2. The option granted hereby may be
exercised in whole or in part by giving written notice (i) at any time
before the Closing Date and (ii) only once thereafter within 30 days after
the date of this Agreement, by you, as Representatives of the several
Underwriters, to the Company and the Attorney-in-Fact, setting forth the
number of Option Shares as to which the several Underwriters are exercising
the option, the names and denominations in which the Option Shares are to
be registered and the time and date at which such certificates are to be
delivered. If the option granted hereby is exercised by the several
Underwriters in part, the respective number of Option Shares to be sold by
each of the Selling Shareholders listed on Schedule II shall be determined
on a pro rata basis in accordance with the percentages of Option Shares set
forth opposite their names on Schedule II, as adjusted by you in such
manner to avoid fractional shares. The time and date at which certificates
for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than ten full
business days after the exercise of such option, nor in any event prior to
the Closing Date (such time and date being herein referred to as the
"Option Closing Date"). If the date of exercise of the option is three or
more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to the total number of Firm Shares,
adjusted by you in such manner as to avoid fractional shares. The option
with respect to the Option Shares granted hereunder may be exercised only
to cover over-allotments in the sale of the Firm Shares by the
Underwriters. You, as Representatives of the several Underwriters, may
cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company and the Attorney-in Fact. To the
extent, if any, that the option is exercised, payment for the Option Shares
shall be made on the Option Closing Date by wire transfer of same-day funds
to an account of the Company "as Custodian" for the Option Shares to be
sold by the Selling Shareholders, against delivery of certificates therefor
at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore
Street, Baltimore, Maryland.
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<PAGE>
(d) Certificates in negotiable form, or option or warrant agreements
together with properly executed notices of exercise, for the total number
of the Shares to be sold hereunder by the Selling Shareholders have been
placed in custody with the Company as custodian (the "Custodian") pursuant
to the Custody Agreement executed by each Selling Shareholder for delivery
of all Shares to be sold hereunder by the Selling Shareholders. Each of the
Selling Shareholders specifically agrees that the Shares represented by the
certificates held in custody for the Selling Shareholders under the Custody
Agreement are subject to the interests of the Underwriters hereunder, that
the arrangements made by the Selling Shareholders for such custody are to
that extent irrevocable, and that the obligations of the Selling
Shareholders hereunder shall not be terminable by any act or deed of the
Selling Shareholders (or by any other person, firm or corporation including
the Company, the Custodian or the Underwriters) or by operation of law
(including the death of an individual Selling Shareholder or the
dissolution of a corporate Selling Shareholder) or by the occurrence of any
other event or events, except as set forth in the Custody Agreement. If any
such event should occur prior to the delivery to the Underwriters of the
Shares hereunder, certificates for the Shares shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as
if such event has not occurred. The Custodian is authorized to receive and
acknowledge receipt of the proceeds of sale of the Shares held by it
against delivery of such Shares.
(e) If on the Closing Date or the Option Closing Date, as the case
may be, any Selling Shareholder fails to sell the Shares which such Selling
Shareholder has agreed to sell on such date as set forth in Schedule II
hereto, the Company agrees that it will sell or arrange for the sale of
that number of shares of Common Stock to the Underwriters which represents
Shares which such Selling Shareholder has failed to so sell, as set forth
in Schedule II hereto, or such lesser number as may be requested by the
Representatives.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
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<PAGE>
4. Covenants of the Company and the Selling Shareholders.
-----------------------------------------------------
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in
Rule 430A of the Rules and Regulations is followed, to prepare and
timely file with the Commission under Rule 424(b) of the Rules and
Regulations a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness
of the Registration Statement in reliance on Rule 430A of the Rules
and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives
shall not previously have been advised and furnished with a copy or to
which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations. To the
extent applicable, the copies of the Registration Statement (including
all exhibits filed therewith), any Preliminary Prospectus or
Prospectus furnished to the Underwriters shall be identical to the
copies thereof electronically filed with the Commission on EDGAR,
except to the extent permitted by Regulation S-T.
(ii) The Company will advise the Representatives promptly (A)
when the Registration Statement or any post-effective amendment
thereto shall have become effective, (B) of receipt of any comments
from the Commission, (C) of any request of the Commission for
amendment of the Registration Statement or for supplement to the
Prospectus or for any additional information, and (D) of the issuance
by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus or of the
institution of any proceedings for that purpose. The Company will use
its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as
soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws
of such jurisdictions as the Representatives may reasonably have
designated in writing and will make such applications, file such
documents, and furnish such information as may be reasonably required
for that purpose, provided the Company shall not be required to
qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. 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 the Representatives may reasonably
request for distribution of the Shares.
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<PAGE>
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company
will deliver to, or upon the order of, the Representatives during the
period when delivery of a Prospectus is required under the Act, as
many copies of the Prospectus in final form, or as thereafter amended
or supplemented, as the Representatives may reasonably request. The
Company will deliver to the Representatives, at or before the Closing
Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will
deliver to the Representatives such number of copies of the
Registration Statement (including such number of copies of the
exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so
as to permit the completion of the distribution of the Shares as
contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in
the judgment of the Company or in the reasonable opinion of counsel to
the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of
the circumstances existing at the time the Prospectus is delivered to
a purchaser, not misleading, or, if it is necessary at any time to
amend or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will
not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration
Statement, an earning statement (which need not be audited) in
reasonable detail, covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement,
which earning statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports
and copies of all other documents, reports and information furnished
by the Company to its shareholders
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or filed with any securities exchange pursuant to the requirements of
such exchange or with the Commission pursuant to the Act or the
Securities Exchange Act of 1934, as amended. The Company will deliver
to the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements. To
the extent applicable, such reports and documents shall be identical
to the copies thereof electronically filed with the Commission on
EDGAR, except to the extent permitted by Regulation S-T.
(viii) The Company will not issue, sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock or other securities
convertible into or exchangeable or exercisable for shares of Common
Stock or derivative of Common Stock (or enter into any agreement for
such) for a period of 180 days after the date of this Agreement
otherwise than hereunder or with the prior written consent of Alex.
Brown & Sons Incorporated, except that the Company may, without such
consent, (A) issue shares upon the exercise of options outstanding on
the date of this Agreement issued pursuant to its 1991 Amended and
Restated Stock Option Plan, 1996 Non-Employee Directors Stock Option
Plan and 1996 Employee and Consultant Stock Option Plan, (B) grant
options and offer to sell shares of Common Stock to its employees and
directors pursuant to the plans listed in clause (A), provided that
the Company will not grant any options which will become exercisable
within 180 days after the date of this Agreement and (C) issue shares
of Common Stock to its employees pursuant to the Employee Stock
Purchase Plan, provided that the Company will not permit the
withdrawal of such shares from the plan for 180 days after the date
of this Agreement.
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused to be furnished to you, on or prior
to the date of this Agreement, a letter or letters executed by (i)
each officer and director of the Company, substantially in the form
attached hereto as Exhibit A-1; (ii) certain shareholders of the
Company, substantially in the form attached hereto as Exhibit A-1 or
A-2; and (iii) each holder of options to purchase Common Stock (other
than the officers and directors referred to in clause (i) above),
substantially in the form attached hereto as Exhibit A-3.
(xi) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus and shall file such reports
with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(xii) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the
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<PAGE>
Company or any of the Subsidiaries to register as an investment
company under the 1940 Act.
(xiii) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(xiv) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the
several Underwriters that:
(i) Such Selling Shareholder has furnished to you, on or prior
to the date of this Agreement, a letter or letters substantially in
the form attached hereto as Exhibit A-1 or A-2 (such letters of the
Selling Shareholders and the letters referred to in Section 4(a)(x)
being collectively referred to as the "Lockup Agreements").
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax
Compliance Act of 1983 with respect to the transactions herein
contemplated, such Selling Shareholder agrees to deliver to the
Representatives prior to or at the Closing Date a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' invitation letter, the listing application, the
Blue Sky survey and any supplements or amendments thereto; the filing fees of
the Commission; the filing fees incurred
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<PAGE>
in connection with securing any required review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares;
the listing fee of the Nasdaq National Market; and the expenses, including the
fees and disbursements of counsel for the Underwriters, incurred in connection
with the qualification of the Shares under State securities or Blue Sky laws. To
the extent, if at all, that any Selling Shareholder engages special legal
counsel to represent it in connection with this offering, the fees and expenses
of such counsel shall be borne by such Selling Shareholder, except as otherwise
provided in the registration rights agreements between the Company and certain
Selling Shareholders. The Sellers shall not, however, be required to pay for any
of the Underwriters expenses (other than those related to qualification under
NASD regulations and State securities or Blue Sky laws) except that, if this
Agreement shall not be consummated because the conditions in Section 6 hereof
are not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 11 hereof , or by reason of any failure,
refusal or inability on the part of the Company or the Selling Shareholders to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on their part to be performed, unless such failure
to satisfy said condition or to comply with said terms be due to the default or
omission of any Underwriter, then the Company shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Sellers shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company and the
Selling Shareholders contained herein, and to the performance by the Company and
the Selling Shareholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
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<PAGE>
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of LeBoeuf, Lamb,
Greene & MacRae LLP, counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Connecticut, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of the Subsidiaries has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in each
jurisdiction in which the Company or any Subsidiary maintains an
office or owns or leases property; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized
and validly issued and are fully paid and non-assessable and are owned
of record and, to such counsel's knowledge, beneficially, by the
Company; and, to such counsel's knowledge, the outstanding shares of
capital stock of each of the Subsidiaries is owned free and clear of
all liens, encumbrances and equities and claims, and no options,
warrants or other rights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into any shares of
capital stock or of ownership interests in the Subsidiaries are
outstanding.
(ii) As of the date set forth under the caption "Capitalization"
in the Prospectus, the Company has authorized and outstanding capital
stock as set forth therein; the authorized shares of the Company's
Common Stock have been duly authorized; the outstanding shares of the
Company's Common Stock, including the Shares to be sold by the Selling
Shareholders, have been duly authorized and validly issued and are
fully paid and non-assessable; all of the Shares conform to the
description thereof contained in the Prospectus; the certificates for
the Shares, assuming they are in the form filed with the Commission,
are in due and proper form; the shares of Common Stock, including the
Option Shares, if any, to be sold by the Company pursuant to this
Agreement have been duly authorized and will be validly issued, fully
paid and non-assessable when issued and paid for as contemplated by
this Agreement; and no statutory preemptive rights and, to such
counsel's knowledge, no contractual preemptive rights of stockholders
exist with respect to any of the Shares or the issue or sale thereof.
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(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible into or
exchangeable for or evidencing the right to purchase or subscribe for
any shares of such stock; and except as described in the Prospectus,
to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise,
which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any
Common Shares or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement as of its effective date and
the Prospectus as of its date comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no
opinion as to the financial statements, schedules and statistical
information contained therein).
(vi) The statements under the captions "Risk Factors--Shares
Eligible for Future Sale; Registration Rights," "Risk Factors--
Antitakeover Provisions," "Certain Transactions," "Description of
Capital Stock," and "Shares Eligible for Future Sale" in the
Prospectus accurately summarize in all material respects the
provisions of the laws and documents referred to therein.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required, and summaries of such contracts
and documents contained in the Registration Statement or the
Prospectus are accurate in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
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(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or By-laws
of the Company, or any agreement listed as an exhibit to the
Registration Statement.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
(xii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has the legal right, power and
authority, and any approval required by law (other than as required by
State securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion
of the Shares to be sold by such Selling Shareholder under this
Agreement.
(xv) The Custody Agreement and the Power of Attorney executed
and delivered by each Selling Shareholder are valid and binding.
(xvi) On the Closing Date and the Option Closing Date, each
Underwriter that is a bona fide purchaser within the meaning of the
Code will acquire, upon payment therefor, the interest of such Selling
Shareholder in the Firm Shares or the Option Shares, as the case may
be, free and clear of any adverse claim, as defined in the Code.
In rendering such opinion, LeBoeuf, Lamb, Greene & MacRae LLP may rely
as to matters governed by the laws of states other than Connecticut or
Federal laws on local
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<PAGE>
counsel in such jurisdictions and as to the matters set forth in
subparagraphs (xiii), (xiv) (xv) and (xvi) on opinions of other counsel
representing the respective Selling Shareholders (provided that in each
case LeBoeuf, Lamb, Greene & MacRae LLP shall state that they believe that
they and the Underwriters are justified in relying on such other counsel)
and, as to matters of fact, on the representations and warranties of such
Selling Shareholders contained herein and in the Custody Agreement and the
Power of Attorney. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to
Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an 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, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to
the Rules and Regulations and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, LeBoeuf, Lamb, Greene & MacRae LLP may state
that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(c) The Representatives shall have received from Ropes & Gray,
counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (iii), (iv), (x) and (xi) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Connecticut. In
rendering such opinion Ropes & Gray may rely as to all matters governed
other than by the laws of the Commonwealth of Massachusetts or Federal laws
on the opinion of counsel referred to in Paragraph (b) of this Section 6.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement as
of the time it became effective under the Act (but after giving effect to
any modifications incorporated therein pursuant to Rule 430A under the Act)
contained an 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, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements, in the light of the circumstances under which they are
made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement,
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<PAGE>
may state that their belief is based upon the procedures set forth therein,
but is without independent check and verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Ropes & Gray a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of Arthur Andersen LLP,
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and
the Prospectus and, in his opinion, as of the effective date of the
Registration
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Statement, the statements contained in the Registration Statement were
true and correct, and such Registration Statement and Prospectus did
not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, and
since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a supplement to or an
amendment of the Prospectus which has not been so set forth in such
supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, whether or not arising
in the ordinary course of business.
(g) The Company and the Selling Shareholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, shall have been
approved for designation upon notice of issuance on the Nasdaq National
Market.
(i) The Lockup Agreements shall be in full force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Ropes & Gray, counsel for
the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Shareholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).
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<PAGE>
7. Conditions of the Obligations of the Sellers.
--------------------------------------------
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the condition that at the Closing Date or the Option Closing Date, as
the case may be, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and in effect or proceedings therefor initiated
or threatened.
8. Indemnification.
---------------
(a) The Sellers jointly and severally 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 or the Prospectus, (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 or (iii)
any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Shares or
the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of
or based upon matters covered by clause (i) or (ii) above (provided that
the Sellers shall not be liable under this clause (iii) to the extent that
it is determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly from
any such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its gross negligence or willful misconduct); 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 that the Selling Shareholders shall not be
liable for indemnification pursuant to clause (iii) above; and provided
further that with respect to the indemnity of each Selling Shareholder,
other than the Principal Selling Shareholders (the Principal Selling
Shareholders being defined as the Selling Shareholders marked with an "*"
on Schedule II), the indemnity shall, in each case, apply only 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 or the Prospectus in reliance upon and in conformity with
written information furnished by such Selling Shareholder specifically for
use in the preparation thereof; and provided further that the Sellers will
not 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
-24-
<PAGE>
Registration Statement, any Preliminary Prospectus or the Prospectus, 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. Neither the Underwriters nor any such controlling
person shall seek indemnification from the Selling Shareholders for any
losses, claims, damages, expenses, or liabilities suffered by them unless
either (i) they have first reduced their indemnification claims against the
Company to judgment and such claims remain unsatisfied or (ii) the Company
is then bankrupt, in which event the Underwriters and any such controlling
person shall be entitled to seek indemnification from the Selling
Shareholders for the unsatisfied portion of such losses, claims, damages,
liabilities or expenses. In no event, however, shall the liability of any
Selling Shareholder for indemnification under this Section 8(a) or breach
of the representations contained in Section 1(b)(iv) or (v) exceed the
proceeds, net of underwriting discounts and commissions, received by such
Selling Shareholder from the Underwriters in the offering. This indemnity
agreement will be in addition to any liability which the Sellers may
otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each of its directors, each of its officers
who have signed the Regis tration Statement, the Selling Shareholders, and
each person, if any, who controls the Company or any Selling Shareholder
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, Selling
Shareholder 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 or the
Prospectus, 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 any legal or other expenses
reasonably incurred by the Company or any such director, officer, Selling
Shareholder or controlling person in connection with investigating or
defending any such loss, claim, damage, liability, 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 or the Prospectus, 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.
(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 8, 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 8(a) or (b) shall be available to any party who shall
-25-
<PAGE>
fail to give notice as provided in this Section 8(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 8(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 8(a) and by the Company and the
Selling Shareholders in the case of parties indemnified pursuant to Section
8(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 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in re spect 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
-26-
<PAGE>
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 Shareholders 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 fault of the Company and the Selling Shareholders 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 Shareholders 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 Shareholders 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 or the Selling Shareholders 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.
(e) The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to
Section 8(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 Section 8(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 Section 8(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 Section 8(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) no
Selling Shareholder shall be required to contribute any amount in excess of
the proceeds, net of underwriting discounts and commissions, received by
such Selling Shareholder from the Underwriters in the offering. The
Underwriters' obligations in Section 8(d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
-27-
<PAGE>
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus or the Prospectus, each party against whom
contribution may be sought under this Section 8 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.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 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 8 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, (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, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company or a Selling Shareholder),
you, as Representatives of the Underwriters, shall use your reasonable efforts
to procure within 36 hours thereafter one or more of the other Underwriters, or
any others, to purchase from the Company and the Selling Shareholders such
amounts as may be agreed upon and upon the terms set forth herein, the Firm
Shares or Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the
-28-
<PAGE>
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder, to
purchase the Firm Shares or Option Shares, as the case may be, which such
defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of shares of Firm Shares or Option Shares, as the case may be,
with respect to which such default shall occur exceeds 10% of the Firm Shares or
Option Shares, as the case may be, covered hereby, the Company or you as the
Representatives of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters,
the Company or the Selling Shareholders except to the extent provided in Section
8 hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
Syndicate; with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore
Street, Baltimore, Maryland 21202. Attention: General Counsel; if to the Company
or to the Attorney-in-Fact, to Information Management Associates, Inc., One
Corporate Drive, Suite 414, Shelton, Connecticut 06484, Attention: General
Counsel; with a copy to LeBoeuf, Lamb, Greene & MacRae LLP, Goodwin Square, 225
Asylum Street, Hartford, Connecticut 06103; Attention: Thomas L. Fairfield,
Esq.; and if to a Selling Shareholder, to the address of such Selling
Shareholder set forth on Schedule II hereto.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change
-29-
<PAGE>
in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment,
make it impracticable to market the Shares or to enforce contracts for the
sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation
on prices (other than limitations on hours or numbers of days of trading)
for securities on either such Exchange, (iv) the enactment, publication,
decree or other promulgation of any statute, regulation, rule or order of
any court or other governmental authority which in your opinion materially
and adversely affects or may materially and adversely affect the business
or operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Exchange Act); (vii) the suspension of trading of the Company's
common stock by the Commission on the Nasdaq National Market or (viii) the
taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company, the Selling Shareholders and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
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
-30-
<PAGE>
made by or on behalf of any Underwriter or controlling person thereof, or by or
on behalf of the Company or its directors or officers and (c) delivery of and
payment for the Shares under this Agreement.
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 Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
-31-
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
INFORMATION MANAGEMENT ASSOCIATES, INC.
By_______________________________
Name:
Title:
Selling Shareholders listed on Schedule II
By_______________________________
Attorney-in-Fact
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
ALEX. BROWN & SONS INCORPORATED
ROBERTSON, STEPHENS & COMPANY, LLC
SOUNDVIEW FINANCIAL GROUP, INC.
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By_____________________________
Authorized Officer
-32-
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SHARES
TO BE PURCHASED
<S> <C>
Alex. Brown & Sons Incorporated
Robertson, Stephens & Company, LLC
SoundView Financial Group, Inc.
---------------
TOTAL UNDERWRITERS ( )
</TABLE>
-33-
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
MAXIMUM
NUMBER OF NUMBER OF
FIRM SHARES PERCENTAGE OF OPTION SHARES PERCENTAGE OF
SELLING SHAREHOLDER TO BE SOLD FIRM SHARES TO BE SOLD OPTION SHARES
- ------------------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Wand/IMA Investments, L.P.*.....
630 Fifth Avenue, Suite 2435
New York, NY 10111
Wand/IMA Investments II L.P.*...
630 Fifth Avenue, Suite 2435
New York, NY 10111
Wand/IMA Investments III L.P.*..
630 Fifth Avenue, Suite 2435
New York, NY 10111
Albert R. Subbloie, Jr.*+.......
Gary R. Martino*+...............
Andrei Poludnewycz *+...........
James S. Aufdemberge............
Paul G. Frederick...............
James E. Anderson...............
David G. Caldeira...............
Michael P. McGroarty *+.........
Paul J. Schmidt *+..............
David J. Callard *..............
c/o Wand Partners Inc.
630 Fifth Avenue, Suite 2435
New York, NY 10111
Thomas F. Hill *................
c/o Wand Partners Inc.
630 Fifth Avenue, Suite 2435
New York, NY 10111
Donald P. Miller *..............
_______________
</TABLE>
+ Management Selling Shareholders. See Section 1(b)(iv).
* Principal Selling Shareholders. See Section 8(a).
Unless otherwise indicated, each person or entity listed hereon maintains a
mailing address c/o Information Management Associated, One Corporate Drive,
Suite 414, Shelton, Connecticut 06484.
-34-
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM
NUMBER OF NUMBER OF
FIRM SHARES PERCENTAGE OF OPTION SHARES PERCENTAGE OF
SELLING SHAREHOLDER TO BE SOLD FIRM SHARES TO BE SOLD OPTION SHARES
- ------------------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Mercury Asset Management plc...
James H. Coffman, Jr. .........
Michael Herlehy................
Joseph Niciforo................
Joseph LeMay, Jr. .............
Thomas Pederson................
William and Marylee Trousdale..
Floyd Donahue..................
Charles Heller.................
Craig Lund.....................
Robert Geissman................
---------- ---------- ---------- ---------
</TABLE>
TOTAL
_______________
+ Management Selling Shareholders. See Section 1(b)(iv).
* Principal Selling Shareholders. See Section 8(a).
Unless otherwise indicated, each person or entity listed hereon maintains a
mailing address c/o Information Management Associated, One Corporate Drive,
Suite 414, Shelton, Connecticut 06484.
-35-
<PAGE>
EXHIBIT A-1
FORM OF LOCK-UP LETTER FOR
DIRECTORS, OFFICERS AND CERTAIN SHAREHOLDERS
February ___, 1997
CONFIDENTIAL
- ------------
Alex. Brown & Sons Incorporated
Robertson Stephens & Company, LLC
Soundview Financial Group, Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Information Management Associates, Inc.
One Corporate Drive, Suite 414
Shelton, Connecticut 06484
Re: Restriction on Transfer of Common Stock
---------------------------------------
Ladies and Gentlemen:
The undersigned officer, director or beneficial owner of securities of
Information Management Associates, Inc. (the "Company") understands that the
Company is engaged in the preparation of a Registration Statement (the
"Registration Statement") for the initial public offering (the "Offering") of
its Common Stock, no par value per share (the "Common Stock"), underwritten by
Alex. Brown & Sons Incorporated, Robertson Stephens & Company, LLC and Soundview
Financial Group, Inc. (the "Representatives") and several other underwriters
(collectively with the Representatives, the "Underwriters").
The undersigned recognizes that it is in the best financial interests of the
undersigned, as an officer, director or securityholder of the Company, that the
Company complete the Offering and you have requested this agreement to
facilitate the Offering.
<PAGE>
In consideration of the Underwriters' agreement to purchase and undertake the
Offering and for other good and valuable consideration, receipt of which is
hereby acknowledged, the undersigned hereby agrees, except as provided herein,
that the undersigned will not, for a period beginning on the date hereof and
expiring one hundred and eighty (180) days following the date the Registration
Statement is declared effective by the Securities and Exchange Commission: (i)
offer, pledge, sell, contract to sell, grant any option to purchase, purchase
any option to sell, or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock, any options, rights or warrants to purchase any
shares of Common Stock (including any stock appreciation right, or similar right
with an exercise or conversion privilege at a price related to or derived from
the market price of the Common Stock) or any securities convertible into or
exchangeable for shares of Common Stock owned directly by the undersigned or
with respect to which the undersigned has the power of disposition; or (ii)
engage in any hedging transactions with respect to the Common Stock that may
have an impact on the market price of the Common Stock.
Notwithstanding the foregoing restrictions on transfer, the undersigned shall
be permitted to make the following transfers: (i) transfers made by gift, will
or intestacy, provided that each transferee agrees in writing to be bound by the
terms hereof; (ii) transfers to the transferor's affiliates, as such term is
defined in Rule 405 promulgated under the Securities Act of 1933, as amended,
provided that each transferee agrees in writing to be bound by the terms hereof;
(iii) in the event the undersigned is an individual, transfers to members of the
immediate family, provided that each transferee agrees in writing to be bound by
the terms hereof; (iv) transfers made with the prior written consent of each of
the Representatives; and (v) transfers pursuant to the Registration Statement.
The undersigned also agrees and consents to the entry of stock transfer
instructions with the Company's transfer agent against the transfer of shares of
Common Stock issued or issuable to the undersigned, except in accordance with
the terms hereof. This instrument shall terminate if the Underwriting Agreement
relating to the Offering (other than the provisions thereof that survive
termination) shall terminate or be terminated prior to payment for and delivery
of the shares thereunder.
The undersigned understands that the Company and the Underwriters will proceed
with the Offering in reliance on this agreement.
2
<PAGE>
The undersigned hereby represents and warrants that the undersigned has full
power and authority to enter into this agreement. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and any obligations of the undersigned shall be binding upon the
heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours,
________________________________
By:_____________________________
Name:__________________________
(Print)
Title:___________________________
Date Signed: February __, 1997
3
<PAGE>
EXHIBIT A-2
FORM OF LOCK-UP LETTER FOR CERTAIN SHAREHOLDERS
February ___, 1997
CONFIDENTIAL
- ------------
Alex. Brown & Sons Incorporated
Robertson Stephens & Company, LLC
Soundview Financial Group, Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Information Management Associates, Inc.
One Corporate Drive, Suite 414
Shelton, Connecticut 06484
Re: Restriction on Transfer of Common Stock
---------------------------------------
Ladies and Gentlemen:
The undersigned officer, director or beneficial owner of securities of
Information Management Associates, Inc. (the "Company") understands that the
Company is engaged in the preparation of a Registration Statement (the
"Registration Statement") for the initial public offering (the "Offering") of
its Common Stock, no par value per share (the "Common Stock"), underwritten by
Alex. Brown & Sons Incorporated, Robertson Stephens & Company, LLC and Soundview
Financial Group, Inc. (the "Representatives") and several other underwriters
(collectively with the Representatives, the "Underwriters").
The undersigned recognizes that it is in the best financial interests of the
undersigned, as an officer, director or securityholder of the Company, that the
Company complete the Offering and you have requested this agreement to
facilitate the Offering.
<PAGE>
In consideration of the Underwriters' agreement to purchase and undertake the
Offering and for other good and valuable consideration, receipt of which is
hereby acknowledged, the undersigned hereby agrees, except as provided herein,
that the undersigned will not, for a period beginning on the date hereof and
expiring ninety (90) days following the date the Registration Statement is
declared effective by the Securities and Exchange Commission: (i) offer,
pledge, sell, contract to sell, grant any option to purchase, purchase any
option to sell, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock, any options, rights or warrants to purchase any shares
of Common Stock (including any stock appreciation right, or similar right with
an exercise or conversion privilege at a price related to or derived from the
market price of the Common Stock) or any securities convertible into or
exchangeable for shares of Common Stock owned directly by the undersigned or
with respect to which the undersigned has the power of disposition; or (ii)
engage in any hedging transactions with respect to the Common Stock that may
have an impact on the market price of the Common Stock.
Notwithstanding the foregoing restrictions on transfer, the undersigned shall
be permitted to make the following transfers: (i) transfers made by gift, will
or intestacy, provided that each transferee agrees in writing to be bound by the
terms hereof; (ii) transfers to the transferor's affiliates, as such term is
defined in Rule 405 promulgated under the Securities Act of 1933, as amended,
provided that each transferee agrees in writing to be bound by the terms hereof;
(iii) in the event the undersigned is an individual, transfers to members of the
immediate family, provided that each transferee agrees in writing to be bound by
the terms hereof; (iv) transfers made with the prior written consent of each of
the Representatives; and (v) transfers pursuant to the Registration Statement.
The undersigned also agrees and consents to the entry of stock transfer
instructions with the Company's transfer agent against the transfer of shares of
Common Stock issued or issuable to the undersigned, except in accordance with
the terms hereof. This instrument shall terminate if the Underwriting Agreement
relating to the Offering (other than the provisions thereof that survive
termination) shall terminate or be terminated prior to payment for and delivery
of the shares thereunder.
The undersigned understands that the Company and the Underwriters will proceed
with the Offering in reliance on this agreement.
2
<PAGE>
The undersigned hereby represents and warrants that the undersigned has full
power and authority to enter into this agreement. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and any obligations of the undersigned shall be binding upon the
heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours,
________________________________
By:_____________________________
Name:__________________________
(Print)
Title:___________________________
Date Signed: February __, 1997
3
<PAGE>
EXHIBIT A-3
FORM OF LOCK-UP LETTER FOR EMPLOYEE OPTION HOLDERS
February ___, 1997
CONFIDENTIAL
- ------------
Alex. Brown & Sons Incorporated
Robertson Stephens & Company, LLC
Soundview Financial Group, Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Information Management Associates, Inc.
One Corporate Drive, Suite 414
Shelton, Connecticut 06484
Re: Restriction on Transfer of Common Stock
---------------------------------------
Ladies and Gentlemen:
The undersigned officer, director or beneficial owner of securities of
Information Management Associates, Inc. (the "Company") understands that the
Company is engaged in the preparation of a Registration Statement (the
"Registration Statement") for the initial public offering (the "Offering") of
its Common Stock, no par value per share (the "Common Stock"), underwritten by
Alex. Brown & Sons Incorporated, Robertson Stephens & Company, LLC and Soundview
Financial Group, Inc. (the "Representatives") and several other underwriters
(collectively with the Representatives, the "Underwriters").
The undersigned recognizes that it is in the best financial interests of the
undersigned, as an officer, director or securityholder of the Company, that the
Company complete the Offering and you have requested this agreement to
facilitate the Offering.
In consideration of the Underwriters' agreement to purchase and undertake the
Offering and for other good and valuable consideration, receipt of which is
hereby acknowledged, the
<PAGE>
undersigned hereby agrees, except as provided herein, that the undersigned will
not, for a period beginning on the date hereof and expiring one hundred and
eighty (180) days following the date the Registration Statement is declared
effective by the Securities and Exchange Commission: (i) offer, pledge, sell,
contract to sell, grant any option to purchase, purchase any option to sell, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock, any options, rights or warrants to purchase any shares of Common Stock
(including any stock appreciation right, or similar right with an exercise or
conversion privilege at a price related to or derived from the market price of
the Common Stock) or any securities convertible into or exchangeable for shares
of Common Stock owned directly by the undersigned or with respect to which the
undersigned has the power of disposition; or (ii) engage in any hedging
transactions with respect to the Common Stock that may have an impact on the
market price of the Common Stock.
Notwithstanding the foregoing restrictions on transfer, the undersigned shall
be permitted to make the following transfers: (i) transfers made by gift, will
or intestacy, provided that each transferee agrees in writing to be bound by the
terms hereof; (ii) transfers to the transferor's affiliates, as such term is
defined in Rule 405 promulgated under the Securities Act of 1933, as amended,
provided that each transferee agrees in writing to be bound by the terms hereof;
(iii) in the event the undersigned is an individual, transfers to members of the
immediate family, provided that each transferee agrees in writing to be bound by
the terms hereof; (iv) transfers made with the prior written consent of each of
the Representatives; (v) transfers pursuant to the Registration Statement; and
(vi) transfers of up to ________ shares of Common Stock issued upon exercise of
stock options.
The undersigned also agrees and consents to the entry of stock transfer
instructions with the Company's transfer agent against the transfer of shares of
Common Stock issued or issuable to the undersigned, except in accordance with
the terms hereof. This instrument shall terminate if the Underwriting Agreement
relating to the Offering (other than the provisions thereof that survive
termination) shall terminate or be terminated prior to payment for and delivery
of the shares thereunder.
The undersigned understands that the Company and the Underwriters will proceed
with the Offering in reliance on this agreement.
2
<PAGE>
The undersigned hereby represents and warrants that the undersigned has full
power and authority to enter into this agreement. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and any obligations of the undersigned shall be binding upon the
heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours,
________________________________
By:_____________________________
Name:__________________________
(Print)
Title:___________________________
Date Signed: February __, 1997
3
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
INFORMATION MANAGEMENT ASSOCIATES, INC.
1. OFFICES
1.1. Offices. The Corporation shall maintain its registered office in the
-------
State of Connecticut, and such other offices, either within or without the State
of Connecticut, at such locations as the Board of Directors may from time to
time determine or the business of the Corporation may require.
2. SEAL
2.1 Seal
----
(a) The Corporation shall have a seal, which shall have inscribed
thereon its name and year of incorporation and the words, "Corporate Seal
Connecticut."
(b) The seal shall be kept in safe custody by the Secretary of the
Corporation, it shall be affixed by the Chairman of the Board, the President or
any Vice President, the Secretary or any Assistant Secretary, or the Treasurer
to any corporate instrument or document requiring it, by practice or by law, and
when so affixed, it may be attested by the signature of the officer so affixing
it.
3. MEETINGS OF SHAREHOLDERS
3.1 Annual Meetings.
---------------
(a) Annual meetings of shareholders shall be held at such place,
either within or without the State of Connecticut, and at such time and date as
the Board of Directors shall determine by resolution and set forth in the notice
of the meeting. In the event that the Board of Directors fails to so determine
the time, date and place for the annual meeting, it shall be held at the
principal office of the Corporation at 10:00 a.m. on the first Tuesday of May of
each year. In the event such day shall fall upon a legal holiday, then the
annual meeting shall be on the next succeeding business day at the
aforementioned time and place.
(b) At each annual meeting the shareholders shall, by plurality of
the votes cast, unless otherwise required by law, elect Directors and transact
such other business as may properly be brought before them.
<PAGE>
(c) The Board of Directors may, in advance of any annual or special
meeting of the shareholders, adopt an agenda for such meeting, adherence to
which the Chairman of the Board may enforce.
3.2 Special Meetings. Special meetings of the shareholders of the
----------------
Corporation, for any purpose or purposes, unless otherwise prescribed herein or
by statute, (a) may be called by the Chairman of the Board, and (b) shall be
called by the Secretary at the written request, or by resolution adopted by the
affirmative vote, of a majority of the Board of Directors. Such request shall
state the purpose or purposes of the proposed meeting.
3.3 Notice of Meetings.
------------------
(a) Notice of meetings of shareholders shall be in writing and shall
state the place (which may be within or without the State of Connecticut), date
and hour of the meeting and in the case of a special meeting, the purpose or
purposes for which a meeting is called. No business other than that specified
in the notice thereof shall be transacted at any special meeting.
(b) Such notice shall be communicated in person, by telephone,
telegraph, teletype or other form of wire or wireless communication or by mail
or private carrier to each shareholder entitled to vote at such meeting not less
than ten (10) nor more than sixty (60) days before the date of the meeting. If
mailed, the notice shall be directed to the shareholder at his or her address as
it appears on the records of the Corporation. Personal delivery of any such
notice to any officer of a corporation or association or to any member of a
partnership shall constitute delivery of such notice to such corporation,
association or partnership.
(c) Notice of any meeting of shareholders need not be given to any
shareholder if waived by such shareholder in a writing signed by the shareholder
entitled to the notice and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. A shareholder's attendance at a
meeting: (1) waives objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting; and (2) waives
objection to consideration of a particular matter at the meeting that is not
within the purpose or purposes described in the meeting notice, unless the
shareholder objects to considering the matter when it is presented.
3.4 Adjourned Meetings. When a meeting is adjourned to another time or
------------------
place, unless otherwise provided by these Bylaws, notice need not be given of
the adjourned meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken. At the adjourned meeting the shareholders
may transact any business that might have been transacted at the original
meeting. If an adjournment is for more than thirty (30) days or if after an
adjournment a new record date is fixed for the adjourned meeting a notice of the
adjourned meeting shall be given to each shareholder entitled to vote at the
meeting.
3.5 Quorum and Adjournment. Except as otherwise provided by law, by the
----------------------
Corporation's Certificate of Incorporation or by these Bylaws, the presence, in
person or by proxy, of the holders of a majority of the aggregate voting power
of the shares issued and outstanding, entitled to vote thereat, and the voting
rights of which are not suspended, shall be
2
<PAGE>
requisite and shall constitute a quorum for the transaction of business at all
meetings of shareholders. If, however, such majority shall not be present or
represented at any meeting of shareholders, the shareholders present, although
less than a quorum, shall have the power to adjourn the meeting.
3.6 Majority Vote Required. When a quorum is present at any meeting of
----------------------
shareholders, the affirmative vote of the majority of the aggregate voting power
of the shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall constitute the act of the
shareholders; provided, however, that if a provision of the Certificate of
Incorporation, these Bylaws or any statute specifically requires a different
vote such provision shall govern and control.
3.7 Manner of Voting. At each meeting of shareholders, each shareholder
----------------
having the right to vote, and whose voting rights have not been suspended, shall
be entitled to vote in person or by proxy. Proxies need not be filed with the
Secretary of the Corporation until the meeting is called to order, but shall be
filed before being voted. Each shareholder shall be entitled to vote each share
having voting power registered in his name on the books of the Corporation on
the record date fixed, as provided in Section 6.4 of these Bylaws, for the
determination of shareholders entitled to vote at such meeting. All elections
of Directors shall be by written ballot.
3.8 Proxies.
-------
(a) At any meeting of shareholders, any shareholder may be represented
and vote by proxy or proxies appointed by a written form of proxy. In the event
that any form of proxy shall designate two or more persons to act as proxies, a
majority of such persons present at the meeting or, if only one shall be
present, then that one shall have and may exercise all of the powers conferred
by the form of proxy upon all of the persons so designated unless the form of
proxy shall otherwise provide.
(b) The Board of Directors may, in advance of any annual or special
meeting of the shareholders, prescribe additional regulations concerning the
manner of execution and filing of proxies and the validation of the same, which
are intended to be voted at any such meeting.
3.9 Presiding Officer and Secretary. At each meeting of shareholders, the
-------------------------------
Chairman of the Board shall preside and the Secretary shall act as Secretary of
the meeting.
3.10 Disregard of Nomination or Proposal. Except as otherwise provided by
-----------------------------------
law, the Certificate of Incorporation or these Bylaws, the person presiding over
any meeting of the shareholders shall have the power and duty to determine
whether a nomination or any other business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Section 3
and, if any proposed nomination or business is not in compliance
with such provisions, to declare that such defective proposal or nomination
shall be disregarded.
3.11 Inspections of Elections. The Board of Directors by resolution may
------------------------
appoint one or more persons to act as inspector of elections (which may include
individuals who serve the
3
<PAGE>
Corporation in other capacities including, without limitation, as officers,
employees, agents or representatives of the Corporation) at any shareholders'
meeting. If appointed, the inspector of election shall have the duties of
accepting, rejecting and tabulating on behalf of the Corporation, votes,
ballots, consents, waivers and proxies for shareholders' meetings and making and
certifying the written report thereof, or such other duties as may be designated
by the Board of Directors.
3.12 Shareholder Notices. At any meeting of the shareholders, only such
-------------------
business shall be conducted, and only such proposals shall be acted upon as
shall have been brought before the meeting (a) by or at the direction of the
Board of Directors, or (b) by any shareholder who complies with the notice
procedures set forth in this Section 3.12 (or for election of Directors, with
the notice provisions set forth in Section 3.13)
(a) For a proposal to be properly brought before an annual meeting by
a shareholder, the shareholder must have given timely notice thereof in writing
to the Secretary. To be timely, a shareholder's notice must be delivered to, or
mailed and received at, the principal executive offices of the corporation (i)
in the case of the 1998 annual shareholders' meeting, not later than March 1,
1998, and (ii) in the case of all subsequent annual shareholders' meetings, not
less than sixty (60) days nor more than ninety (90) days prior to the scheduled
annual meeting, regardless of any postponements, deferrals or adjournments of
that meeting to a later date; provided, however, that if less than seventy (70)
days' notice or prior public disclosure of the date of the scheduled annual
meeting is given or made, notice by the shareholder to be timely must be so
delivered or received not later than the close of business on the tenth (10th)
day following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such public disclosure
was made.
(b) A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the annual
shareholders' meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address as they appear on the Corporation's
books of the shareholder proposing such business, (iii) the class, series and
number of shares of the Corporation that are beneficially owned by the
shareholder on the date of such shareholder notice, and (iv) any material
interest of the shareholder in such business.
(c) If the presiding officer at the annual meeting determines that a
shareholder proposal was not made in accordance with the terms of this Section
3.12, such officer shall so declare at the annual meeting and any such proposal
shall not be acted upon at the annual meeting.
3.13 Director Nominations. Nominations for the election of directors may
--------------------
be made by the Board of Directors or a nominating committee appointed by the
Board of Directors or by any shareholder entitled to vote in the election of
directors generally. However, any shareholder entitled to vote in the election
of directors generally may nominate one or more persons for election as
directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
not later than (i) with respect to an election to be held at an annual meeting
of shareholders, not less than sixty (60) days nor more than ninety (90) days
prior to the scheduled annual meeting, regardless of any postponements,
deferrals or
4
<PAGE>
adjournments of that meeting to a later date; provided, however, that if less
than seventy (70) days' notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, notice by the shareholder to be
timely must be so delivered or received not later than the close of business on
the tenth (10th) day following the earlier of the day on which such notice of
the date of the scheduled annual meeting was mailed or the day on which such
public disclosure was made, and such written notice shall contain (ii) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy or other applicable rules of the Securities and Exchange
Commission as then in effect; and (v) the consent of each nominee to serve as a
director of the Corporation if so elected. The presiding officer of the meeting
may refuse to acknowledge the nomination of any person not made in compliance
with the foregoing procedure, or if the nominating shareholder is not or will
not be a record holder of shares at the time of the shareholders' meeting.
3.14 Compliance with Law. Notwithstanding the foregoing provisions of
-------------------
Section 3.12 or Section 3.13, a shareholder shall also comply with all
applicable requirements of state law and of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations thereunder with
respect to the matters set forth in such sections. Nothing in Section 3.13
shall be deemed to affect any rights of shareholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
4. DIRECTORS
4.1 Powers. The Board of Directors shall exercise all of the powers of
------
the Corporation except such powers conferred upon or reserved to the
shareholders of any class or classes by law, the Corporation's Certificate of
Incorporation or these Bylaws.
4.2 Number and Classification.
-------------------------
(a) The Board of Directors of the Corporation shall consist of five
(5) to fifteen (15) members, as determined by resolution duly adopted by such
Board.
(b) Subject to and as provided in the Certificate of Incorporation,
the total number of Directors shall be divided into three (3) classes, with each
class containing approximately the same percentage of the total, as near as may
be. The Board of Directors, by resolution duly adopted, shall so divide the
members of the Board of Directors into designated classes effective on and as of
the effective date of the Corporation's Amended and Restated Certificate of
Incorporation which establishes such staggered Board of Directors. In the case
of any increase in the number of Directors of the Corporation, the additional
Directors shall be so designated by the Board of Directors such that all classes
of Directors shall be increased equally as nearly as may be possible, and the
additional Directors shall be elected as provided herein by the Directors or by
the shareholders at an annual meeting. In case of any decrease in the number
5
<PAGE>
of Directors of the Corporation, all classes of Directors shall be decreased
equally as nearly as may be possible by the Board of Directors; provided,
however, that no such decrease shall shorten the current term of any then-
serving Director. Elections of Directors shall be conducted as provided in the
Certificate of Incorporation, these Bylaws or by applicable law.
4.3 Resignations. Any Director may resign at any time by giving written
------------
notice to the Board of Directors or the Secretary. Such resignation shall take
effect at the date of receipt of such notice or at any later time specified
therein. Acceptance of such resignation shall not be necessary to make it
effective.
4.4 Removal. At any special meeting of the shareholders duly called as
-------
provided herein, any Director may be removed from office in accordance with the
Certificate of Incorporation and the successor of the Director so removed may be
elected at such meeting. Any vacancy may be filled as provided in Section 4.5.
4.5 Vacancies.
---------
(a) In case any vacancy shall occur on the Board of Directors because
of death, resignation, retirement, disqualification, removal, an increase in the
authorized number of Directors or any other cause, the Board of Directors may,
at any meeting, by resolution adopted by the affirmative vote of a majority of
the Directors then in office, though less than a quorum, elect a Director to
fill such vacancy.
(b) If, as a result of a disaster or emergency (as determined in good
faith by the then remaining Directors), it becomes impossible to ascertain
whether or not vacancies exist on the Board of Directors, and a person is or
persons are elected by Directors, who in good faith believe themselves to be a
majority of the remaining Directors, to fill a vacancy or vacancies that said
remaining Directors in good faith believe exists, then the acts of such person
or persons who are so elected as Directors shall be valid and binding upon the
Corporation even though (i) there was in fact no vacancy or vacancies existing
on the Board of Directors, or (ii) the Directors who so elected such person or
persons did not in fact constitute a majority of the remaining Directors.
4.6 Presiding Officer and Secretary. At each meeting of the Board of
-------------------------------
Directors, the Chairman of the Board shall preside, and the Secretary shall act
as secretary of the meeting.
4.7 Annual Meeting. The Board of Directors shall meet each year
--------------
immediately following the annual meeting of shareholders, at the place where
such meeting of shareholders has been held, or at such other place as shall be
fixed by the person presiding over the meeting of the shareholders at which such
Directors are elected, for the purpose of organization, election of officers and
consideration of such other business as the Board considers relevant to the
management of the Corporation.
4.8 Regular Meetings. Regular meetings of the Board of Directors shall be
----------------
held on such dates and at such times and places, within or without the State of
Connecticut, as shall from time to time be determined by the Board of Directors.
In the absence of any such determination, such meetings shall be held at such
times and places, within or without the State of Connecticut,
6
<PAGE>
as shall be designated by the Chairman of the Board on not less than two (2)
calendar days' notice (specifying the time and place of the meeting) to each
Director, given orally or in writing either personally, by telephone, by
facsimile transmission, by mail, by courier service, by telegram or by telex.
4.9 Special Meetings. Special meetings of the Board of Directors shall be
----------------
held at the call of the Chairman of the Board at such times and places, within
or without the State of Connecticut, as he or she shall designate, on not less
than two (2) calendar days' notice (specifying the time and place of the
meeting) to each Director, given verbally or in writing either personally, by
telephone, by facsimile transmission, by mail, by courier service, by telegram
or by telex. Special meetings shall be called by the Secretary on like notice
at the written request of a majority of the Directors.
4.10 Quorum and Powers of a Majority. At all meetings of the Board of
-------------------------------
Directors and of each committee thereof, a majority of the members shall be
necessary and sufficient to constitute a quorum for the transaction of business,
and the act of a majority of the members present at any meeting at which a
quorum is present shall be the act of the Board of Directors or such committee,
unless by express provision of law, of the Certificate of Incorporation or these
Bylaws, a different vote is required, in which case such express provision shall
govern and control. In the absence of a quorum, a majority of the members
present at any meeting may, without notice other than announcement at the
meeting, adjourn such meeting from time to time until a quorum is present.
4.11 Waiver of Notice. Notice of any meeting of the Board of Directors, or
----------------
any committee thereof, need not be given to any member if waived by him or her
before or after the date and time of the meeting in a writing signed by the
Director entitled to the notice and filed with the minutes of the Corporation.
A Director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless the Director at the beginning of the
meeting, or promptly upon his or her arrival, objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
4.12 Manner of Acting.
----------------
(a) Members of the Board of Directors, or any committee thereof, may
participate in any meeting of the Board of Directors or such committee by means
of conference telephone or similar communications equipment by means of which
all persons participating therein can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
(b) Any action required or permitted to be taken at any meeting of the
Board of Directors or any committee thereof may be taken without a meeting if
all members of the Board of Directors or such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or such committee.
7
<PAGE>
4.13 Compensation.
------------
(a) The Board of Directors, by a resolution or resolutions, may fix,
and from time to time, change the compensation of Directors.
(b) Each Director who is not also an employee of the Corporation shall
be entitled to reimbursement from the Corporation for his or her reasonable
expenses incurred in attending meetings of the Board of Directors or a committee
thereof.
(c) Nothing contained in these Bylaws shall be construed to preclude
any Director from serving the Corporation in any other capacity and from
receiving compensation from the Corporation for services rendered to it in such
other capacity.
4.14 Committees. The Board of Directors may, by resolution or resolutions
----------
adopted by the affirmative vote of a majority of the Board of Directors,
designate one or more committees, each committee to consist of two or more
Directors, which to the extent provided in said resolution or resolutions shall
have and may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation; provided that no such
committee shall have the power to (a) elect Directors, (b) alter, amend, or
repeal these Bylaws or any resolution of the Board relating to such committee,
(c) appoint any member of such committee, (d) declare any dividend or make any
other distribution to the shareholders of the Corporation or (e) take any other
actions which may lawfully be taken only by the full Board of Directors. Such
committee or committees shall have such name or names as may be determined from
time to time by resolutions adopted by the Board of Directors.
4.15 Committee Procedure.
-------------------
(a) Except as otherwise provided by these Bylaws, each committee shall
adopt its own rules governing the time, place and method of holding its meetings
and the conduct of its proceedings and shall meet as provided by such rules or
by resolution of the Board of Directors. Unless otherwise provided by these
Bylaws or any such rules or resolutions, notice of the time and place of each
meeting of a committee shall be given to each member of such committee as
provided in Section 4.9 of these Bylaws with respect to notices of special
meetings of the Board of Directors.
(b) Each committee shall keep regular minutes of its proceedings and
report the same to the Board of Directors when required.
(c) Any member of any committee, other than a member thereof serving
ex officio, may be removed from such committee either with or without cause, at
any time, by resolution adopted by the affirmative vote of a majority of the
Board of Directors at any meeting thereof. Any vacancy in any committee shall
be filled by the Board of Directors in the manner prescribed by these Bylaws for
the original appointment of the members of such committee.
8
<PAGE>
5. OFFICERS
5.1 Number
------
(a) The officers of the Corporation shall include a President, one or
more Vice Presidents, a Secretary and a Treasurer. The Board of Directors shall
also elect a Chairman of the Board pursuant to Section 5.2. The Board of
Directors may also elect such other officers as the Board of Directors may from
time to time deem appropriate or necessary. Officers of the Corporation may be
given distinctive designations such as Chief Executive Officer, Executive Vice
President, Senior Vice President, Chief Operating Officer and Chief Financial
Officer. Except for the Chairman of the Board, none of the officers of the
Corporation need be a Director of the Corporation. Any two or more offices may
be held by the same person, but no officer shall execute, acknowledge or verify
any instrument in more than one capacity.
(b) The Board of Directors may delegate to the Chairman or the
President the power to appoint one or more employees of the Corporation as
divisional or departmental Vice Presidents and fix the duties of such
appointees. However, no such divisional or departmental Vice President shall be
considered as an officer of the Corporation, the officers of the Corporation
being limited to those officers elected by the Board of Directors.
5.2 Election of Officers. The officers of the corporation to be elected
--------------------
by the Board of Directors shall be elected annually at the first meeting of the
Board of Directors held after each annual meeting of the shareholders. Each
such officer shall hold office for one (1) year and until a successor shall have
been duly elected and shall qualify in his or her stead unless the Board of
Directors shall have provided by contract or otherwise in any particular case,
or until such officer shall have resigned and his or her resignation shall have
become effective, or until such officer shall have been removed in the manner
hereinafter provided. Notwithstanding anything in this Section 5.2 to the
contrary, the Chairman of the Board may be elected only by the vote of a
majority of the Directors then in office (who may include the Director who is or
is to be the Chairman of the Board).
5.3 Removal. Except as otherwise expressly provided in a contract duly
-------
authorized by the Board of Directors, any officer elected by the Board of
Directors may be removed, either with or without cause, at any time by
resolution adopted by the affirmative vote of a majority of the Board of
Directors at any meeting thereof; provided that the Chairman of the Board may be
removed by the vote of a majority of the Directors then in office (excluding the
Director who is Chairman of the Board).
5.4 Resignations. Any officer of the Corporation may resign at any time
------------
by giving written notice to the Board of Directors or the Chairman of the Board.
Such resignation shall take
9
<PAGE>
effect at the date of the receipt of such notice or at any later time specified
therein and, unless otherwise specified herein, the acceptance of such
resignation shall not be necessary to make it effective.
5.5 Vacancies. A vacancy in any office because of death, resignation,
---------
removal, disqualification or any other cause may be filled for the unexpired
portion of the term by election by the Board of Directors at any meeting
thereof.
5.6 Salaries. The salaries of all officers of the Corporation shall be
--------
fixed by the Board of Directors from time to time, and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
Director of the Corporation.
5.7 The Chairman of the Board.
-------------------------
(a) The Chairman of the Board shall have the powers and duties
customarily and usually associated with the office of the Chairman of the Board.
The Chairman of the Board shall preside at meetings of the shareholders and of
the Board of Directors. In the event of the Chairman of the Board's temporary
absence or disability and the absence or disability of the President, the
Chairman of the Board shall have the power to designate any Director to preside
at any or all meetings of the shareholders and of the Board of Directors.
(b) If at any time the office of President shall not be filled, or in
the event of the disability of the President, the Chairman of the Board (if one
shall be elected) shall have the duties and powers of the President. The
Chairman of the Board shall have such other powers and perform such greater or
lesser duties as may be delegated to him or her from time to time by the Board
of Directors.
5.8 The President. In the absence of the Chairman of the Board, the
-------------
President shall preside at all meetings of the shareholders and directors at
which he is present. The President shall have the general powers and duties of
supervision and management usually vested in the office of president of a
corporation. In addition, the President shall see that all orders and
resolutions of the Board of Directors are carried into effect. The President
shall have such other powers and perform such other duties as may be delegated
to him or her from time to time by the Board of Directors or the Chairman of the
Board.
5.9 The Vice Presidents. Each Vice President shall have such powers and
-------------------
perform such duties as may from time to time be assigned to him or her by the
Board of Directors, the Chairman of the Board or the President.
5.10 The Secretary and the Assistant Secretary.
-----------------------------------------
(a) The Secretary shall attend meetings of the Board of Directors and
meetings of the shareholders and record all votes and minutes of all such
proceedings in a book or equivalent electronic database kept for such purpose
and shall perform like duties for the committees of Directors as provided for in
these Bylaws when required. The Secretary shall give,
10
<PAGE>
or cause to be given, notice of all meetings of shareholders and of the Board of
Directors (except in case of meetings called by the Chairman of the Board in
accordance with Sections 3.2, 4.8 or 4.9). He or she shall have charge of the
stock ledger (unless responsibility for maintaining the stock ledger is
delegated to a transfer agent by the Board of Directors pursuant to Section 6.6)
and such other books and papers as the Board of Directors may direct. He or she
shall have the responsibility of authenticating records of the Corporation. He
or she shall have all such further powers and duties as generally are incident
to the position of Secretary or as may from time to time be assigned to him or
her by the Board of Directors or the Chairman of the Board.
(b) Each Assistant Secretary shall have such powers and perform such
duties as may from time to time be assigned to him or her by the Board of
Directors, the Chairman of the Board or the Secretary. In case of the absence
or disability of the Secretary, the Assistant Secretary designated by the
Secretary (or, in the absence of such designation, the senior Assistant
Secretary) shall perform the duties and exercise the powers of the Secretary.
5.11 The Treasurer and the Assistant Treasurer.
-----------------------------------------
(a) The Treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit moneys and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. He or she may
endorse all commercial documents requiring endorsements for or on behalf of the
Corporation and may sign all receipts and vouchers for payments made to the
Corporation.
(b) The Treasurer shall disburse funds of the Corporation as may from
time to time be ordered by the Board of Directors, taking proper vouchers for
such disbursements, and render to the Board of Directors, the Chairman of the
Board and President, whenever they may require it, an account of all
transactions undertaken by him or her as Treasurer and of the financial
condition of the Corporation.
(c) Each Assistant Treasurer shall have such powers and perform such
duties as may from time to time be assigned to him or her by the Board of
Directors, the Chairman of the Board, the President or the Treasurer. In case of
the absence or disability of the Treasurer, the Assistant Treasurer designated
by the Treasurer (or, in the absence of such designation, the senior Assistant
Treasurer) shall perform the duties and exercise the powers of the Treasurer.
5.12 Treasurer's Bond. If required by the Board of Directors, the
----------------
Treasurer or any Assistant Treasurer shall give the Corporation a bond in such
form and with such surety or sureties as are satisfactory to the Board of
Directors for the faithful performance of the duties of office and for the
restoration to the Corporation, in case of his or her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation.
11
<PAGE>
6. SHARES OF THE CORPORATION
6.1 Certificates. Share certificates shall be issued under the seal of
------------
the Corporation, or facsimile thereof, and shall be numbered and shall be
entered in the books of the Corporation as they are issued. Each certificate
shall bear a serial number, shall exhibit the holder's name and the number of
shares evidenced thereby and shall be signed by the Chairman of the Board or a
Vice Chairman, if any, or the Chief Executive Officer, if any, or the President
or any Vice President and the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person or entity were such officer, transfer agent or registrar at
the date of issue.
6.2 Transfers. Transfers of shares of the Corporation shall be made on
---------
the books of the Corporation only upon surrender to the Corporation of a share
certificate duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, provided such succession, assignment or
transfer is not prohibited by the Certificate of Incorporation, the Bylaws,
applicable law or contract. Thereupon, the Corporation shall issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transactions upon its books.
6.3 Lost, Stolen or Destroyed Certificates. Any person claiming a share
--------------------------------------
certificate to be lost, stolen or destroyed shall make an affidavit or an
affirmation of that fact, and may be required to give the Corporation a bond of
indemnity in satisfactory form and with one or more satisfactory sureties,
whereupon a new certificate may be issued of the same tenor and for the same
number of shares as the one alleged to be lost or destroyed.
6.4 Record Date.
-----------
(a) In order that the Corporation may determine the shareholders
entitled to notice of or to vote at a meeting of shareholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of shares or for the purpose of any other lawful
action, the Board of Directors shall fix, in advance, a record date, which shall
not be more than seventy (70) nor less than ten (10) days before the date of
such meeting or any other action.
(b) If no record date is fixed by the Board of Directors, (i) the
record date for determining shareholders entitled to notice of or to vote at a
meeting of shareholders shall be at the close of business on the day next
preceding the date on which notice is given or, if the notice is waived by all
shareholders entitled to vote at the meeting, at the close of business on the
day next preceding the day on which the meeting was held and (ii) the record
date for determining
12
<PAGE>
shareholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
(c) A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any adjournment of the
meeting; provided that the Board of Directors may fix a new record date for the
adjourned meeting.
6.5 Registered Shareholders. The Corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares as the person entitled to exercise the rights referred to in Section
6.4 and shall not be bound to recognize any equitable or other claim to or
interest in any such shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by the laws of the State of Connecticut.
6.6 Additional Powers of the Board.
------------------------------
(a) In addition to those powers set forth in Section 4.1, the Board of
Directors shall have power and authority to make all such rules and regulations
as it shall deem expedient concerning the issue, transfer and registration of
certificates for shares of the Corporation.
(b) The Board of Directors may appoint and remove transfer agents and
registrars of transfers, and may require all share certificates to bear the
signature of any such transfer agent and/or any such registrar of transfers.
(c) The Board of Directors shall have power and authority to create
and issue (whether or not in connection with the issue and sale of any shares or
other securities of the Corporation) warrants, rights or options entitling the
holders thereof to purchase from the Corporation any shares of any class or
classes or any other securities of the Corporation for such consideration and to
such persons, firms or corporations as the Board of Directors, in its sole
discretion, may determine, setting aside from the authorized but unissued shares
of the Corporation the requisite number of shares for issuance upon the exercise
of such warrant, rights or options. Such warrants, rights or options shall be
evidenced by such instrument or instruments as shall be approved by the Board of
Directors. The terms upon which, the time or times (which may be limited or
unlimited in duration) at or within which, and the price or prices at which any
such shares or other securities may be purchased from the Corporation upon the
exercise of any such warrant, right or option shall be such as shall be fixed
and stated in a resolution or resolutions of the Board of Directors providing
for the creation and issue of such warrants, rights or options.
13
<PAGE>
7. MISCELLANEOUS
7.1 Place and Inspection of Books.
-----------------------------
(a) The books and records of the Corporation shall be kept at the
Corporation's principal office in the State of Connecticut or, except as
otherwise required by law, at such other place or places within or without the
State of Connecticut as the Board of Directors may from time to time determine.
(b) After fixing a record date for a meeting, the officer in charge of
the stock ledger of the Corporation shall prepare an alphabetical list of the
names of all the shareholders who are entitled to notice of a shareholders'
meeting. The list shall be arranged by voting group, and within each voting
group by class or series of shares, and show the address of and number of shares
held by each shareholder. The shareholders' list shall be available for
inspection by any shareholder, beginning two business days after notice of the
meeting is given for which the list was prepared and continuing through the
meeting, at the Corporation's principal office or at a place identified in the
meeting notice in the city where the meeting will be held. A shareholder, his
agent or attorney is entitled on written demand to inspect and, subject to the
requirements of Section 33-946(c) of the CBCA, to copy the list, during regular
business hours and at his expense, during the period it is available for
inspection. The shareholders' list shall also be available at the meeting, and
any shareholder, his agent or attorney is entitled to inspect the list at any
time during the meeting or any adjournment.
(c) The Board of Directors shall determine from time to time whether,
when and under what conditions and regulations the accounts and books of the
Corporation (except such as may be by law specifically open to inspection or as
otherwise provided by these Bylaws) or any of them shall be open to the
inspection of the shareholders and the shareholders' rights in respect thereof.
7.2 Indemnification. As provided in the Corporation's Certificate of
---------------
Incorporation and pursuant to the provisions thereof, (i) the Corporation shall
indemnify all Directors and officers of the Corporation to the fullest extent
permitted by Sections 33-770 to 33-778 of the CBCA, as the same may be amended
and supplemented, from and against any and all expenses, liabilities or other
matters referred to in or covered by said sections; (ii) the Corporation shall
pay for or reimburse reasonable expenses incurred by a Director or officer who
is a party to a proceeding in advance of final disposition of the proceeding if
the requirements of Section 33-773 of the CBCA are satisfied with respect to
such Director or officer; and (iii) in the event and to the extent of a general
or specific action of the Board of Directors to that effect, the Corporation
shall indemnify and advance expenses to an employee or agent of the Corporation
who is not a Director or officer to the same extent as to a Director or officer.
In connection with the foregoing, all applicable procedural and other
requirements set forth in Sections 33-770 to 33-778 of the CBCA, as the same may
be amended and supplemented, shall be observed.
7.3 Distributions. Subject to any limitations or conditions contained in
-------------
the Corporation's Certificate of Incorporation or as provided by law, the Board
of Directors may authorize and the Corporation may make distributions to its
shareholders. The Board of Directors
14
<PAGE>
may base a determination that a distribution is not prohibited under Section 33-
687(c) of the CBCA, as the same may be amended and supplemented, either on
financial statements prepared on the basis of accounting practices and
principles that are reasonable in the circumstances or on a fair valuation or
other method that is reasonable in the circumstances.
7.4 Execution of Deeds, Contracts and Other Agreements and Instruments.
------------------------------------------------------------------
Subject to the specific directions of the Board of Directors, all deeds,
mortgages and bonds entered into by the Corporation and all other written
contracts and agreements to which the Corporation shall be a party shall be
executed in its name by the Chairman of the Board, the President or a Vice
President, or such other person or persons as may be authorized by any such
officer.
7.5 Checks. All checks, drafts, acceptances, notes and other orders,
------
demands or instruments with respect to the payment of money may be signed or
endorsed on behalf of the Corporation by such officer or officers or by such
agent or agents as the Board of Directors may from time to time designate.
7.6 Voting of Shares Held. Unless otherwise provided by resolution of the
---------------------
Board of Directors each of the Chairman and President may from time to time
appoint an attorney or attorneys or agent or agents of the Corporation, in the
name and on behalf of the Corporation, to cast the vote which the Corporation
may be entitled to cast as a shareholder or otherwise in any other corporation,
partnership, limited liability company or joint venture, any of whose securities
may be held by the Corporation, at meetings of the holders of the shares or
other securities of such other corporation, partnership, limited liability
company or joint venture or to consent in writing to any action by any such
other corporation, partnership, limited liability company or joint venture; and
the President shall instruct the person or persons so appointed as to the manner
of casting such votes or giving such consent and may execute or cause to be
executed on behalf of the Corporation, and under its corporate seal or
otherwise, such written proxies, consents, waivers or other instruments as may
be necessary or proper in the premises. In lieu of such appointment the
Chairman or President may themselves attend any meetings of the holders of
shares or other securities of any such other corporation, partnership, limited
liability company or joint venture and there vote or exercise any or all power
of the Corporation as the holder of such shares or other securities of such
other corporation, partnership, limited liability company or joint venture.
7.7 Fiscal Year. The fiscal year of the Corporation shall correspond with
-----------
the calendar year.
7.8 Gender/Number. As used in these Bylaws, the masculine, feminine or
-------------
neuter gender, and the singular or plural number, shall each include the others
whenever the context so indicates.
7.9 Paragraph Titles. The titles of the paragraphs have been inserted as
----------------
a matter of reference only and shall not control or affect the meaning or
construction of any of the terms and provisions hereof.
7.10 Amendment. These Bylaws may be altered, amended or repealed by the
---------
affirmative vote of the holders of a majority of the voting power of the shares
issued and outstanding and
15
<PAGE>
entitled to vote at any meeting of shareholders or by resolution adopted by the
affirmative vote of not less than a majority of the Directors in office at any
annual or regular meeting of the Board of Directors or at any special meeting of
the Board of Directors if notice of the proposed alteration, amendment or repeal
be contained in the notice of such special meeting; provided, however, that any
provision of these Bylaws adopted or required to be adopted pursuant to the CBCA
by the shareholders of the Corporation shall only be amended by the affirmative
vote of a majority of the votes entitled to be cast on such matter.
7.11 Certificate of Incorporation. Notwithstanding anything to the
----------------------------
contrary contained herein, if any provision contained in these Bylaws is
inconsistent with or conflicts with a provision of the Corporation's Certificate
of Incorporation, such provision of these Bylaws shall be superseded by the
inconsistent provision in the Certificate of Incorporation to the extent
necessary to give effect to such provision in the Certificate of Incorporation.
16
<PAGE>
Exhibit 10.75
Information Management Associates, Inc.
One Corporate Drive
Shelton, CT 06484
July 1, 1997
Wand Partners Inc.,
Wand (IMA) Inc.,
Wand/IMA Investments, L.P.,
Wand/IMA Investments II L.P.,
Wand/IMA Investments III L.P.
and Thomas F. Hill
630 Fifth Avenue
Suite 2435
New York, NY 10111
Re: IMA Initial Public Offering
---------------------------
Dear Sirs:
As described in previous notices to you, Information Management Associates,
Inc. (the "Company") has filed a registration statement with the Securities and
Exchange Commission (the "Registration Statement") with respect to a proposed
initial public offering of its common stock (the "Offering"). This letter
agreement amends and restates the letter agreement dated March 6, 1997 among the
securityholders named herein and the Company. In connection with the Offering,
the Company proposes to effect a 2.25-for-1 split of its common stock (the
"Stock Split"). Based on said Stock Split, the proposed offering price per
share in the Offering is presently contemplated to be between $11.00 and $13.00
per share (the "Price Range"). The agreements of the undersigned
securityholders under paragraphs 1 and 2 below are subject to the condition
precedent that the Offering constitute a Qualified Public Offering as defined
herein. "Qualified Public Offering" means an underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, in which (i) the offering price per share for the Common Stock
(assuming a 2.25-for-1 stock split and subject to proportional adjustment in the
event of a different stock split) is at least $11.00 per share; (ii) the
aggregate proceeds to the Company and any selling shareholders exceed $20
million; and (iii) the offering is completed prior to September 30, 1997. If
the Offering does not constitute a
<PAGE>
Qualified Public Offering, the undersigned securityholders shall have no
obligations under paragraphs 1 and 2 hereof. By signing this letter and
returning it to the Company, each of you agrees with the Company as follows:
Each of the undersigned securityholders is the owner of the number of
shares of Series A Senior Convertible Preferred Stock ("Series A Preferred
Stock") and Series B Senior Convertible Preferred Stock ("Series B Preferred
Stock") and Warrants to purchase Common Stock ("Warrants") of the Company
described below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Number of
Shares
Name of Holder Title of Security (Pre-Split)
- ---------------------------------------------------------------------------
<S> <C> <C>
Wand/IMA Investments, L.P. Series A Preferred Stock 3,750
Warrants 148,120
- ---------------------------------------------------------------------------
Wand/IMA Investments II L.P. Series A Preferred Stock 750
Series B Preferred Stock 354
- ---------------------------------------------------------------------------
Wand/IMA Investments III L.P. Series B Preferred Stock 3,996
- ---------------------------------------------------------------------------
Wand Partners Inc. Warrant 20,680
- ---------------------------------------------------------------------------
Thomas F. Hill Warrant 23,810
- ---------------------------------------------------------------------------
</TABLE>
1. Conversion of Preferred Stock. In order to facilitate the Offering,
-----------------------------
each of the undersigned securityholders hereby elects to convert all of the
shares of Series A Preferred Stock and Series B Preferred Stock held by such
securityholder into shares of Common Stock as of the date and time of closing of
the Offering, at the Series A Conversion Price and the Series B Conversion
Price, respectively (as such terms are defined in paragraph 4 of the Company's
Certificate of Incorporation). Each of the undersigned securityholders further
agree to surrender to the Company the certificates representing all of the
Series A Preferred Stock and Series B Preferred Stock held by such
securityholder, which shall be held, prior to conversion, by the Company as
Custodian, pursuant to the Custody Agreement to be provided to the undersigned
securityholders after the filing of the Registration Statement.
2. Exercise of Warrants. Each of the undersigned agrees to exercise all
--------------------
Warrants held by the undersigned on a cashless basis pursuant to the provisions
of Section 1.6 of the Warrants as of the date and time of closing of the
Offering. In connection with such exercise, each of the undersigned agrees
that, as used in Section 1.6 of the Warrants, the term "Current Market Price" at
the time of exercise of the Warrants, shall mean the initial public offering
price of the Common Stock as set forth on the cover page of the final prospectus
issued in connection with the Offering.
3. Stock Split Adjustments. Pursuant to the Stock Split, the Series A
-----------------------
Conversion Price, the Series B Conversion Price and the exercise prices of the
Warrants held by the
<PAGE>
undersigned securityholders shall be adjusted pursuant to the Stock Split as
described below.
- --------------------------------------------------------------------------------
(a) Warrant No. W-3 held by Thomas F. Hill (the "Hill Warrant") to
purchase 23,810 shares of Common Stock at a purchase price per share of $0.90
shall be adjusted in accordance with Section 2 of the Hill Warrant as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrant Price: $0.90 x 1,908,173 = $0.40
---------
4,293,389
- --------------------------------------------------------------------------------
Number of Shares Issuable: 23,810 x $0.90/3/ = 53,572
--------
$0.40/4/
- --------------------------------------------------------------------------------
</TABLE>
(b) Warrant No. W-4 held by Wand/IMA Investments, L.P. (the "Wand/IMA
Warrant") to purchase 148,120 shares of Common Stock is adjusted in accordance
with Section 2 of the Wand/IMA Warrant as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrant Price: $0.90 x 1,908,173 = $0.40
---------
4,293,389
- --------------------------------------------------------------------------------
Number of Shares Issuable: 148,120 x $0.90/3/ = 333,270
--------
$0.40/4/
- --------------------------------------------------------------------------------
</TABLE>
(c) Warrant No. W-5 held by Wand Partners Inc. (the "Wand Partners
Warrant") to purchase 20,860 shares of Common Stock is adjusted in accordance
with Section 2 of the Wand Partners Warrant as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrant Price: $3.00 x 1,908,173 = $1.33333
---------
4,293,389
- --------------------------------------------------------------------------------
Number of Shares Issuable: 20,680 x $3.00/3/ = 46,530
-----------
$1.33333/4/
- --------------------------------------------------------------------------------
</TABLE>
(d) The Series A Conversion Price and Series B Conversion Price are
adjusted as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Series A Conversion Price $11.00 x 1,908,173 = $4.889
---------
4,500
- --------------------------------------------------------------------------------
Wand/IMA 3,750 x $1,000 Stated Value = 767,028
Investments, L.P. shares -------------------
4.889
- --------------------------------------------------------------------------------
Wand/IMA 750 shares x $1,000 Stated Value = 153,405
Investments II L.P. ------------------- -------
4.889
- --------------------------------------------------------------------------------
Aggregate Common Stock upon Conversion of Series A Preferred Stock: 920,433
- --------------------------------------------------------------------------------
Series B Conversion Price $16.00 x 1,908,173 = $7.111
---------
4,293,389
================================================================================
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wand/IMA 354 shares x $1,000 Stated Value = 49,782
Investments II L.P. -------------------
7.111
- --------------------------------------------------------------------------------
Wand/IMA 3,996 x $1,000 Stated Value = 561,946
Investments III L.P. shares ------------------- -------
7.111
- --------------------------------------------------------------------------------
Aggregate Common Stock upon Conversion of Series B Preferred Stock: 611,728
- --------------------------------------------------------------------------------
</TABLE>
/1/ (Pre-split shares outstanding)
/2/ (Post-split shares outstanding)
/3/ (Pre-split warrant exercise price per share)
/4/ (Post-split warrant exercise price per share)
- --------------------------------------------------------------------------------
This notice is the notice referred to in and is given pursuant to Section 6
of the Warrants and Section 1.11 of paragraph 4 of the Company's Certificate of
Incorporation.
Very truly yours,
Information Management Associates, Inc.
By: /s/ Gary R. Martino
------------------------------------
Gary R. Martino
Chairman of the Board and Chief Financial
Officer
AGREED TO AND ACCEPTED BY:
Wand/IMA Investments, L.P.
By: Wand Partners Inc., its General Partner
By: /s/ Bruce W. Schnitzer
------------------------------------
Bruce W. Schnitzer
Chairman
<PAGE>
Wand/IMA Investments II L.P.
By: Wand Partners Inc. and Wand (IMA) Inc., its General Partners
By: /s/ Bruce W. Schnitzer
------------------------------------
Bruce W. Schnitzer
Chairman
By: Wand (IMA) Inc., its General Partner
By: /s/ Bruce W. Schnitzer
------------------------------------
Bruce W. Schnitzer
Chairman
Wand/IMA Investments III L.P.
By: Wand (IMA) Inc., its General Partner
By: /s/ Bruce W. Schnitzer
------------------------------------
Bruce W. Schnitzer
Chairman
Wand Partners Inc.
By: /s/ Bruce W. Schnitzer
-------------------------------------
Bruce W. Schnitzer
Chairman
/s/ Thomas F. Hill
- ------------------------------------------
Thomas F. Hill
<PAGE>
EXHIBIT 11.1
INFORMATION MANAGEMENT ASSOCIATES, INC.
CALCULATION OF SHARES USED IN DETERMINING PRO FORMA NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
------------------ -------------------------- --------------------------
<S> <C> <C> <C>
Weighted average common
stock outstanding
during the year........ 4,262,133 4,255,197 4,293,379
Convertible preferred
stock (1).............. 1,022,388 920,433 1,532,161
Redeemable common stock
warrants (1)........... 415,308 415,308 415,308
Stock options (1)....... 154,934 154,934 154,934
Dilutive effect of
common and common stock
equivalents issued
subsequent to March 6,
1996 (2)............... 272,694 272,694 272,694
--------- --------- ---------
Shares used in computing
pro forma net loss per
common share........... 6,127,457 6,018,566 6,668,476
========= ========= =========
</TABLE>
- --------
(1) The numbers of shares issuable upon conversion or exercise of the Series A
convertible preferred stock, redeemable common stock warrants and stock
options are shown as if such conversion or exercise occurred on January 1,
1996. The number of shares issuable upon conversion of the Series B
convertible preferred stock is shown as if such conversion occurred upon
issuance of such stock on November 1, 1996.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock options and warrants issued at prices below the
initial public offering price of $12.00 per share ("cheap stock") during
the 12-month period immediately preceding the initial filing date of the
Company's Registration Statement for its initial public offering have been
included as outstanding for all periods presented. The dilutive effect of
the common and common share equivalents was computed in accordance with
the treasury stock method.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Hartford, Connecticut
July 1, 1997
