<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER , 1998
REGISTRATION NO. 333-63535
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
CLARUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 58-1972600
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION)
OF INCORPORATION OR
ORGANIZATION)
CLARUS CORPORATION
3950 JOHNS CREEK COURT, SUITE 100
SUWANEE, GEORGIA 30024
(770) 291-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
THE CORPORATION TRUST COMPANY
CORPORATION TRUST CENTER
1209 ORANGE STREET
WILMINGTON, DELAWARE 19801
(302) 658-7581
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
G. DONALD JOHNSON, ESQ. CHARLES J. KATZ, JR.
SHARON L. MCBRAYER, ESQ. ELIZABETH W. KORRELL
ELIZABETH O. DERRICK, ESQ. PERKINS COIE LLP
WOMBLE CARLYLE SANDRIDGE & RICE, PLLC 1201 THIRD AVENUE, 40TH FLOOR
1275 PEACHTREE STREET, NE, SUITE 700 SEATTLE, WASHINGTON 98101
ATLANTA, GEORGIA 30309 (206) 583-8888
(404) 872-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G check the following box. [_]
If this Form is being filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Securities Act"), check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If this Form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
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>
[ELEKOM CORPORATION LOGO AND LETTERHEAD]
To the Shareholders of ELEKOM Corporation
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders (the
"Meeting") of ELEKOM Corporation ("ELEKOM") to be held at the executive
offices of ELEKOM at 155 - 108th Avenue, NE, Eighth Floor, Bellevue,
Washington 98004 on October , 1998, at 8:00 a.m., local time, notice of
which is enclosed.
At the Meeting, you will be asked to consider and vote on a proposal (the
"Proposal") to approve the Agreement and Plan of Reorganization dated August
31, 1998 by and among Clarus Corporation (the "Company"), Clarus CSA, Inc., a
wholly-owned subsidiary of the Company ("Clarus CSA"), and ELEKOM (the
"Agreement") pursuant to which ELEKOM will merge with and into Clarus CSA (the
"Merger"). Upon consummation of the Merger, each share of capital stock of
ELEKOM (collectively, the "ELEKOM Preferred Stock" and "ELEKOM Common Stock")
that is issued and outstanding at the effective time of the Merger will be
converted into the right to receive (i) a specified amount of cash
consideration and (ii) a number of shares of fully-paid and nonassessable
common stock of the Company ("Company Common Stock") as more fully described
in the accompanying Proxy Statement/Prospectus, so that the total amount of
Company Common Stock to be issued to the holders of ELEKOM Preferred Stock and
ELEKOM Common Stock (the "ELEKOM Shareholders") at the effective time will
equal 1,350,000 shares, subject to adjustment as more particularly described
in the accompanying Proxy Statement/Prospectus, and the total cash received by
the ELEKOM Shareholders will equal $8.0 million (the "Merger Consideration").
Because the number of shares of Company Common Stock to be received by the
ELEKOM shareholders is based on the market price of the Company Common Stock
immediately prior to the closing of the Merger, the actual number of shares of
Company Common Stock to be received by ELEKOM shareholders may not be
determined at the time of shareholder vote on the Agreement and the Merger.
ELEKOM shareholders are urged to call Wayne Burns collect at (425) 586-2781
for daily updates regarding the number of shares ELEKOM shareholders will
receive under the Agreement.
The allocation of the Merger Consideration among the ELEKOM Shareholders
will be determined in accordance with the Articles of Incorporation of ELEKOM
based on the closing price of the Company Common Stock on the last trading day
immediately preceding the Closing (the "Closing Price"). The $8 million cash
consideration is not affected by a change in the Closing Price. ELEKOM
Preferred Shareholders will likely receive a greater portion of the Merger
Consideration on both a per share basis and in the aggregate than ELEKOM
common shareholders. For example, if the Closing Price is $ , each holder
of ELEKOM Series A Preferred Stock would be entitled to receive total Merger
Consideration valued at $ per share, each holder of ELEKOM Series B
Preferred Stock would be entitled to receive total Merger Consideration valued
at $ per share, and each holder of ELEKOM Common Stock would be
entitled to receive total Merger Consideration valued at $ per
share. Cash will be paid in lieu of any fractional shares of Company Common
Stock. The closing price per share of the Company Common Stock on the Nasdaq
National Market on September , 1998 was $ .
The Board of Directors of ELEKOM (the "Board") has unanimously approved the
Agreement, together with all agreements ancillary to the Agreement, and now
submits the Proposal to the ELEKOM Shareholders for approval. Attached to this
letter is a Proxy Statement/Prospectus explaining the terms of the Merger and
the procedures necessary to approve the Merger. APPROVAL OF THE AGREEMENT AND
THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST (I) TWO-
THIRDS OF THE OUTSTANDING SHARES OF COMMON STOCK OF ELEKOM, (II) TWO-THIRDS OF
THE OUTSTANDING SHARES OF SERIES A PREFERRED STOCK OF ELEKOM AND (III) TWO-
THIRDS OF THE OUTSTANDING SHARES OF SERIES B PREFERRED STOCK OF ELEKOM, EACH
VOTING AS A SEPARATE CLASS. CONSEQUENTLY, FAILURE TO VOTE WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE AGREEMENT AND THE MERGER.
Although the Board has called the Meeting, the Board hopes to obtain
unanimous written consent approving the Proposal and thereby to accelerate the
closing of the Merger. Accordingly, the Board is requesting the ELEKOM
Shareholders to complete, sign, date and send by facsimile or hand deliver the
enclosed Proxy and
<PAGE>
Consent in Lieu of Special Meeting ("Proxy and Consent") to Wayne Burns, Chief
Financial Officer of ELEKOM at (425) 586-2881 as soon as possible, and in no
event later than October , 1998. Please also mail the Proxy and Consent in
the envelope provided. IF YOU HAVE ANY QUESTIONS CONCERNING THE DELIVERY OF
THE ENCLOSED PROXY AND CONSENT, PLEASE CALL WAYNE BURNS AT (425) 586-2781. If
the Board receives the Proxy and Consent from all ELEKOM Shareholders
unanimously approving the Proposal, the Proposal will be deemed properly
adopted by the unanimous consent of the ELEKOM Shareholders, and the Meeting
will be canceled. If the Proposal receives the unanimous consent of the ELEKOM
Shareholders, you will be notified that the Proposal has been adopted, and you
will be notified of the cancellation of the Meeting.
Also enclosed is a Cash/Stock Election Form, which will allow each ELEKOM
Shareholder the opportunity to elect to receive the Merger Consideration
payable to such shareholder in either cash or stock, subject to the proration
procedures described in the attached Proxy Statement/Prospectus. The
allocation of the cash and shares of Company Common Stock that you will
receive will depend on the stated preferences of the other ELEKOM Shareholders
on the election forms and the proration procedures to be applied. You are
urged to review carefully the enclosed Proxy Statement/Prospectus, which
contains a more complete description of the terms of the Merger and the
election and proration procedures. You should note that the federal income tax
consequences of the Merger to you will depend on whether you receive cash,
stock or a combination of cash and stock in exchange for your shares of ELEKOM
stock.
Whether or not you plan to attend the Meeting, you are urged to complete,
sign, and promptly return the enclosed Proxy and Consent. If you attend the
Meeting, you may vote in person if you wish, even if you have previously
returned your Proxy and Consent. ON BEHALF OF THE BOARD OF DIRECTORS, I URGE
YOU TO VOTE FOR APPROVAL OF THE AGREEMENT AND THE MERGER BY MARKING THE
ENCLOSED PROXY AND CONSENT "FOR" APPROVAL OF THE AGREEMENT AND THE MERGER.
Sincerely,
-------------------------------------
Norman N. Behar
President and Chief Executive
Officer
155 - 108th Avenue, NE
Eighth Floor
Bellevue, Washington
October , 1998
2
<PAGE>
[ELEKOM CORPORATION LOGO AND LETTERHEAD]
ELEKOM CORPORATION
EIGHTH FLOOR
155-108TH AVENUE, NE
BELLEVUE, WASHINGTON 98004
(425) 990-3060
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER , 1998
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of ELEKOM Corporation ("ELEKOM") will be held at the executive
offices of ELEKOM, located at 155 - 108th Avenue, NE, Eighth Floor, Bellevue,
Washington 98004 on October , 1998, at 8:00 a.m., local time, for the
following purposes:
1. Merger. To consider and vote on a proposal to approve the Agreement
and Plan of Reorganization dated August 31, 1998 (the "Agreement") by and
among Clarus Corporation (the "Company"), Clarus CSA, Inc., a wholly-owned
subsidiary of the Company ("Clarus CSA"), and ELEKOM pursuant to which
ELEKOM will merge with and into Clarus CSA, and each issued and outstanding
share of capital stock of ELEKOM will be converted into (i) a specified
amount of cash consideration and (ii) a number of shares of fully-paid and
nonassessable common stock of the Company (the "Merger Consideration") as
described more fully in the accompanying Proxy Statement/Prospectus (the
"Merger").
2. Other Business. To transact such other business as may properly come
before the Meeting, including adjourning the Meeting to permit, if
necessary, further solicitation of proxies.
THE MERGER IS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS, AND
A COPY OF THE AGREEMENT IS ATTACHED AS APPENDIX A THERETO.
Approval of the Agreement and the Merger requires the affirmative vote of
the holders of at least (i) two-thirds of the outstanding shares of common
stock of ELEKOM, (ii) two-thirds of the outstanding shares of Series A
Preferred Stock of ELEKOM and (iii) two-thirds of the outstanding shares of
Series B Preferred Stock of ELEKOM, each voting as a separate class. Only
shareholders of record at the close of business September , 1998, the record
date for the Meeting, are entitled to receive notice of and to vote at the
Meeting or any adjournment or postponement thereof. Holders of ELEKOM capital
stock (the "ELEKOM Shareholders") will be entitled to dissenters' rights as
further described in the accompanying Proxy Statement/Prospectus. Pursuant to
an agreement with the Company, ELEKOM Shareholders and the executive officers
of ELEKOM who hold 100% of the outstanding shares of ELEKOM Series A Preferred
Stock, 67% of the outstanding shares of ELEKOM Series B Preferred Stock and
49% of the outstanding shares of ELEKOM Common Stock have agreed to vote for
approval of the Agreement and the Merger. Accordingly, approval of the
Agreement and the Merger by the holders of ELEKOM Series A Preferred Stock and
Series B Preferred Stock is assured.
The Board of Directors of ELEKOM (the "Board") also seeks your written
consent in lieu of the Meeting to approve the proposal set forth above. If the
Board receives Form of Proxy and Consent in Lieu of Special Meeting ("Proxy
and Consent") from all ELEKOM Shareholders unanimously approving the Merger
and the Merger Agreement, the Agreement and the Merger will be deemed properly
adopted by the unanimous consent of the ELEKOM Shareholders, and the Meeting
will be canceled. If the Board receives the unanimous consent of the ELEKOM
Shareholders, you will be notified that the Merger and the Agreement have been
approved and adopted, and you will be notified of the cancellation of the
Meeting.
Please sign and return the enclosed form of Proxy and Consent in Lieu of
Special Meeting as promptly as possible, whether or not you plan to attend the
Meeting in person. Your proxy may be revoked at any time before it is voted by
signing and returning a Proxy and Consent bearing a later date with respect to
the same shares, by filing with Wayne Burns of ELEKOM a written revocation
bearing a later date, or by attending and voting in person at the Meeting.
<PAGE>
Please also sign and return the enclosed Cash/Stock Election Form pursuant
to which you may elect to receive the Merger Consideration payable to you in
exchange for your shares of ELEKOM stock in either cash or stock, subject to
the proration procedures described in the attached Proxy Statement/Prospectus.
By Order of the Board of Directors
-------------------------------------
Wayne D. Burns, Secretary and
Treasurer
155 - 108th Avenue, NE
Eighth Floor
Bellevue, Washington
October , 1998
2
<PAGE>
PROXY STATEMENT AND CONSENT SOLICITATION
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER , 1998
ELEKOM CORPORATION
155 - 108TH AVENUE, NE
EIGHTH FLOOR
BELLEVUE, WASHINGTON 98004
(425) 990-3060
PROSPECTUS
OF
CLARUS CORPORATION
3950 JOHNS CREEK COURT, SUITE 100
SUWANEE, GEORGIA 30024
(770) 291-3900
FOR
UP TO 1,391,305 SHARES OF COMMON STOCK
This Proxy Statement/Prospectus of Clarus Corporation, a corporation
organized and existing under the laws of the State of Delaware (the
"Company"), relates to the issuance of shares of its common stock, par value
$.0001 per share (the "Company Common Stock"), to the shareholders of ELEKOM
Corporation, a Washington corporation ("ELEKOM") upon consummation of a
proposed merger of ELEKOM (the "Merger") with and into Clarus CSA, Inc., a
wholly-owned subsidiary of the Company ("Clarus CSA"), pursuant to the terms
of that certain Agreement and Plan of Reorganization, dated August 31, 1998,
by and among the Company, Clarus CSA and ELEKOM (the "Agreement") as described
herein. A copy of the Agreement is attached to this Proxy Statement/Prospectus
as Appendix A.
This Proxy Statement/Prospectus is also being furnished to holders (the
"ELEKOM Shareholders") of shares of common stock, $.01 par value (the "ELEKOM
Common Stock"), and of preferred stock, $.01 par value (the "ELEKOM Preferred
Stock" and, together with the ELEKOM Common Stock, the "ELEKOM Stock"), of
ELEKOM, in connection with the solicitation of proxies by ELEKOM's Board of
Directors (the "ELEKOM Board") for use at the Special Meeting of ELEKOM
Shareholders to be held on October , 1998, at 8:00 a.m., local time, at the
principal executive offices of ELEKOM at 155 - 108th Avenue, NE, Eighth Floor,
Bellevue, Washington 98004, and at any adjournments or postponements thereof
(the "ELEKOM Meeting") and in connection with the simultaneous solicitation by
the ELEKOM Board of unanimous written consent approving the proposal scheduled
to be addressed at the ELEKOM Meeting. Unanimous written consent must be
received no later than October , 1998. It is anticipated that the effective
date and time of the Merger will be within three business days following the
approval of the Agreement and the Merger by the ELEKOM shareholders.
On the effective date and time of the merger (the "Effective Time"), ELEKOM
will merge with and into Clarus CSA, and the separate existence of ELEKOM will
cease. Subject to the terms and conditions of the Agreement, each share of
ELEKOM Stock that is issued and outstanding immediately prior to the Effective
Time will be converted into (i) a specified amount of cash consideration and
(ii) a number of shares of fully-paid and nonassessable Company Common Stock
as set forth herein (the "Merger Consideration"), so that the number of shares
of the Company Common Stock issued to ELEKOM Shareholders at the Effective
Time will equal between 1,350,000 and 1,391,305 shares, depending on the
market price of the Company's Common Stock, as more particularly described
herein, and the total cash consideration received by the ELEKOM Shareholders
will equal $8.0 million. Based on current prices of the Company's Common Stock
the Merger consideration is approximately $ million, consisting of $8 million
in cash and $ million in Company Common Stock. The allocation of the Merger
Consideration among the holders of ELEKOM Preferred Stock and ELEKOM Common
Stock will be determined in accordance with the Articles of Incorporation of
ELEKOM based on the closing price of the Company Common Stock on the last
trading day immediately preceding the closing of the Merger (the "Closing
Price"). The $8 million cash consideration is not affected by a change in the
Closing Price. For example, if the Closing Price is $ , each holder of
ELEKOM Series A Preferred Stock would be entitled to receive total Merger
Consideration valued at $ per share, each holder of ELEKOM Series B
Preferred Stock would be entitled to receive total Merger Consideration valued
at $ per share, and each holder of ELEKOM Common Stock would be entitled
to receive total Merger Consideration valued at $ per share. Cash will
be paid in lieu of any fractional shares of Company Common Stock. The closing
price per share of the Company Common Stock on the Nasdaq National Market on
October , 1998 was $ .
The Company Common Stock is quoted on the Nasdaq National Market System
("NASDAQ/NMS"). ELEKOM Stock is not traded on any stock exchange or the
Nasdaq/NMS or the Nasdaq Small Cap market. On August 31, 1998, the last full
trading day prior to announcement of the execution of the Agreement, the
closing price of a share of Company Common Stock, as reported on the
Nasdaq/NMS, was $5.31. On October , 1998, the last trading day prior to the
date of this Proxy Statement/Prospectus, the closing price of a share of
Company Common Stock, as quoted on the Nasdaq/NMS, was $ .
The Company is not soliciting proxies from its shareholders in connection
with the Merger.
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY ELEKOM SHAREHOLDERS IN CONNECTION WITH THE
MERGER.
THIS PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF PROXY AND
CONSENT IN LIEU OF SPECIAL MEETING ARE FIRST BEING MAILED TO ELEKOM
SHAREHOLDERS ON OR ABOUT OCTOBER , 1998.
THE SHARES OF COMPANY COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is October , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "SEC"). ELEKOM is not subject to such
reporting requirements of the Exchange Act. Copies of such reports and other
information regarding the Company can be read and/or copied at the SEC's
Public Reference Section at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The public may obtain information on the operations of
the Public Reference Room by calling the SEC at 1-800- SEC-0330.The SEC
maintains a Web site that contains reports and other information regarding the
Company. The address of such Web site is http://www.sec.gov. The Company's web
site is http://www.claruscorp.com.
This Proxy Statement/Prospectus constitutes part of the Registration
Statement on Form S-4 of the Company (including any exhibits and amendments
thereto, the "Registration Statement") filed with the SEC under the Securities
Act of 1933, as amended (the "Securities Act"), relating to the securities
offered hereby. This Proxy Statement/Prospectus does not include all of the
information in the Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. For further
information about the Company and the securities offered hereby, reference is
made to the Registration Statement. The Registration Statement may be
inspected and copied, at prescribed rates, at the SEC's public reference
facility at the address set forth above. The Company's Common Stock is traded
on Nasdaq/NMS. Reports, proxy statements, and other information concerning the
Company may be inspected at the offices of The Nasdaq Stock Market, Inc.,
located at 1735 K Street, N.W., Washington, D.C. 20006.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ELEKOM. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO OR
FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
ELEKOM SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
All information included in this Proxy Statement/Prospectus with respect to
the Company was supplied by the Company and all information included herein
with respect to ELEKOM was supplied by ELEKOM.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED
BY REFERENCE HEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OF SHARES OF ELEKOM'S STOCK TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO THE
SECRETARY, CLARUS CORPORATION, 3950 JOHNS CREEK COURT, SUITE 100, SUWANEE,
GEORGIA 30024, TELEPHONE NUMBER (770) 291-3900. TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS ANY REQUESTS SHOULD BE MADE BEFORE OCTOBER , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION.................................................... 4
SUMMARY.................................................................. 1
The Parties............................................................ 1
Special Meeting of ELEKOM Shareholders................................. 2
The Merger and The Agreement........................................... 3
General................................................................ 3
Reason for Merger...................................................... 4
Fairness Opinion....................................................... 5
Dissenter's Rights..................................................... 5
Closing of the Merger.................................................. 5
Conditions of the Merger............................................... 5
Termination of the Agreement........................................... 7-12
RISK FACTORS............................................................. 13
Histories of Operating Losses; Uncertainty of Future Operating Results. 13
Limited Period of Public Trading; Possible Volatility of Stock Price... 13
Risk of Fixed Merger Consideration..................................... 14
Financial Impact of Merger............................................. 14
Fluctuations in Quarterly Operating Results............................ 14
Transaction Expenses; Risk of Inability to Integrate Operations........ 15
Dependence on Direct Sales Model....................................... 16
Competition............................................................ 17
Rapid Technological Change; Risks Associated with New Products and
Product Enhancements.................................................. 17
Limited Experience, and Risks Associated, with Internet Commerce....... 18
Risk of Inability to Manage Growth..................................... 19
Dependence on Key Personnel; Ability to Hire and Retain Personnel...... 19
Risk Associated with Planned International Expansion................... 20
Product Concentration; Market Acceptance............................... 20
Lengthy Sales Cycles................................................... 21
Proprietary Rights and Licensing....................................... 21
Third Party Patent and Other Intellectual Property Rights.............. 22
Risk of Product Defects; Product Liability............................. 23
Reliance on Third-Party Software; Year 2000 Compliance................. 23
Reliance on Microsoft Technologies..................................... 24
Risks Associated with Government Regulation and Legal Uncertainties.... 25
Risks Associated with Encryption Technology............................ 25
Control by Management and Principal Stockholders....................... 25
Dilution; Shares Eligible for Future Sale.............................. 26
Potential Issuance of Preferred Stock; Antitakeover Provisions......... 27
THE ELEKOM MEETING....................................................... 27
General................................................................ 27
Record Date; Vote Required............................................. 28
BACKGROUND AND REASONS FOR THE MERGER.................................... 30
Background of the Merger............................................... 30
ELEKOM's Reasons for the Merger........................................ 32
The Company's Reasons for the Merger................................... 32
Fairness Opinion....................................................... 33
</TABLE>
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THE MERGER............................................................... 37
Basic Terms of the Merger.............................................. 37
Stock Options.......................................................... 39
Warrants............................................................... 39
Effective Time of the Merger........................................... 40
Exchange of Certificates............................................... 40
Representations and Warranties......................................... 40
Business of ELEKOM Pending the Merger.................................. 41
Standstill Agreement................................................... 42
Certain Covenants of the Company....................................... 42
Third Party Proposals; Break-up Fee.................................... 43
Conditions to the Merger............................................... 44
Termination; Amendment................................................. 45
Material Federal Income Tax Consequences of the Merger................. 46
Accounting Treatment................................................... 49
Resale of the Company's Common Stock................................... 49
Directors and Executive Officers Following the Merger.................. 50
Expenses and Fees...................................................... 50
Rights of Dissenting ELEKOM Shareholders............................... 50
Interests of Certain Persons in the Merger............................. 52
Shareholders' Voting Agreements........................................ 52
Registration Rights Agreement.......................................... 53
Effect on Employees, Employee Benefit Plans and Stock Options.......... 53
COMPARATIVE MARKET PRICES AND DIVIDENDS.................................. 55
The Company's Market Prices............................................ 55
ELEKOM Stock Prices.................................................... 55
Recent Prices.......................................................... 55
Dividends.............................................................. 55
Stockholders of Record................................................. 55
UNAUDITED PRO FORMA FINANCIAL DATA....................................... 56
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS..... 59
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY........................ 62
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 63
Overview............................................................... 63
Affiliate Relationships................................................ 64
Results of Operations.................................................. 65
Quarter and Six Months Ended June 30, 1998 Compared to Quarter and Six
Months Ended June 30, 1997............................................ 65
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.. 68
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.. 69
Liquidity and Capital Resources........................................ 71
Impact of Year 2000.................................................... 72
New Accounting Pronouncements.......................................... 72
BUSINESS OF THE COMPANY.................................................. 74
General................................................................ 74
Industry Background.................................................... 74
The Clarus Solution.................................................... 75
</TABLE>
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Strategy............................................................... 76
Technology............................................................. 77
Products............................................................... 78
Applications........................................................... 78
Graphical Architects................................................... 78
Sales and Marketing.................................................... 79
Implementation Services................................................ 80
Customer Service and Maintenance....................................... 80
Research and Development............................................... 80
Competition............................................................ 81
Proprietary Rights and Licensing....................................... 82
Employees.............................................................. 82
Facilities............................................................. 83
Legal Proceedings...................................................... 83
MANAGEMENT OF THE COMPANY................................................ 84
Committees of the Board of Directors................................... 86
Director Compensation.................................................. 86
Executive Compensation................................................. 87
Employee Benefit Plans................................................. 89
Agreements with Employees.............................................. 90
Compensation Committee Interlocks and Insider Participation............ 90
Limitation of Liability and Indemnification of Officers and Directors.. 91
COMPANY PRINCIPAL STOCKHOLDERS........................................... 92
CERTAIN TRANSACTIONS OF THE COMPANY...................................... 93
COMPANY CAPITAL STOCK.................................................... 95
Common Stock........................................................... 95
Preferred Stock........................................................ 95
Delaware Law and Certain Provisions of the Company's Restated
Certificate and By-laws............................................... 95
Transfer Agent and Registrar........................................... 96
COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND ELEKOM........... 96
Authorized Capital Stock............................................... 96
Amendment of Articles of Incorporation and Bylaws...................... 98
Number of Directors, Election of Directors and Classified Board of
Directors............................................................. 99
Removal of Directors................................................... 99
Limitation on Director Liability....................................... 100
Indemnification........................................................ 100
Vote Required for Shareholder Approval................................. 101
Mergers, Consolidations, and Sales of Assets........................... 102
Actions by Stockholders Without a Meeting.............................. 102
Special Meeting of Stockholders........................................ 103
Dividends.............................................................. 103
SELECTED HISTORICAL FINANCIAL DATA OF ELEKOM............................. 104
ELEKOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 105
Overview............................................................... 105
Results of Operations.................................................. 106
Liquidity and Capital Resources........................................ 107
Impact of Year 2000.................................................... 108
New Accounting Pronouncements.......................................... 109
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS OF ELEKOM....................................................... 110
General................................................................ 110
Industry Background.................................................... 110
The ELEKOM Solution.................................................... 110
Strategy............................................................... 111
Technology............................................................. 111
Products............................................................... 111
Customers.............................................................. 112
Sales and Marketing.................................................... 112
Professional Services and Customer Support............................. 112
Research and Development............................................... 112
Competition............................................................ 112
Proprietary Rights and Licensing....................................... 113
Employees.............................................................. 113
Facilities............................................................. 113
Legal Proceedings...................................................... 113
ELEKOM PRINCIPAL SHAREHOLDERS............................................ 114
EXPERTS.................................................................. 115
OPINIONS................................................................. 115
THE COMPANY'S FINANCIAL STATEMENTS....................................... F-1
ELEKOM FINANCIAL STATEMENTS.............................................. F-32
APPENDIX A: AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN CLARUS
CORPORATION AND ELEKOM CORPORATION...................................... A-1
APPENDIX B: OPINION OF NATIONSBANC MONTGOMERY SECURITIES L.L.C........... B-1
APPENDIX C: CHAPTER 23B-13 OF THE WASHINGTON BUSINESS CORPORATION ACT.... C-1
</TABLE>
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SUMMARY
The following is a summary of certain information discussed in this Proxy
Statement/Prospectus relating to the ELEKOM Meeting and the Merger, and shares
of Company Common Stock to be issued to ELEKOM Shareholders at the Effective
Time of the Merger. This summary does not purport to be complete and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Proxy Statement/Prospectus, including "Risk Factors" and the Company's
and ELEKOM's Consolidated Financial Statements and Notes thereto. Except as
otherwise indicated, all information in this Proxy Statement/Prospectus assumes
that 1,350,000 shares of Company Common Stock will be issued in the Merger.
ELEKOM Shareholders are urged to read carefully the entire Proxy
Statement/Prospectus, including the Appendices.
THE PARTIES
THE COMPANY
Clarus Corporation (the "Company") develops, markets and supports
client/server financial software applications that reduce the total cost of
ownership by minimizing the time, costs and risks associated with implementing,
changing and upgrading applications. The Company's Clarus(TM) line of products
is based on a flexible, open architecture called Active Architecture(R) which
allows for seamless, rapid changes and upgrades without modifying the source
code. The Company's software provides organizations with the broad
functionality of custom-designed applications without the high total cost of
ownership traditionally associated with such applications. By providing broad
functionality, a flexible open architecture, and minimized implementation and
modification time, the Company addresses the needs of a wide range of
organizations while giving end users more control of their work environment.
The Company's Clarus(TM) product line includes a full suite of financial,
human resource and procurement applications. These applications cover the full
range of financial and accounting functions, including general accounting,
expense accounting, revenue accounting and human resources. The Company
licenses a series of modules, its Graphical Architects(R), that are designed to
extend, enhance, integrate and change the look and feel of the Company's core
applications. Through a visual point-and-click interface, the Graphical
Architects modules allow users to personalize and configure the Company's
applications without any source code programming.
Additionally, the Company has recently introduced its growing suite of
Corporate Service Applications, including Clarus(TM) HRPoint(TM), Clarus(TM)
Budget, Clarus(TM) OLAP and Clarus(TM) E--Procurement. In addition, the Company
provides dedicated implementation services as an integral part of its solution,
and believes that these services result in a high level of customer
satisfaction, strong customer references and long relationships. The Company
provides ongoing support services to assist customers in maintaining and
updating their systems, training their employees and adding functionality as
the customers' businesses grow and their requirements change.
The Company's objective is to become the leading provider of financial, human
resource and corporate service applications to non-industrial organizations.
The key elements of the Company's strategy are: (i) to extend its technology
leadership; (ii) to leverage its expertise in financial and human resource
applications; (iii) to capitalize on middle market opportunities; (iv) to
leverage its installed customer base; and (v) to expand sales and marketing
channels.
The Company licenses its products and services primarily through a direct
sales force in the United States and Canada. The Company focuses its sales and
marketing efforts on value buyers in mid-sized non-industrial organizations,
including divisions of larger companies, which represent the fastest growing
segment of the financial applications market. At July 31, 1998, the Company had
more than 225 customers, including leading organizations such as NOVA
Information Systems, Inc., National Railroad Passenger Corporation ("Amtrak"),
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Blue Cross and Blue Shield of Alabama, Chartwell Re Holdings Corporation, First
Data Corporation, Land's End, Inc., T. Rowe Price Associates, Inc., Shaw
Industries, Inc., and Toronto-Dominion Bank.
The Company was incorporated in Delaware in 1991. On May 26, 1998, the
Company completed an initial public offering of its Common Stock and sold 2.5
million shares which resulted in net proceeds of approximately $22.0 million.
Unless the context otherwise requires, references in this Proxy
Statement/Prospectus to the "Company" refer to Clarus Corporation and its
consolidated subsidiaries, SQL Financials Services, L.L.C. (the "Services
Subsidiary"), SQL Financials Europe, Inc. and Clarus CSA, Inc. The Company's
principal executive offices are located at 3950 Johns Creek Court, Suite 100,
Suwanee, Georgia 30024. The Company's telephone number at that address is (770)
291-3900.
ELEKOM
ELEKOM is a development stage enterprise engaged in the development of ELEKOM
Procurement, an intranet-based, business-to-business electronic commerce
solution that is designed to streamline the corporate procurement process.
ELEKOM believes that its business-to-business commerce solution will provide
its customers an application that simplifies corporate procurement procedures,
decreases purchasing overhead costs and streamlines purchasing from multiple
suppliers.
ELEKOM Procurement is designed to automate the creation, routing, approval
and transaction functions for purchase requests and orders of non-production
goods and services by creating a localized database of available products and
services and providing ELEKOM's customers with Internet links to suppliers to
review more detailed supplier and product information. Once deployed at a
customer site, ELEKOM Procurement will automate the procurement process for
non-production goods and services from requisition creation and approval
routing to electronic placement of orders with suppliers. The system is
designed to allow transaction communication through standard communications
methods including facsimile, E-mail and electronic data interface ("EDI"). In
addition to the web-based end user application, ELEKOM believes that ELEKOM
Procurement will reduce the information technology ("IT") burden associated
with installation, implementation, deployment and maintenance of the
application through a suite of administrative tools.
Using intranet and Internet based technology, ELEKOM Procurement is designed
to provide users with increased control over their purchasing processes.
Traditionally, purchasing of non-production goods and services, including
computer hardware and software and office supplies has been an inefficient,
paper intensive process. ELEKOM believes ELEKOM Procurement will streamline and
automate a company's procurement operations, reduce processing costs, improve
procurement effectiveness and discourage users from purchasing outside of a
customer's approved procedures.
ELEKOM was incorporated in Washington in August 1995, as a subsidiary of
Egghead, Inc. (now known as Egghead.com, Inc.) ("Egghead") and has operated on
a stand-alone basis since November 1997. ELEKOM's principal executive offices
are located at 155-108th Avenue, NE, Eighth Floor, Bellevue, Washington 98004.
ELEKOM's telephone number at that address is (425) 990-3060.
SPECIAL MEETING OF ELEKOM SHAREHOLDERS
The ELEKOM Meeting will be held at 8:00 a.m., local time, on October ,
1998, at 155-108th Avenue, NE, Eighth Floor, Bellevue, Washington, for the
purpose of considering and voting on a proposal to approve the Agreement and
the Merger and transacting such other business as may properly come before the
meeting or any adjournments thereof. See "The ELEKOM Meeting."
Only holders of record of ELEKOM Stock at the close of business on September
, 1998, the record date for the ELEKOM Meeting (the "Record Date"), will be
entitled to vote at the ELEKOM Meeting. Approval of the Agreement and the
Merger requires the affirmative vote of the holders of at least (i) two-thirds
of the
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outstanding shares of ELEKOM Common Stock, (ii) two-thirds of the outstanding
shares of Series A ELEKOM Preferred Stock of ELEKOM (the "Series A Preferred
Stock") and (iii) two-thirds of the outstanding shares of Series B ELEKOM
Preferred Stock of ELEKOM (the "Series B Preferred Stock"), each voting as a
separate class. As of the Record Date, there were shares of ELEKOM
Common Stock, shares of Series A Preferred Stock and shares of
Series B Preferred Stock outstanding and entitled to be voted. At the Effective
Time it is anticipated that there will be shares of ELEKOM Common Stock
issued and outstanding, shares of Series A Stock issued and
outstanding and shares of Series B Preferred Stock issued and
outstanding (assuming exercise at or before the Effective Time of all
outstanding options and warrants to purchase ELEKOM Stock and repurchase at or
before the Effective Time of all issued and outstanding shares of ELEKOM Stock
that are subject to ELEKOM's right of repurchase).
The directors and executive officers of ELEKOM beneficially owned, as of the
Record Date, shares (or approximately %) of the outstanding
shares of ELEKOM Common Stock, shares (or approximately %) of the
outstanding shares of Series A Preferred Stock and shares (or
approximately %) of the outstanding shares of Series B Preferred Stock.
Pursuant to an agreement with the Company, ELEKOM Shareholders and executive
officers of ELEKOM who hold 100% of the outstanding shares of Series A
Preferred Stock, 67% of the outstanding shares of Series B Preferred Stock and
49% of the outstanding shares of ELEKOM Common Stock have agreed to vote for
approval of the Agreement and the Merger. Accordingly, approval of the
Agreement and the Merger by the holders of Series A Preferred Stock and Series
B Preferred Stock is assured.
As of the Record Date, the directors and executive officers of the Company
did not own beneficially or of record any shares of ELEKOM Stock. See "The
ELEKOM Meeting."
THE MERGER AND THE AGREEMENT
GENERAL
Pursuant to the Agreement, at the Effective Time, ELEKOM will be merged with
and into Clarus CSA, a wholly-owned subsidiary of the Company, and the separate
existence of ELEKOM will cease. Each share of ELEKOM Stock that is issued and
outstanding immediately prior to the Effective Time will be converted into
(i) a specified amount of cash consideration and (ii) a number of shares of
Company Common Stock so that the total number of shares of Company Common Stock
issued to ELEKOM Shareholders at the Effective Time will equal 1,350,000
shares, subject to adjustment as more particularly described herein, and the
total cash consideration received by ELEKOM Shareholders will equal $8.0
million (the "Merger Consideration"). However, in the event that the Closing
Price is less than $5.93, then the aggregate number of shares of Company Common
Stock to be issued in the Merger shall be increased by a number of shares of
Company Common Stock such that the aggregate value of such shares based on the
Closing Price, will equal $8.0 million, provided that in no event will more
than 1,391,305 shares of Company Common Stock be issued to ELEKOM Shareholders
in the Merger. The $8 million cash consideration is not affected by a change in
the Closing Price. In addition, in the event that the Closing Price is less
than $5.75, ELEKOM may terminate the Agreement and, if the Closing Price is
less than $5.00, either party may terminate the Agreement. Consummation of the
Merger is subject to approval by the ELEKOM Shareholders and is expected to
occur in the fourth quarter of 1998. The ELEKOM Shareholders will own as a
result of the Merger approximately % of the outstanding Company Common Stock
immediately following consummation of the Merger (excluding any Company Common
Stock owned by ELEKOM Shareholders prior to the Merger).
The portion of the total Merger Consideration to be received by each ELEKOM
Shareholder in the Merger will be established pursuant to a formula that is
based on certain requirements and liquidation preferences established by
ELEKOM's Articles of Incorporation. The formula is designed to allocate the
Company Common Stock and the $8.0 million cash consideration among the ELEKOM
Shareholders as follows: first, to the holders of Series B Preferred Stock in
an amount that satisfies the liquidation preference applicable to the Series B
Preferred Stock of $.6814 per share; second, to the holders of Series A
Preferred Stock, Series B Preferred Stock
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and ELEKOM Common Stock, such that the holders of Series A Preferred Stock are
entitled to 17.28% of the remaining consideration, and the holders of Series B
Preferred Stock and the holders of ELEKOM Common Stock share, on a pro rata
basis, 82.72% of the remaining consideration, all until the holders of Series A
Preferred Stock have received consideration equal to $7.2092 per share. In the
event any Merger Consideration remains to be distributed after the steps
described above (which is not expected to occur), such consideration will be
allocated among the holders of the Series A Preferred Stock, Series B Preferred
Stock and the ELEKOM Common Stock on a pro rata basis. For purposes of this
allocation, the value of each share of Company Common Stock to be received in
the Merger will be deemed to be the Closing Price. The Closing Price of the
Company Common Stock on September , 1998 was $ per share. If the
Closing Price were $ , the holders of Series A Preferred Stock would be
entitled to receive Merger Consideration of $ in cash and shares
of Company Common Stock per share, the holders of Series B stock would be
entitled to receive Merger Consideration of $ in cash and shares
of Company Common Stock per share, and the holders of ELEKOM Common Stock would
be entitled to receive Merger Consideration of $ in cash and
shares of Company Common Stock per share (assuming exercise at or prior to the
Effective Time of all outstanding vested options and warrants to purchase
ELEKOM Stock and repurchase by ELEKOM, at or prior to the Effective Time, of
all outstanding shares of ELEKOM Common Stock that are subject to ELEKOM's
right of repurchase). As discussed below, however, each of the ELEKOM
Shareholders will be given the opportunity to elect to receive his, her or its
portion of the Merger Consideration in cash or stock, subject to adjustment as
described in this Proxy Statement/Prospectus. See "The Merger--Basic Term of
the Merger."
Each ELEKOM Shareholder may elect either to receive his or her share of the
Merger Consideration in cash and Company Common Stock in the pro rata amounts
that would be applicable in the absence of a cash or stock election option (a
"Pro Rata Election"), or to receive his or her share of the Merger
Consideration in either as much cash as possible (a "Cash Election") or as much
Company Common Stock as possible (a "Stock Election") (with any balance, if
any, of such ELEKOM Shareholder's Merger Consideration payable in Company
Common Stock or cash, as the case may be). If an ELEKOM Shareholder makes a
Cash Election or a Stock Election, the actual amounts of cash and Company
Common Stock he or she receives will depend on the valid elections made by
other ELEKOM Shareholders and the ability of the Company to give effect to such
elections given the fixed composition of the Merger Consideration. However, an
ELEKOM Shareholder making a Cash Election will receive no less than the
applicable Pro Rata Election amount of cash for his or her ELEKOM Stock, and an
ELEKOM Shareholder making a Stock Election will receive no less than the
applicable Pro Rata Election amount of Company Common Stock for his or her
ELEKOM Stock. ELEKOM Shareholders who do not make any election will be deemed
to have made a Pro Rata Election and thus will receive in exchange for their
shares of ELEKOM Stock the amounts of cash and Company Common Stock that they
would have received in the absence of a cash or stock election option. See "The
Merger--Election Procedures."
REASONS FOR THE MERGER
The Company's Board of Directors has approved the Agreement and has
determined that the Merger is desirable to the Company and its stockholders. In
approving the Merger, the Company's directors considered (i) ELEKOM's market
presence and recognition in the business-to-business electronic procurement
market and the Company's desire to gain and exploit a market presence and
recognition; (ii) ELEKOM's financial condition, earnings and operations on a
prospective basis and the expected high growth potential of the electronic
commerce procurement software market; (iii) the increased revenues and
resources of the Company as a result of the Merger; (iv) the Company's overall
strategic focus; (v) the financial terms of the Merger; and (vi) the management
philosophy of ELEKOM and its compatibility with that of the Company. See
"Background and Reasons for the Merger--The Company's Reasons for the Merger."
The ELEKOM Board has unanimously approved the Agreement and the Merger and
has determined that the Merger is fair to, and in the best interests of, ELEKOM
and its shareholders. In approving the Merger, the
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ELEKOM Board considered (i) the Company's financial condition; (ii) various
alternatives to the Merger, including the merits of other acquisition proposals
and venture capital financing; (iii) the consideration to be received by ELEKOM
Shareholders; (iv) the anticipated synergies and enhanced resources and
capabilities that would be available to ELEKOM as a result of the Merger; (v)
the competitive and regulatory environments for internet software generally;
(vi) the current lack of marketability of the ELEKOM Stock, contrasted with the
ability of ELEKOM Shareholders to trade the Company Common Stock to be received
by them in the Merger on the Nasdaq/NMS; and (v) the structure of the Merger as
a tax-free reorganization. ACCORDINGLY, THE ELEKOM BOARD UNANIMOUSLY RECOMMENDS
THAT ELEKOM SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT AND THE MERGER.
The ELEKOM Board will continue to evaluate the terms and conditions of the
Merger, including the total consideration (cash plus the value of the shares of
Company Common Stock) to be received by the ELEKOM Shareholders in the Merger,
the fairness of the Merger Consideration to each class of ELEKOM Shareholders
and the likelihood that the Merger will qualify as a tax-free reorganization.
If the ELEKOM Board determines that the economic terms of the Agreement are
unfair to the ELEKOM Shareholders in light of all relevant circumstances,
including ELEKOM's other financing options and business opportunities, it will
seek to amend or terminate the Agreement in accordance with its terms. See "The
Merger--Termination; Amendment." If the ELEKOM Board decides for any reason to
amend or terminate the Agreement after the mailing of this Proxy
Statement/Prospectus, it will notify the ELEKOM Shareholders of the amendment
or termination. In the event that the Agreement is amended or renegotiated to
provide terms that are satisfactory to the Board and will result in fair
consideration for the ELEKOM Shareholders, the Board will submit the new
Agreement to the ELEKOM Shareholders for approval and will resolicit the ELEKOM
Shareholders' proxies to vote at a meeting called for that purpose and/or
obtain the ELEKOM Shareholders' unanimous written consent.
Pursuant to an agreement with the Company, ELEKOM Shareholders and executive
officers of ELEKOM who hold 100% of the outstanding shares of Series A Stock,
67% of the outstanding shares of Series B Stock and 49% of the outstanding
shares of ELEKOM Common Stock have agreed to vote for approval of the Agreement
and the Merger. Accordingly, approval of the Agreement and the Merger by the
holders of Series A Stock and Series B Stock is assured. See "Background and
Reasons for the Merger--ELEKOM's Reasons for the Merger."
FAIRNESS OPINION
NationsBanc Montgomery Securities LLC ("NMS") has rendered an opinion to the
Company that, based on and subject to the procedures, matters, and limitations
described in its opinion, and such other matters as it considered relevant as
of the date of its opinion, the Merger Consideration to be paid by the Company
pursuant to the Agreement is fair to the Company from a financial point of
view. NMS's opinion is attached as Appendix B to this Proxy
Statement/Prospectus. See "Background and Reasons for the Merger--Fairness
Opinion."
DISSENTER'S RIGHTS
Under Washington law, holders of ELEKOM Stock who give proper notice to
ELEKOM and who do not vote in favor of the Merger have the right to receive
cash equal to the "fair market value" of their ELEKOM Stock in lieu of the
Merger Consideration. See "The Merger--Rights of Dissenting ELEKOM
Shareholders" and Chapter 23B.13 of the Washington Business Corporation Act
(the "WBCA"), a copy of which is attached hereto as Appendix C.
CLOSING OF THE MERGER
Unless otherwise agreed upon by the Company and ELEKOM, and subject to the
conditions to the obligations of the parties to effect the Merger, the parties
will use their reasonable efforts to cause the Merger to occur on the date on
which the Agreement and Merger is approved by the requisite vote of the ELEKOM
Shareholders. The parties expect that all conditions to consummation of the
Merger will be satisfied so that the Merger can be consummated during the
fourth quarter of 1998, although there can be no assurance as to whether or
when the Merger will occur. See "The Merger--Effective Time of the Merger," "--
Conditions to the Merger" and "--Termination; Amendment."
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CONDITIONS TO THE MERGER
In addition to approval by ELEKOM Shareholders, consummation of the Merger is
subject to various other conditions, including receipt by ELEKOM of a legal
opinion concerning the federal income tax consequences of the Merger and the
execution of certain ancillary agreements between the Company and certain
ELEKOM Shareholders and employees, as well as certain other customary
conditions. See "The Merger--Conditions to the Merger."
TERMINATION OF THE AGREEMENT
The Agreement may be terminated by either party, and the Merger abandoned, if
the Merger is not completed on or before November 15, 1998. The Agreement may
also be terminated if the price of the Company Common Stock trades below
certain prices, and under certain other circumstances. See "The Merger--
Termination; Amendment."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger has been structured to qualify as a nontaxable transaction under
the Internal Revenue Code of 1986, as amended (the "Code"), to the extent that
ELEKOM Shareholders receive shares of Company Common Stock in exchange for
shares of ELEKOM Stock. ELEKOM Shareholders will recognize the gain realized in
the exchange for federal income tax purposes, however, to the extent of cash
received by them in the Merger.
The foregoing discussion is based on the Code, and current judicial and
administrative interpretations of the Code, each of which is subject to change.
Changes in the Code and interpretations of it may be applied retroactively.
Consequently, there can be no assurance that the tax effects described in the
foregoing discussion will not be changed in a manner adverse to ELEKOM or the
ELEKOM Shareholders. For further discussion of the expected material federal
income tax consequences to ELEKOM and the ELEKOM Shareholders, see "The
Merger--Certain Material Federal Income Tax Consequences."
THIS DISCUSSION DOES NOT ADDRESS THE TAXABILITY OF THE HOLDERS OF ELEKOM
PREFERRED STOCK WHO RECEIVE CASH AND COMPANY COMMON STOCK ATTRIBUTABLE TO
ACCRUED DIVIDENDS OR A LIQUIDATION PREFERENCE. ELEKOM SHAREHOLDERS WHO OWN
ELEKOM PREFERRED STOCK HAVING ACCRUED DIVIDENDS OR A LIQUIDATION PREFERENCE ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAXABILITY OF THE COMPANY
COMMON STOCK ATTRIBUTABLE THERETO.
THE TAX CONSEQUENCES OF THE MERGER TO A PARTICULAR ELEKOM SHAREHOLDER WILL
DEPEND ON THE PARTICULAR CIRCUMSTANCES OF SUCH ELEKOM SHAREHOLDER. ACCORDINGLY,
EACH ELEKOM SHAREHOLDER SHOULD CONSULT WITH SUCH SHAREHOLDER'S OWN TAX ADVISORS
AS TO THE FEDERAL (AND ANY STATE OR LOCAL) TAX CONSEQUENCES OF THE MERGER UNDER
SUCH SHAREHOLDER'S PARTICULAR CIRCUMSTANCES. MOREOVER, NO INFORMATION HAS BEEN
PROVIDED HEREIN AS TO FOREIGN, STATE OR LOCAL LAW, AND EACH ELEKOM SHAREHOLDER
IS THEREFORE URGED TO CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISORS AS TO THE TAX
CONSEQUENCES OF THE MERGER UNDER SUCH LAWS.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a purchase
business combination.
The Company's allocation of the purchase price in the Merger will result in
the allocation of $14.0 million of in-process acquired research and development
which, under generally accepted accounting principles, will be expensed
immediately upon completion of the Merger.
APPOINTMENT OF ELEKOM REPRESENTATIVE TO THE COMPANY'S BOARD
The Company has agreed to propose that its stockholders increase the size of
its Board of Directors and to nominate Norman N. Behar, currently President and
Chief Executive Officer of ELEKOM, for election to the
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Company's Board at the next annual meeting of the Company's stockholders. The
Agreement provides that Mr. Behar shall have board observation rights until the
time he is elected to the Company's Board. If Mr. Behar is elected to the
Company's Board and his term expires before June 30, 2000, he will maintain
board observation rights until June 30, 2000.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors and ELEKOM Shareholders have
interests in the Merger in addition to their respective interests as ELEKOM
Shareholders generally. Norman N. Behar, President and Chief Executive Officer
of ELEKOM, Wayne D. Burns, Chief Financial Officer of ELEKOM, Ona Karasa, Vice
President Development of ELEKOM and Todd Ostrander, Vice President Marketing of
ELEKOM, will enter into employment agreements (the "Employment Agreements")
with the Company at Closing, to become effective at the Effective Time, that
provide for base salaries, grants of stock options and certain retention
incentives. The Employment Agreements also provide for certain benefits upon
termination of employment by the Company. The Company and such officers and
directors are currently negotiating the terms and conditions of these
Employment Agreements, which negotiations will be completed prior to or upon
Closing. In addition, pursuant to the terms of the ELEKOM 1996 Stock Option
Plan, immediately upon the Effective Time, one-half of all unvested shares of
ELEKOM Stock subject to option awards will become fully vested. The ELEKOM 1996
Stock Option Plan provides for the exercise of options prior to vesting. Any
shares issued for unvested options are subject to repurchase by ELEKOM. Upon
the Effective Time, the right to repurchase one-half of the outstanding
unvested shares subject to repurchase will lapse. See "The Merger--Interests of
Certain Persons in the Merger."
SHAREHOLDERS' VOTING AGREEMENT
Concurrently with the execution of the Agreement, the holders of ELEKOM
Preferred Stock and the executive officers of ELEKOM have entered into an
agreement with the Company pursuant to which such Shareholders and officers
have agreed to vote 49% of the ELEKOM Common Stock, 100% of the Series A Stock
and 67% of the Series B Stock owned by them in favor of the Agreement and the
Merger. See "The Merger-- Shareholders' Voting Agreement."
CERTAIN DIFFERENCES IN RIGHTS OF STOCKHOLDERS
On the Effective Date of the Merger, the ELEKOM Shareholders, whose rights
currently are governed by the WBCA and by ELEKOM's Articles of Incorporation
and Bylaws, will automatically become the stockholders of the Company, and
their rights as such will be determined by the Delaware Business Corporation
Law and by the Company's Certificate of Incorporation and Bylaws. See "The
Merger--Certain Differences in Rights of Stockholders."
REGULATORY APPROVALS
Other than federal and state securities law requirements, no other federal or
state regulatory requirements must be complied with or approvals obtained in
connection with the Merger.
PRICES OF COMMON STOCK
The Company Common Stock is currently traded on the NASDAQ/NMS under the
symbol "CLRS." The last sale price of the Company Common Stock on August 31,
1998, the last trading day before public announcement of the proposed Merger,
as reported on the Nasdaq/NMS was $5.31. The last sale price of the Company
Common Stock reported by the Nasdaq/NMS prior to the mailing of this Proxy
Statement/Prospectus was $ .
There is no public market for shares of ELEKOM Stock. There were
holders of record of ELEKOM Common Stock holders of record of Series A Stock
and holders of record of Series B Stock as of the Record Date.
Neither the Company nor ELEKOM has paid its shareholders any cash dividends and
neither anticipates paying dividends in the foreseeable future.
7
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating to
net loss, cash dividends, and book value (deficit) on (i) an historical basis
for the Company and ELEKOM, (ii) a pro forma basis per share of the Company
Common Stock, giving effect to the Merger as if it had occurred at the
beginning of the period presented for loss per share data and on the date
presented for book value (deficit) per share data, and (iii) an equivalent pro
forma basis per share of ELEKOM Common Stock and Preferred Stock estimated to
be outstanding immediately prior to the Merger. The data also retroactively
reflects the Company's three-for-two stock split on May 26, 1998. The Company
and ELEKOM pro forma combined information gives effect to the Merger
anticipating the use of purchase accounting and is for illustrative purposes
only and is not necessarily indicative of the results of operations or combined
financial position that would have resulted had the Merger been consummated at
the dates or during the periods indicated, nor is it necessarily indicative of
future results of operations or combined financial position.
The information shown below should be read in conjunction with, and is
qualified in its entirety by, the historical financial statements of the
Company and ELEKOM, including the respective notes thereto, and the unaudited
pro forma financial information included herein. See "--Selected Historical
Financial Data of the Company," and "--Selected Historical Financial Data of
ELEKOM."
The pro forma data do not reflect any cost savings or other economic
efficiencies resulting from the Merger.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1997 1998
------------ --------------
<S> <C> <C>
BASIC AND DILUTED NET LOSS PER SHARE:
Company historical......................... $ (2.97) $(0.01)
ELEKOM historical.......................... (103,892) (2.55)
ELEKOM pro forma(1)........................ (0.84) (0.26)
Pro forma combined(2)...................... (3.74) (0.50)
Equivalent of one ELEKOM share............. (0.82) (0.11)
BOOK VALUE (DEFICIT) PER SHARE (PERIOD END):
Company historical......................... (19.02) 2.65
ELEKOM historical.......................... 51,497 1.28
ELEKOM pro forma(1)........................ 0.50 0.18
Pro forma combined......................... (11.97) 1.73
Equivalent of one ELEKOM share............. (2.61) 0.38
</TABLE>
Neither the Company nor ELEKOM declared or paid any dividends for the periods
presented.
- --------
(1) Given the changes in ELEKOM's capital structure as a result of the 1997
recapitalization and the changes to be effected as a result of the Merger,
pro forma loss and book value per share is presented. Pro forma loss and
book value per share is calculated based on the number of shares of common
stock and preferred stock outstanding at June 30, 1998, and has been
adjusted to give effect to the conversion of all shares of preferred stock
into common stock that will occur in connection with the Merger. Stock
options outstanding at each period end have not been included in the loss
per share calculations as their effect is antidilutive.
(2) The Company's allocation of the purchase price in the Merger will result in
the allocation of $14.0 million of in-process acquired research and
development which, under generally accepted accounting principles, will be
expensed immediately upon completion of the Merger. This charge has been
excluded from the calculation of pro forma loss per share for these
presentations due to its nonrecurring nature.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues........ $ 1,054 $ 3,821 $ 8,190 $13,056 $25,988 $ 9,921 $18,747
Operating loss........ (2,156) (5,157) (7,987) (7,658) (3,358) (4,127) (41)
Net loss.............. (2,170) (5,140) (8,049) (7,879) (4,110) (4,407) (39)
Basic and diluted net
loss per share....... (2.23) (5.65) (6.19) (5.74) (2.97) (3.19) (0.01)
Weighted average
common shares
outstanding.......... 975 910 1,300 1,373 1,386 1,382 3,026
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $26,090
Working capital.................................................. 20,089
Total assets..................................................... 40,025
Long-term debt, net of current portion........................... 375
Total stockholders' equity....................................... 24,057
</TABLE>
9
<PAGE>
SUMMARY FINANCIAL DATA OF ELEKOM
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1996 1997 1997 1998
-------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues..................... $ 5 $ 17 -- $ 376
Operating loss..................... (2,378) (4,594) (2,546) (1,657)
Net loss........................... (2,532) (5,195) 2,814 (1,611)
Basic and diluted net loss per
share............................. $(50,646) $(103,892) $(56,280) $ (2.55)
Weighted average common shares
outstanding....................... 50 50 50 631,088
Pro forma basic and diluted net
loss per share(1)................. (0.84) (0.26)
Pro forma weighted average common
shares outstanding(1)............. 6,183,097 6,183,097
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $1,467
Working capital................................................... 624
Total assets...................................................... 2,099
Long-term debt, net of current portion............................ 24
Total shareholders' equity........................................ 1,117
</TABLE>
- --------
(1) Given the changes in ELEKOM's capital structure as a result of the 1997
recapitalization and the changes to be effected as a result of the Merger,
pro forma earnings per share is presented. Pro forma earnings per share is
calculated based on the number of shares of common stock and preferred
stock outstanding at June 30, 1998, and has been adjusted to give effect to
the conversion of all shares of preferred stock into common stock that will
occur in connection with the Merger. Stock options outstanding at each
period end have not been included in the loss per share calculations as
their effect is antidilutive.
10
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed combined financial data is
presented assuming the Merger will be accounted for as a purchase. The pro
forma condensed combined balance sheet data has been prepared as if the Merger
had been consummated on June 30, 1998. The pro forma condensed combined
statements of operations data have been prepared as if the Merger had been
consummated at the beginning of the periods presented. The following financial
statements do not reflect any anticipated cost savings which may be realized by
the Company after consummation of the Merger. The pro forma information does
not purport to represent what the Company's results of operations actually
would have been if such Merger had occurred on or for the periods presented.
The pro forma condensed financial data should be read in conjunction with the
historical financial statements of the Company's and the historical financial
statements of ELEKOM appearing elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Total revenues......................... $ 26,005 $18,973
Operating loss......................... (8,202) (1,988)
Net loss............................... (10,236) (2,180)
Basic and diluted net loss per
share(1).............................. (3.74) (0.50)
Weighted average common shares
outstanding........................... 2,736 4,376
PRO FORMA BALANCE SHEET DATA:
Working capital (deficit).............. (6,625) 12,013
Total assets........................... 9,516 35,008
Redeemable convertible preferred stock. 25,112 -0-
Stockholders' equity (deficit)......... (33,714) 18,058
</TABLE>
- --------
(1) The Company's allocation of the purchase price in the Merger will result in
the allocation of $14.0 million of in-process acquired research and
development which, under generally accepted accounting principles, will be
expensed immediately upon completion of the Merger. This charge has been
excluded from the calculation of pro forma loss per share for these
presentations due to its nonrecurring nature.
RISK FACTORS
For a discussion of certain risk factors that should be considered carefully
by the ELEKOM Shareholders in determining whether to approve the Agreement and
the Merger or to perfect their statutory appraisal rights, see "Risk Factors,"
beginning on page 13.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains certain forward-looking statements,
as defined in the Private Securities Litigation Reform Act of 1995, including
or related to future results of the Company and ELEKOM (including certain
projections and business trends).
These and other statements, which are not historical facts, are based largely
on current expectations and assumptions of management and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, the risks and uncertainties
described in "Risk Factors" beginning on page 10 herein.
11
<PAGE>
Assumptions related to forward-looking statements include that the Company and
ELEKOM will continue to price and market their products competitively; that
competitive conditions within their respective markets will not change
materially or adversely; that the demand for the Company's and ELEKOM's
products will remain strong; that the Company and ELEKOM will retain key
personnel; and that there will be no material adverse change in the Company's
or ELEKOM's operations or businesses following the Merger.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company and ELEKOM. When used in this Proxy Statement/Prospectus with
respect to the Company and ELEKOM, the words "estimate," "project," "intend,"
and "expect" and similar expressions are intended to identify forward-looking
statements. Although the assumptions underlying the forward-looking statements
are believed by the Company and ELEKOM to be reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in the forward-looking information will be realized.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause either of the Company or ELEKOM to
alter its business strategy or capital expenditure plans which may, in turn,
affect the Company's or ELEKOM's results of operations. In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by the Company or ELEKOM or any other person that any strategy,
objectives or other plans will be achieved. The forward-looking statements
contained herein speak only as of the date hereof, and neither the Company nor
ELEKOM undertakes any obligation to publicly update or revise any of these
forward-looking statements.
TRADEMARKS
Active Architecture(R), Graphical Architects(R) and World Class Applications
. . . Breakthrough in Time(R) are trademarks of the Company registered with the
U.S. Patent and Trademark Office and Data Exchange/Graphical Architect(TM),
Solution/Graphical Architect(TM), Workload/Graphical Architect(TM),
Workflow/Graphical Architect(TM), Business Controls/Graphical Architect(TM) and
Clarus(TM) are trademarks used by the Company. ELEKOM(R) is a trademark of
ELEKOM registered with the U.S. Patent and Trademark Office. All other
trademarks and registered trademarks used in this Proxy Statement/Prospectus
are the property of their respective owners.
12
<PAGE>
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
ELEKOM Shareholders should consider carefully the following risk factors in
evaluating the Merger. This Proxy Statement/Prospectus contains certain
forward-looking statements that are based largely on the Company's and
ELEKOM's current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from those implied by
these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in this section and elsewhere
in this Proxy Statement/Prospectus. In light of these risks and uncertainties,
many of which are described in greater detail below, there can be no assurance
that the forward-looking statements contained in this Proxy
Statement/Prospectus will in fact transpire.
HISTORIES OF OPERATING LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company has incurred significant net losses in each year since its
formation. As of June 30, 1998, the Company had an accumulated deficit of
approximately $28.1 million. These losses have occurred, in part, because of
the substantial costs incurred by the Company to develop its products, expand
its product research and hire and train its direct sales force. Although the
Company has achieved revenue growth and recent profitability for the quarters
ended September 30, 1997, December 31, 1997 and June 30, 1998, there can be no
assurance that the Company will be able to generate the substantial additional
growth in revenues that will be necessary to sustain profitability. In
addition to planned expenditures in connection with the Merger, the Company
plans to continue to increase its operating expenses in order to fund higher
levels of research and development, increase its sales and marketing efforts,
broaden its customer support capabilities and expand its administrative
resources in anticipation of future growth. To the extent that increases in
such expenses precede or are not offset by increased revenues, the Company's
business, results of operations and financial condition would be materially
adversely affected. See "Company Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ELEKOM is a development stage enterprise that was incorporated in August
1995 as a subsidiary of Egghead and has operated on a stand-alone basis since
November 1997. Accordingly, ELEKOM has a limited operating history upon which
an evaluation of its business and prospects can be based. To date, ELEKOM has
generated minimal operating revenues, has incurred significant losses and has
experienced substantial negative cash flow from operations. ELEKOM had an
accumulated deficit as of June 30, 1998, of approximately $10.1 million, with
operating losses of approximately $4.6 million for the year ended December 31,
1997. See "ELEKOM Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ELEKOM's business and prospects must be considered in light of the risks,
expenses and difficulties frequently encountered, particularly by development
stage companies in new and rapidly evolving and emerging markets. Such risks
include, but are not limited to, an evolving and unpredictable business model,
potential product obsolescence, uncertain adoption of the Internet as a
commercial medium, dependence on key personnel and third-party relationships,
management of potential growth and rapidly changing technology and
competition. To address these risks, ELEKOM must, among other things, manage
product obsolescence and pricing risks, identify customer tastes, maintain its
customer base while attracting significant numbers of new customers and
continue to develop and upgrade its development stage technologies and
customer service capabilities, expand its sales and marketing efforts,
including relationships with third parties, retain and motivate qualified
personnel and respond to competitive developments. There can be no assurance
that ELEKOM will be successful in addressing the risks it faces, and the
failure to do so could have a material adverse effect on ELEKOM's and the
Company's business, financial condition and results of operation. Further, in
view of the rapidly evolving nature of ELEKOM's business, and its extremely
limited operating history, ELEKOM believes that the analysis of its financial
results is not necessarily meaningful and should not be relied upon as an
indication of future performance. See "ELEKOM Management's Discussion and
Analysis of Financial Condition and Results of Operations." The financial
statements of ELEKOM have been prepared assuming that ELEKOM will continue as
a going concern. As described in Note 1 to the financial statements, ELEKOM
has suffered losses from operations and has used significant cash in its
operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to those matters are also
described in Note 1 to the financial statements. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
13
<PAGE>
The prospects for the Company and the Merger must be considered in light of
the considerable risks, expenses, and difficulties frequently encountered by
companies in their early stage of development, particularly technology-based
companies operating in unproven markets with unproven products. The Company
expects to incur substantial additional costs in efforts to complete the
development of the Clarus E-Procurement product and to integrate the ELEKOM
Procurement software in its existing stage of development into the Company's
Clarus Purchasing Control module and to market and support this product. There
can be no assurance that the Company's investments in ELEKOM's products and
technologies will achieve the desired returns, or that such investments will
not have a material adverse effect on the financial condition and results of
operations of the Company as a whole.
LIMITED PERIOD OF PUBLIC TRADING; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to May 1998, there was no public market for the shares of Common Stock
of the Company, and there can be no assurance that an active public market for
the shares of Common Stock of the Company will be sustained in the future. The
market price of the shares of Common Stock has been and may continue to be
highly volatile and could be subject to wide fluctuations in response to
variations in results of operations, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts or other events or factors. In
addition, the financial markets have experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been
unrelated to the operating performance of such companies or have resulted from
the failure of the operating results of such companies to meet market
expectations in a particular quarter. Broad market fluctuations or any failure
of the Company's operating results in a particular quarter to meet market
expectations may adversely affect the market price of the shares of Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would
have a material adverse effect on the Company's business, results of
operations and financial condition. The market price of the Company Common
Stock has been highly volatile since the Company's public offering in May
1998. The market price of the Company Common Stock on August 31, 1998, the
last trading day before the public announcement of the Agreement, was $5.31
per share. Since August 31, 1998, the Company Common Stock has closed at
prices ranging from $ to $ per share. On October , 1998, the closing
price was $ . The market price for the Company Common Stock may fluctuate
significantly between the mailing date, the ELEKOM shareholder vote and the
Effective Time of the Merger.
RISK OF FIXED MERGER CONSIDERATION
The consideration to be paid to ELEKOM Shareholders pursuant to the
Agreement in exchange for all shares of ELEKOM Stock is fixed at 1,350,000
shares of the Company Common Stock and $8.0 million in cash, subject to
adjustment only in the event that the Closing Price of the Company Common
Stock is less than $5.93. The price of the Company Common Stock on the date of
the ELEKOM Meeting and the Closing Price are likely to be different from the
price on the date of this Proxy Statement/Prospectus. Such variation may
result from changes in the business, operations or prospects of the Company or
ELEKOM, market assessments of the likelihood that the Merger will be
consummated and the timing thereof, general market and economic conditions and
other factors. ELEKOM Shareholders are urged to obtain current market
quotations for the Company Common Stock.
FINANCIAL IMPACT OF MERGER
The Company is in the process of completing the Merger. As a result of the
accounting treatment for the Merger, the Company's results of operations will
be negatively impacted. In connection with the Merger, the Company will
recognize a write-off of acquired in-process research and development of
approximately $14.0 million and will amortize the remainder of approximately
$1.6 million over a period ranging from one month to 10 years. Such
amortization will adversely affect the Company's results of operations through
2008. The consummation of additional acquisitions may significantly increase
amortization costs and result in significant
14
<PAGE>
write-offs of acquired in-process research and development. The amounts
allocated under purchase accounting to developed technology and in-process
research and development in the Merger involve valuations utilizing
estimations of future revenues, expenses, operating profit and cash flows. The
actual revenues, expenses, operating profit and cash flows from the acquired
technology recognized in the future may vary materially from such estimates.
If the in-process research and development project is not successfully
developed, the sales and profitability of the combined company may be
adversely affected in future periods. Additionally, the value of other
intangible assets acquired may become impaired. The Company expects to begin
to benefit from the purchased in-process technology in the second quarter
1999.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and is expected to continue to experience,
significant fluctuations in quarterly operating results caused by many
factors, including, but not limited to: (i) changes in the demand for the
Company's products; (ii) the timing, composition and size of orders from the
Company's customers, including the tendency for significant bookings to occur
in the fourth quarter; (iii) lengthy sales cycles; (iv) spending patterns and
budgetary resources of its customers; (v) the success of the Company in
generating new customers; (vi) introductions or enhancements of products, or
delays in the introductions or enhancements of products, by the Company or its
competitors; (vii) changes in the Company's pricing policies or those of its
competitors; (viii) the Company's ability to anticipate and effectively adapt
to developing markets and rapidly changing technologies; (ix) the Company's
ability to attract, retain and motivate qualified personnel; (x) changes in
the mix of products sold; (xi) the publication of opinions about the Company
and its products, or its competitors and their products, by industry analysts
or others; and (xii) changes in general economic conditions.
The loss of any large sale, or the deferral of a large sale to a subsequent
quarter, could have a material adverse effect on current quarter operating
results and could cause significant fluctuations in revenues and earnings from
quarter to quarter. Additionally, because the Company derives a smaller
percentage of its revenues from maintenance contracts than many financial and
human resource software companies with a longer history of operations, the
Company does not have a significant ongoing revenue stream that may tend to
mitigate quarterly fluctuations in operating results.
The Company also has experienced, and is expected to continue to experience,
a high degree of seasonality, and in recent years has recognized a
proportionately greater percentage of its total revenues in the fourth quarter
than in any other quarter during such year. Fourth quarter revenues in 1995,
1996 and 1997 were 39.1%, 33.6% and 32.5%, respectively, of total revenues for
those years. As a result of this seasonality, the Company may experience
reduced net income, or even net losses, in the first, second or third fiscal
quarters in any year.
Consistent with software industry practice, the Company typically ships its
software promptly following receipt of a firm order. Accordingly, the Company
expects to continue to operate with minimal backlog. As a result, quarterly
sales and operating results depend generally on the volume and timing of
orders within the quarter, the tendency of sales to occur late in fiscal
quarters and the ability of the Company to fill orders received within the
quarter, all of which are difficult to forecast and manage. The Company's
expense levels are based in part on its expectations of future orders and
sales. A substantial portion of the Company's operating expenses are related
to personnel, facilities and sales and marketing programs. This level of
spending for such expenses cannot be adjusted quickly and is, therefore,
relatively fixed in the near term. Accordingly, any significant shortfall in
demand for the Company's products in relation to the Company's expectations
would have an immediate and material adverse financial effect on the Company.
Due to all of the foregoing factors, the Company believes that its quarterly
operating results are likely to vary significantly in the future. Therefore,
in some future quarter the Company's results of operations may fall below the
expectations of securities analysts and investors. In such event, or in the
event that such result is perceived by market analysts to have occurred, the
trading price of the Company Common Stock would likely be materially adversely
affected.
15
<PAGE>
TRANSACTION EXPENSES; RISK OF INABILITY TO INTEGRATE OPERATIONS
The Company and ELEKOM estimate they will incur an aggregate of direct
transaction costs of approximately $700,000 associated with the Merger and
that the combined company will incur additional charges to operations, which
are not currently reasonably estimable, to reflect costs associated with
integrating the two companies. There can be no assurance that the combined
company will not incur additional material charges in subsequent quarters to
reflect additional costs associated with the Merger. The Company has never
acquired a significant business. Accordingly, there can be no assurance that
the Company will be able to consummate the Merger or successfully integrate
ELEKOM's business into the Company's operations.
The combination of ELEKOM and the Company will require the dedication of
management resources, which may temporarily distract attention from the day-
to-day business of both companies. The geographical separation of the
companies' respective operations may hinder efforts to integrate operations.
There can be no assurance that the combination will be completed without
significant disruption of the Company's and ELEKOM's businesses. Should the
Company and ELEKOM not be able to combine their business in a timely and
coordinated fashion, there could be a material adverse effect on operating
results. In addition, anticipation of the combination of the two companies
could cause uncertanties, hesitation and possible dissatisfaction among
customers and potential customers and employees of the Company and of ELEKOM
which could cause delays or cancellations of orders, resulting in a decline in
revenue.
For the Company specifically, risks associated with the integration of
ELEKOM's business include, among other things, potential disruption of the
Company's ongoing business; inability to successfully integrate ELEKOM's
systems into the Company's operations; maintenance of uniform standards,
controls and procedures; and possible impairment of relationships with ELEKOM
employees as a result of the Merger and changes in management. Further, the
Merger may involve a number of additional risks, including diversion of
management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances and legal liabilities, some or all of
which could have a material adverse effect on the Company's or ELEKOM's
business, results of operations and financial condition as a whole.
RISK OF TAXABLE TRANSACTION
Although the Merger is intended to be a reorganization qualifying for tax-
free treatment with respect to the receipt of Company Common Stock (as opposed
to cash), Perkins Coie LLP, tax counsel to ELEKOM, has indicated in its
opinion to ELEKOM that there can be no assurance that the Internal Revenue
Service would not challenge such treatment if the cash portion of the total
Merger Consideration were to exceed 50% of the value of such total Merger
Consideration and that there would be a significant risk that the Merger would
not qualify for such treatment if the cash portion of the total Merger
Consideration were to exceed 60% of the value of the total Merger
Consideration.
Under the Agreement, ELEKOM or may terminate the Merger Agreement if the
Closing Price of the Company Common Stock were to fall to less than $5.75 per
share. The cash portion of the total Merger Consideration (excluding for
purposes of this discussion cash payments by ELEKOM to repurchase shares of
ELEKOM Common Stock subject to ELEKOM's right of repurchase) would be slightly
more than 50% at a Closing Price of less than $5.75 per share based on the
stock adjustment mechanism contained in the Agreement. At $5.00 per share, the
cash portion would be in excess of 53%. If the Closing Price of Company Common
Stock were to fall below $3.84 per share, the cash portion of the total Merger
Consideration would be slightly more than 60%. If ELEKOM and the Company were
to elect to proceed with the Merger in spite of such a Closing Price, there
would be a significant risk that the Merger would be fully taxable to ELEKOM
and to its shareholders. For a discussion of the material federal income tax
consequences of the Merger to ELEKOM Shareholders, see "Material Federal
Income Tax Consequences of the Merger." ELEKOM SHAREHOLDERS ARE URGED TO
CONTACT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER.
16
<PAGE>
DEPENDENCE ON DIRECT SALES MODEL
To date, the Company has sold its products exclusively through its direct
sales force. The Company intends to continue to differentiate itself from many
of its competitors by relying principally on its direct sales model. As a
consequence of this strategy, the Company's ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting, training and retaining additional direct sales and consulting
personnel and on the continuing success of the direct sales force. The
Company's financial success will depend in large part on the ability of the
Company's direct sales force to increase sales to levels necessary to sustain
profitability. In order to increase sales, the Company must hire, train and
deploy a continually increasing staff of competent sales personnel. The
Company believes that there is a shortage of, and significant competition for,
direct sales personnel with the advanced sales skills and technological
knowledge necessary to sell the Company's products. The Company's inability to
hire, or failure to retain, competent sales persons would have a material
adverse effect on the Company's business, results of operations and financial
condition.
In addition, by relying primarily on a direct sales force model, the Company
may fail to leverage the additional sales capabilities that might be available
through other sales distribution channels, which may place the Company at a
disadvantage with respect to its competition. In the future, the Company
intends to develop indirect distribution channels through third-party
distribution arrangements. There can be no assurance that the Company will be
successful in establishing third-party distribution arrangements, or that any
such expansion of the Company's indirect distribution channels will result in
increased revenues.
COMPETITION
The market for financial and human resource applications is intensely
competitive. The Company's applications are designed for use in a
client/server environment utilizing Windows NT and Unix servers. Principal
competitors that offer products that run on Windows NT or Unix servers in a
client/server environment include PeopleSoft, Inc. ("PeopleSoft"), Oracle
Corporation ("Oracle"), and Lawson Software, Inc. ("Lawson"). In 1997, J.D.
Edwards & Company introduced financial applications for use on Windows NT or
Unix servers in competition with the Company. The Company also faces indirect
competition from companies that sell financial software applications for use
mainly on proprietary mid-range computing systems, from suppliers of custom-
developed financial applications software systems, from the consulting groups
of major accounting firms and from the information technology ("IT")
departments of potential customers that choose to develop systems internally.
Similarly, the market for Internet procurement applications, such as ELEKOM
Procurement and electronic commerce technology generally, is rapidly evolving
and intensely competitive. ELEKOM Procurement is designed to compete with
prepackaged electronic commerce software, software tools for developing
electronic commerce applications, system integrators and business application
software. In addition, potential customers may elect to develop their own
electronic commerce solutions.
ELEKOM's primary competitors include other electronic procurement providers
such as ARIBA, Commerce One, Tradeex, Intelisys and Trilogy. ELEKOM also faces
competition from larger corporations, such as Netscape and Harbinger, who have
entered the electronic procurement market. In addition, ELEKOM believes it
will experience increased competition from travel and expense software
companies, such as Extensity, Captura and Concur (formerly Portable Software),
which recently acquired 7Software, a direct competitor. ELEKOM anticipates
that some of the larger enterprise resource planning software vendors, such as
SAP, which recently announced SAP Business-to-Business Procurement solution
with expected availability in the fourth quarter of 1998. Other potential
competitors in this category include Oracle, PeopleSoft, and Baan. Other
companies who have a stated interest in electronic procurement include
Microsoft Corporation, IBM, Aspect Development and Requisite Technologies.
The majority of both companies' principal current and potential competitors
have significantly greater financial, technical and marketing resources and
name recognition than either of the companies. In addition, because of
relatively low barriers to entry and relatively high availability of capital
in today's markets, the
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Company and ELEKOM believe that new competitors will emerge in their
respective markets. The Company anticipates that it may face pricing pressures
and that one or more companies in its markets may face financial failure. In
the past, a number of software markets have become dominated by one or a small
number of suppliers, and a small number of suppliers or even a single supplier
may dominate the Company's and ELEKOM's respective markets. If the Company and
ELEKOM do not offer products that continue to achieve success in their
respective markets in the short term, each could suffer a loss in market share
and brand name acceptance. Moreover, any material reduction in the price of
the Company's or ELEKOM's products would negatively affect margins as a
percentage of net revenues and would require the Company or ELEKOM to increase
sales or reduce costs to maintain or increase net income. The occurrence of
any of the foregoing would result in a material adverse effect on the
Company's and/or ELEKOM's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
effectively with current and future competitors.
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW PRODUCTS AND PRODUCT
ENHANCEMENTS
The market for financial, human resource and electronic procurement
applications is characterized by rapid technological change, frequent
introductions of new and enhanced products, changes in customer demands and
evolving industry and financial accounting standards and practices. The
introduction of products embodying new technologies and functionality can
render existing products obsolete and unmarketable. As a result, the Company's
and ELEKOM's future success will depend, in part, upon their ability to
continue to enhance its existing products and develop and introduce new
products that keep pace with technological developments, satisfy customer
requirements and preferences, while remaining price competitive and achieving
market acceptance. There can be no assurance that the Company or ELEKOM will
identify new product opportunities and develop and bring new products to the
market in a timely and cost-effective manner, or that products, capabilities
or technologies developed by others will not render the Company's and ELEKOM's
products or technologies obsolete or noncompetitive or shorten life cycles of
the Company's products. In particular, ELEKOM Procurement has a limited
product implementation history, and there can be no assurance as to whether it
has been successfully identified as viable product opportunities, whether
either can be successfully and efficiently developed and marketed or, if
successfully brought to market, the period of time during which each may
remain in demand. In addition to the potential acquisition of other
applications or technologies in the future, the Company intends to continue to
address product development and enhancement initiatives through its internal
research and development staff and through the licensing of third-party
technologies.
Because of these potentially rapid changes in the financial, human resource
and procurement applications market, the life cycle of versions of the
Company's and ELEKOM's technology is difficult to estimate. The companies'
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by developing and introducing
enhancements to its products and technologies on a timely basis that keep pace
with technological developments, emerging industry standards and customer
requirements. The Company has recently released 32-bit versions of its
financial applications products. The Company believes that these products
offer the advanced functionality and technological capabilities necessary to
compete with generally available competitive products. There can be no
assurance, however, that the Company or ELEKOM will be successful in
developing and marketing enhancements to existing products or in developing
new products that respond to technological changes, evolving industry or
accounting standards or practices or customer requirements. Any failure by the
Company or ELEKOM to successfully develop and bring new or enhanced products
to market that offer advanced technology and functionality adequate to compete
with other available products, including such a failure with respect to ELEKOM
Procurement, could have a material adverse effect on the business, results of
operations and financial condition of the Company.
RISK OF PERFORMANCE DEGRADATION OF ELEKOM PROCUREMENT IN HIGH VOLUME
ENVIRONMENTS
ELEKOM's computer software systems and technologies have been designed for
use in environments that include, without limitation, a large number of users,
large amounts of catalog and other data and potentially high peak transaction
volumes. However, these software systems and technologies have neither been
tested nor actually used in such high volume environments. Therefore, there
can be no assurance that both ELEKOM
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Procurement and the third party computer software and hardware on which ELEKOM
Procurement is dependant will operate without significant performance
degradation when actually deployed and used in a high volume environment. Any
failure by ELEKOM Procurement to adequately perform in a high volume
environment could have a material adverse effect on the market for ELEKOM
Procurement and the business, results of operations and financial condition of
the Company.
LIMITED EXPERIENCE, AND RISKS ASSOCIATED, WITH INTERNET COMMERCE
The success of ELEKOM's computer software systems and technologies depends
upon the development and expansion of the market for Internet-based packaged
software applications, in particular electronic commerce applications. This
market is new and rapidly evolving. The acceptance of electronic commerce
generally, and the Internet specifically, as a forum for corporate procurement
is highly uncertain and subject to a number of risks. Many significant issues
relating to such use of the Internet (including security, reliability, cost,
ease of use, quality of service and government regulation) remain unresolved
and may delay or prevent the necessary growth of the Internet. If widespread
use of the Internet for commercial transactions does not develop or if the
Internet otherwise does not develop as an effective forum for corporate
procurement, the success of Clarus E-Procurement and of ELEKOM's software and
technologies would be materially adversely affected, as well as, potentially,
the Company's overall business, operating results and financial condition.
The adoption of the Internet for corporate procurement and other commercial
transactions requires acceptance of new ways of transacting business. In
particular, enterprises with established patterns of purchasing goods and
services that have already invested substantial resources in other means of
conducting business and exchanging information may be particularly reluctant
to adopt a new strategy that may make some of their existing personnel and
infrastructure obsolete. Also, the security and privacy concerns of existing
and potential users of Internet-based products and services may impede the
growth of online business generally and the market's acceptance of the
Company's and ELEKOM's products and services in particular. Accordingly, there
can be no assurance that a functioning market for such products will emerge or
be sustainable. If the market for Internet-based packaged procurement
applications fails to develop or develops more slowly than the Company and
ELEKOM anticipate, or if ELEKOM Procurement and any other Internet-based
products developed by the Company do not achieve market acceptance, the
Company's business, operating results and financial condition could be
materially adversely affected.
RISK OF INABILITY TO MANAGE GROWTH
The Company recently has experienced significant growth in its sales and
operations and in the complexity of its products and product distribution
channels. The Company increased its sales by approximately 217% from
approximately $8.2 million in 1995 to approximately $26.0 million in 1997, and
generated revenues of $18.7 million during the first six months of fiscal
1998. The Company increased the number of its employees from 105 at December
31, 1995 to 275 persons at July 31, 1998, and intends to further increase the
size of its sales force and development staff to address anticipated growth in
sales. The Company's growth, coupled with the rapid evolution of the Company's
markets, has placed, and is likely to continue to place, significant strains
on the Company's administrative, operational and financial resources and
increase demands on its internal systems, procedures and controls. If the
Company is unable to manage future growth effectively, the Company's business,
results of operations and financial condition could be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO HIRE AND RETAIN PERSONNEL
The Company's performance is substantially dependent on the performance of
its key management, sales, support and technical personnel, all of whom are
employed at will and are not bound by employment agreements to continue in the
employ of the Company. The loss of the services of any of such personnel could
have a material adverse effect on the business, results of operations and
financial condition of the Company. The Company does not maintain key person
life insurance policies on any of its employees or consultants.
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In completing the development of ELEKOM Procurement , the Company
anticipates that it will rely heavily on the efforts of a number of employees
of ELEKOM, who are expected to become employees of Clarus CSA following the
Effective Time. While certain key employees of ELEKOM have entered into
employment agreements with a term of employment, these employees will be
employed at will and will be able to terminate their services to Clarus CSA at
any time. There can be no assurance that, following the Merger, Clarus CSA
will be able to retain key personnel of ELEKOM or that it will be able to
attract sufficient qualified employees to support the electronic procurement
business. The failure of the Company to employ and retain the necessary
personnel from ELEKOM could have a material adverse effect upon the
development of ELEKOM Procurement and, potentially, upon the overall business,
financial condition and results of operations of ELEKOM and the Company.
The Company's and ELEKOM's success also is highly dependent on their
continuing ability to identify, hire, train, motivate and retain highly
qualified management, technical, and sales and marketing personnel.
Competition for such personnel is intense, and the Company and ELEKOM believe
that there is a shortage of qualified personnel with the skills required to
manage, develop, sell and market financial, human resource and procurement
applications and enhancements in today's highly competitive environment.
Accordingly, there can be no assurance that the Company will be able to
attract, assimilate or retain highly qualified personnel following the Merger.
The inability to attract and retain the necessary personnel would have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISK ASSOCIATED WITH PLANNED INTERNATIONAL EXPANSION
To date, the Company has had limited experience selling or marketing its
products to customers outside of the United States and Canada. In 1994, the
Company investigated opportunities to market its products in the United
Kingdom and ultimately determined that expansion in that market was not
advantageous at that time. At the same time, the Company formed the SQL
Financials Europe, Inc. ("SQL Europe"). SQL Europe currently does not conduct
any operations; however, the Company may use this entity in connection with
its planned international expansion. Notwithstanding that determination, the
Company believes that a potential market exists for its current applications
in countries other than the United States and Canada. Therefore, the Company
currently intends to expand its operations outside of the United States and
Canada and believes that an increasing percentage of its future sales will be
derived from international sales. However, because of the Company's limited
experience in international sales and marketing, no assurance can be given
that the Company will be able to successfully sell its products to customers
outside the United States and Canada. There are certain difficulties and risks
inherent in doing business internationally, including, but not limited to: (i)
costs of customizing products and services for international markets; (ii)
dependence on independent resellers; (iii) multiple and conflicting
regulations; (iv) exchange controls; (v) longer payment cycles; (vi)
unexpected changes in regulatory requirements; (vii) import and export
restrictions and tariffs; (viii) costs and difficulties in staffing and
managing international operations; (ix) greater difficulty or delay in
accounts receivable collection; (x) potentially adverse tax consequences; (xi)
the burden of complying with a variety of laws outside the United States;
(xii) the impact of possible recessionary environments in economies outside
the United States; and (xiii) political and economic instability. The
Company's ability to expand its business in certain countries will require
modification of its products, including modifications to support foreign
languages and accounting principles and practices. Furthermore, the Company
expects that its export sales will be denominated predominantly in United
States dollars. An increase in the value of the United States dollar relative
to other currencies could make the Company's products and services more
expensive and, therefore, potentially less competitive in international
markets. If the Company successfully increases its international sales, its
total revenues may also be affected to a greater extent by seasonal
fluctuations resulting from lower sales that typically occur during the summer
months in Europe and other parts of the world.
PRODUCT CONCENTRATION; MARKET ACCEPTANCE
The Company expects that revenues from its financial and human resource
applications will continue to account for substantially all of the Company's
product revenues for the foreseeable future. During 1997, the Company released
32-bit versions of its financial applications with enhanced functionality.
Increased market
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acceptance of this enhanced product family is critical to the Company's
ability to increase sales and therefore to sustain profitability. Any factor
adversely affecting sales or pricing levels of these applications will have a
material adverse effect on the Company's business, results of operations and
financial condition. Factors that may affect market acceptance include the
availability and price of competing products and technologies and the success
of the sales efforts of the Company. Moreover, the Company anticipates that
its competitors will introduce additional competitive products, particularly
if demand for financial and human resource applications increases, which may
reduce future market acceptance of the Company's products. The Company's
future performance will also depend in part on the successful development,
introduction and market acceptance of new and enhanced products. There can be
no assurance that any such new or enhanced products will be successfully
developed, introduced or marketed, and failure to do so would have a material
adverse effect on the Company's business, results of operations and financial
condition.
ELEKOM is a development stage enterprise and has no significant historical
revenue. ELEKOM's anticipated future revenues are dependent upon the
completion of the development efforts related to the ELEKOM Procurement
product. ELEKOM expects that substantially all of its revenues for the
foreseeable future will be derived from sales of ELEKOM Procurement. Market
acceptance of ELEKOM Procurement is critical to ELEKOM's ability to achieve
profitability. The electronic procurement industry is also a rapidly changing
industry based on new technologies which, although they have grown in
acceptance in the last few years, are still not substantially relied on. There
can be no assurance that there will be market acceptance of intranet-based
electronic procurement processes focused on non-production goods and services.
Furthermore, there is fluid and intense competition in this nascent market,
which may affect the sales efforts of ELEKOM. There can be no assurance that
ELEKOM will be able to overcome these risks, and failure to do so would
materially adversely affect ELEKOM's business, results of operation and
financial condition.
LENGTHY SALES CYCLES
A customer's decision to license and implement the Company's financial,
human resource and procurement applications and ELEKOM's procurement
applications presents significant enterprise-wide implications and involves a
substantial commitment of the customer's management attention and resources.
The Company and ELEKOM believe that the period between initial customer
contact and the customer's purchase commitment typically ranges from four to
seven months for its applications. Currently, the demand for solutions to the
Year 2000 problem generally has resulted in a temporary reduction in the sales
cycle for many companies that have chosen to implement client/server based
financial applications to resolve impending systems failure caused by the Year
2000. However, as more companies achieve Year 2000 compliance in their
financial and human resource applications, and as a result of the increased
complexity of the Company's and ELEKOM's products and an increase in the
number and sophistication of competing products, sales cycles are likely to
increase in the future. Accordingly, both companies' future sales cycle could
extend beyond current levels as a result of lengthy evaluation and approval
processes that typically accompany major initiatives or capital expenditures,
including delays over which the Company and ELEKOM have little or no control.
The loss of individual orders due to increased sales and evaluation cycles, or
delays in the sale of even a limited number of systems, could have a material
adverse effect on both the Company's and ELEKOM'S business, results of
operations and financial condition and, in particular, could contribute to
significant fluctuations in operating results on a quarterly basis.
PROPRIETARY RIGHTS AND LICENSING
The Company's and ELEKOM's success depends significantly upon its internally
developed proprietary intellectual property and intellectual property licensed
from others. The Company and ELEKOM each rely on a combination of copyright,
trademark and trade secret laws as well as on confidentiality procedures and
licensing arrangements, to establish and protect its proprietary rights in its
products. The Company and ELEKOM currently have no patents or patent
applications pending, and existing trade secret and copyright laws provide
only limited protection of the Company's proprietary rights. The Company has
registered or applied for registration for certain copyrights and trademarks,
and ELEKOM also has registered or applied for registration
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of certain trademarks. Both companies will continue to evaluate the
registration of additional copyrights and trademarks, and ELEKOM also has
registered or applied for registration of certain trademarks. Both companies
will continue to evaluate the registration of additional copyrights and
trademarks as appropriate. Despite the Company's and ELEKOM's efforts to
protect their respective proprietary rights, unauthorized parties may attempt
to copy aspects of the Company's and ELEKOM's products or to obtain and use
information that the Company or ELEKOM regard as proprietary. Third parties
may also independently develop products similar to the Company's and ELEKOM's
products. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States.
The Company and ELEKOM enter into license agreements with their respective
customers. These license agreements provide for the customer's non-exclusive
right to use the object code version of the Company's or ELEKOM's products.
The license agreements prohibit the customer from disclosing to third parties
or reverse engineering the Company's or ELEKOM's products and disclosing the
Company's or ELEKOM's other confidential information. In certain rare
circumstances, typically for the earliest releases of the Company's products,
the Company has granted its customers a source code license, solely for the
customer's internal use.
The Company and ELEKOM have in the past licensed and may in the future
license on a non-exclusive basis third-party software for use and distribution
with their respective applications. Because these third-party software
licenses are non-exclusive, no assurance can be given that these licensors
will not grant similar licenses to the Company's or ELEKOM's competitors.
Expiration or termination of the Company's or ELEKOM's third-party licenses or
the inability of the Company's or ELEKOM's licensors to adequately maintain or
update software would adversely affect their ability to ship certain products.
While it may be necessary or desirable in the future or ELEKOM to obtain
third-party software licenses from alternative sources, there can be no
assurance that the Company or ELEKOM will be able to do so on commercially
reasonable terms, if at all.
Although the Company and ELEKOM do not believe that they are infringing the
intellectual property rights of others, claims of infringement are becoming
increasingly common as the software industry matures and expanded legal
protections are applied to software products. Third parties may assert
infringement claims against the Company or ELEKOM with respect to the
Company's and ELEKOM's proprietary technology, intellectual property licensed
from others or the intellectual property to be acquired in the Merger.
Generally, the Company's and ELEKOM's third-party software licensors indemnify
the Company from claims of infringement, and certain shareholders of ELEKOM
will indemnify the Company from various losses relating to the intellectual
property to be acquired in the Merger. However, if the Company were to receive
a claim of infringement relating to third-party software distributed by the
Company there would be no assurance that the Company's licensors will be able
to fully indemnify the Company for such claim, if at all. Similarly, there
would be no assurance that the Company would be fully indemnified if it were
to incur losses based on an infringement or other claim relating to the
intellectual property to be purchased from ELEKOM. Infringement claims against
the Company could cause product release delays, require the Company to
redesign its products or require the Company to enter into royalty or license
agreements, which agreements may not be available on terms acceptable to the
Company or at all. Furthermore, litigation, regardless of the outcome, could
result in substantial cost to the Company, divert management attention and
delay or reduce customer purchases. Any infringement claim against the Company
could have a material adverse effect on the Company's business, results of
operations and financial condition.
THIRD PARTY PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS
There is a risk that one or more of the Company's or ELEKOM's products may,
in the future, be found to infringe the patent rights of one or more third
parties. Because knowledge of a third party's patent rights is not required
for a determination of patent infringement and because new patents are being
issued by the U.S. Patent and Trademark Office on an ongoing basis, this is an
ongoing risk for the Company and ELEKOM. The Company is undertaking a patent
search in an effort to determine whether any aspect of ELEKOM's products
infringes upon any third party's patent rights, and the Closing of the Merger
is conditioned upon the Company's satisfaction with the results of the search.
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In addition to the risk of infringing a third party's patent rights, there
is a risk that the products of either the Company or ELEKOM may infringe upon
other intellectual property rights of third parties (e.g. copyrights,
trademarks and trade secrets). Both the Company and ELEKOM have taken steps to
ensure that their employees and contractors have assigned to either the
Company or ELEKOM all of such third parties' rights in and to any of the
computer software, inventions and other work product created by such third
party for or on behalf of either the Company or ELEKOM. In addition, both the
Company and ELEKOM have taken steps to ensure that they have the proper
licenses in place for the use and distribution of all third party company
software included in or with their products.
The Company and ELEKOM have not been notified that any of their products
infringe any patent or copyright of a third party or that they have
misappropriated the trade secrets of any third party and are not aware of any
such infringement or misappropriation at this time. However, if it is later
determined that a third party's patent or other intellectual property rights
apply to a product of either the Company or ELEKOM, there is a material risk
that the revenue from the sale of such product will be significantly reduced
or eliminated as the Company or ELEKOM may have to (i) pay licensing fees or
royalties to such third party in order to continue selling the product; (ii)
incur substantial expense in the modification of the product so that the third
party's patent or other intellectual property rights no longer apply to such
product; or (iii) stop selling the product. In addition, if a product is
adjudged to be infringing a third party's patent or other intellectual
property rights, then the Company or ELEKOM may be liable to such third party
for actual damages and attorneys' fees. If the infringement of a third party's
patent were found to be wilful on the part of the Company or ELEKOM, then the
third party might be able to recover treble damages plus attorneys fees and
costs.
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released.
There can be no assurance that, despite testing by the Company and ELEKOM and
testing and use by current and potential customers, errors will not be found
in new applications after commencement of commercial shipments or, if
discovered, that either the Company or ELEKOM will be able to successfully
correct such errors in a timely manner or at all. The Company and ELEKOM
could, in the future, lose revenues as a result of software errors or other
product defects. Both companies' products and future products are intended for
use in applications that may be critical to a customer's business. As a
result, the Company's and/or ELEKOM's customers and potential customers might
have a greater sensitivity to product defects than the market for software
generally. The occurrence of errors and failures in the Company's or ELEKOM's
products could result in the loss of or delay in market acceptance of either
company's applications, and alleviating such errors and failures could require
significant expenditure of capital and other resources by the Company. The
consequences of such errors and failures could have a material adverse effect
on the Company's business, results of operations and financial condition.
Since the Company's financial applications are used by its customers for
financial reporting and analysis and payroll processing, any design defects,
software errors, misuse of the Company's products, incorrect data from network
elements or other potential problems within or out of the Company's control
that may arise from the use of the Company's products could result in
financial or other damages to the Company's customers. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims and the liability and costs associated therewith.
The Company does not maintain product liability insurance. Accordingly, any
such claim could have a material adverse effect upon the Company's business,
results of operations and financial condition. The Company provides warranties
for its products after the software is purchased for the period in which the
customer maintains the Company's support of the product. The Company generally
supports only current releases and the immediately prior releases of its
products. The Company's license agreements generally do not permit product
returns by the customer, and product returns and warranty expense for 1995,
1996, 1997 and the first six months of 1998 represented less than 8.3%, 4.9%,
1.2% and 1.1% of total revenues during each respective period. However, no
assurance can be given that product returns will not increase as a percentage
of total revenues in future periods.
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Since ELEKOM's procurement applications are used by its customers for
procurement processing and analysis, any design defects, software errors,
misuse of the ELEKOM product, incorrect data from network elements or other
potential problems within or out of ELEKOM's control that may arise from the
use of an ELEKOM product could result in financial or other damages to
ELEKOM's customers. Although ELEKOM's license agreements with its customers
typically contain provisions designed to limit ELEKOM's exposure to potential
claims as well as any liabilities arising from such claims, such provisions
may not effectively protect ELEKOM against such claims and the liability and
cost associated therewith. ELEKOM does maintain errors and omissions
insurance, however there can be no assurance that this insurance will cover
such a claim. Accordingly, any such claim could have a material adverse effect
upon the Company's business, results of operations and financial condition.
ELEKOM provides warranties for its product after the software is purchased for
a fixed amount of time. ELEKOM generally supports only current releases and
the immediately prior releases of its products. ELEKOM's license agreements
generally do not permit product returns by the customer and product return and
warranty expenses have not been material to date.
RELIANCE ON THIRD-PARTY SOFTWARE; YEAR 2000 COMPLIANCE
The Company maintains nonexclusive license agreements with Microsoft
Corporation, Oracle Corporation and Sybase, Inc. that allow the Company to
integrate its products with relational database management systems provided by
these companies. ELEKOM maintains nonexclusive license agreements with
Microsoft Corporation that allow ELEKOM to integrate its product with
relational database management systems provided by Microsoft Corporation. If
the Company's or ELEKOM's customers experience significant problems with these
database management systems and such problems are not corrected by the
database system provider, there can be no assurance that the Company's or
ELEKOM's customers will be able to continue to use the Company's or ELEKOM's
products. Additionally, the Company's or ELEKOM's inability to maintain upward
compatibility with a new database management system release could impact the
ability of the Company's or ELEKOM's customers to use the Company's or
ELEKOM's products. The customer's inability to use the Company's or ELEKOM's
products would affect customer's renewal of software maintenance for such
products, which would have a material adverse effect on the Company's or
ELEKOM's business, results of operations and financial condition.
The Company relies on non-exclusive license agreements with Arbor Software
Corporation, Centura Corporation, FRx Software Corporation and ELEKOM, and
others for third-party software that is distributed by the Company. The loss
of, or inability to maintain, any of these software licenses would result in
delays or reductions in product shipments until equivalent software could be
identified, licensed or developed. Any such delays could have a material
adverse effect on the Company's business, operating results and financial
condition. Further, in some instances the Company only receives object code
from its licensors, causing the Company to be reliant on software support
services from third parties. If these third parties fail to satisfy their
maintenance obligations to the Company, then the Company would likely fail to
satisfy its software support obligations to its customers. Any such failure
would have a material adverse effect on the Company's business, results of
operations and financial condition.
ELEKOM has also entered into agreements with Seagate Software, Inc.,
Intuitive Data Solutions and other third party licensors with customary
warranty, software maintenance and infringement indemnification terms for
third party software that is distributed by ELEKOM. The loss or inability to
maintain any of these software licenses could result in delays or reductions
in product shipments until equivalent software could be identified, licensed
or developed. Any such delays could have a material adverse effect on the
ELEKOM's business, operating results and financial condition.
The termination of any such licenses or the failure of any of these third-
party licensors to adequately maintain or update their products could delay
the shipment of certain of the Company's or ELEKOM's products while it seeks
to implement software offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of
the Company's or ELEKOM's products or relating to current or future
technologies, there can be no assurance that the Company or ELEKOM will be
able to do so on commercially reasonable terms or at all.
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The Company's and ELEKOM's applications are designed to be Year 2000
compliant. However, both companies are in the process of determining the
extent to which third-party licensed software distributed by and used in the
products of either company is Year 2000 compliant, as well as the impact of
any non-compliance on the companies and their customers. Additionally, in the
event relational database management systems used with the Company's and
ELEKOM's software are not Year 2000 compliant, there can be no assurance that
the Company's or ELEKOM's customers will be able to continue to use the
Company's or ELEKOM's products. The companies do not currently believe that
the effects of any Year 2000 non-compliance in their installed base of
software will result in a material adverse impact on the their business or
financial condition. However, the companies investigation with respect to
third-party software is in its preliminary stages, and no assurance can be
given that either the Company or ELEKOM will not be exposed to potential
claims resulting from system problems associated with the century change. See
"ELEKOM Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Year 2000."
RELIANCE ON MICROSOFT TECHNOLOGIES
The Company and ELEKOM have entered into partnership and marketing
arrangements with Microsoft. The Company's products operate with or are based
on Microsoft's proprietary products such as: Windows NT, Visual C++,
Foundation Classes, Active X, OLE/COM, SQL Server and Visual Basic. The
Company and ELEKOM have designed their products and technology to be
compatible with new developments in Microsoft technology. Although both the
Company and ELEKOM believe that Microsoft technologies are currently widely
utilized by businesses of all sizes, there can be no assurance that businesses
will continue to adopt such technologies as anticipated, will migrate from
older Microsoft technologies to newer Microsoft technologies or will not adopt
alternative technologies that neither the Company nor ELEKOM supports.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Neither the Company nor ELEKOM is currently subject to direct regulation by
any government agency, other than regulations applicable to businesses
generally, and there are currently few laws or regulations specifically
addressing commerce on the Internet. Due to the increasing use and growth of
the Internet; however, it is possible that such laws and regulations may be
adopted covering issues such as user privacy, pricing and characteristics and
quality of products and services. The Telecommunications Act of 1996, which
was enacted in January 1996, prohibits the transmission over the Internet of
certain types of information and content. The scope and applicability of this
statute are currently unsettled, but the imposition upon the Company or ELEKOM
of potential liability for information carried on or disseminated through its
application systems by this or other laws could require either the Company or
ELEKOM to attempt to reduce its exposure to such liability, which could
require significant expenditures, or to discontinue certain services. The
adoption of any such laws or regulations also could slow the growth of the
Internet, which could in turn adversely affect both the Company's and ELEKOM's
businesses, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain.
As a result of customer demand, it is possible that ELEKOM Procurement will
be required to incorporate encryption technology, the export of which is
regulated by the United States government. There can be no assurance that
export regulations, either in their current form or as they may be
subsequently enacted, will not limit the Company's or ELEKOM's ability to
distribute its software outside the United States. Moreover, legislation or
regulation may further limit levels of encryption or authentication technology
that the Company and ELEKOM are able to utilize in its software. Any
revocation or modification of the Company's or ELEKOM's export authority,
unlawful exportation of the Company's or ELEKOM's software, or adoption of new
legislation or regulation relating to exportation of software and encryption
technology could have a material adverse effect on the prospects for ELEKOM
Procurement and, potentially, on the Company's or ELEKOM's business, financial
condition, and operating results as a whole.
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RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY
A significant barrier to commerce involving the Internet is the secure
exchange of value and confidential information over public networks. It is
anticipated that ELEKOM Procurement will rely on encryption and authentication
technology to provide the security and authentication necessary to render
secure the exchange of valued and confidential information. There can be no
assurance that advances in computer capabilities, discoveries in the field of
cryptography or other events or developments will not result in a compromise
of any encryption methods employed in ELEKOM Procurement to protect
transaction data. If any such compromise of security were to occur, it could
have a material adverse effect on the Company's business, financial condition,
and operating results.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The Company's executive officers and directors, and their affiliates, as a
group, will beneficially own approximately 29.9% of the Company's outstanding
Common Stock upon completion of the Merger. As a result, these stockholders
are able to influence matters requiring approval by the stockholders of the
Company, including the election of directors and approval of significant
corporate transactions.
DILUTION; SHARES ELIGIBLE FOR FUTURE SALE
The Company will issue up to 1,391,305 shares of the Company Common Stock in
the Merger, which will dilute by approximately % the ownership interest and
voting power of the Company stockholders (on a fully diluted basis assuming
the exercise of all currently outstanding options to purchase the Company
Common Stock). In addition, the Merger will adversely affect the Company's
earnings for financial statement purposes due to the amortization of goodwill,
which will not initially be offset by contributions to earnings from ELEKOM's
operations.
Sales of a substantial number of shares of the Company's Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of such stock. In connection with the Company's
initial public offering, all officers and directors and substantially all of
the pre-offering stockholders of the Company entered into lockup agreements
that will expire and 5,929,650 shares will become eligible for sale upon
expiration of the lock-up agreements on November 22, 1998, subject to the
provisions of Rules 144 and 701 of the Securities Act. One such stockholder
has entered into a lock-up agreement with respect to 117,188 shares, which
will expire on May 26, 1999. In addition, the holders of the stock options
granted during the period of January 1, 1998 through March 31, 1998 whose
options have been fully vested have entered into lock-up agreements
restricting the sale or transfer of such shares for a four-year period
following the date of the initial public offering, with 25% of such shares
being released from such restriction on each anniversary of May 26, 1998. The
Company has filed a Registration Statement on Form S-8 that has made eligible
for sale an additional 2,581,496 shares issuable upon the exercise of stock
options. Of these 2,581,496 shares, 283,597 shares are subject to the four
year lock-up described above. The holders of 5,929,800 shares of Common Stock
are entitled to certain rights with respect to registration of such shares for
sale to the public beginning after November 22, 1998.
The Company believes that shares of Common Stock issued to the ELEKOM
Shareholders generally will be eligible for resale immediately following the
Effective Time, subject, in the case of recipients who are "affiliates" of
ELEKOM at the Effective Time, to Rule 145 under the Securities Act. The
holders of Series A Stock and Series B Stock and Norman N. Behar have agreed
with the Company not to sell any shares of Company Common Stock received by
them in connection with the Merger until the earlier of nine months after the
Effective Time, or October 1, 1999. After that date, such shares will be
freely tradable, subject to Rules 144 (in the case of former ELEKOM
Shareholders who are then "affiliates" of the Company) and 145 (in the case of
former ELEKOM Shareholders who were "affiliates" of ELEKOM at the Effective
Time but who are not then "affiliates" of the Company). The Company has
granted piggy-back registration rights to holders of Series A Stock, Series B
Stock and Norman N. Behar which will enable such shareholders to trade their
shares of Company Common Stock received in the Merger if the Company files a
registration statement before the expiration of the lock-up agreement.
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POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTITAKEOVER PROVISIONS
The Company's Certificate of Incorporation permits the issuance of up to
5,000,000 shares of preferred stock and permits the Board of Directors to fix
the rights, preferences, privileges and restrictions of such shares without
any further vote or action by the Company's stockholders. Although the Company
has no current plans to issue new shares of preferred stock, the potential
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. The Company's Board of Directors is divided into
three classes, each of which serves for a staggered three-year term. Such
staggered board may make it more difficult for a third party to gain control
of the Company's Board of Directors. In addition, certain provisions of the
Company's corporate charter and by-laws and of Delaware law may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors including takeovers which certain
stockholders may deem to be in their best interest.
THE ELEKOM MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the ELEKOM
Shareholders in connection with the solicitation by the ELEKOM Board of
proxies for use at the ELEKOM Meeting. The ELEKOM Meeting will be held at 8:00
a.m., local time, on October , 1998, at the executive office of ELEKOM,
located at 155-108th Avenue, NE, Eighth Floor, Bellevue, Washington 98004 for
the following purposes:
1. Merger. To consider and vote on a proposal to approve the Agreement
pursuant to which ELEKOM will merge with and into Clarus CSA, and each
issued and outstanding share of ELEKOM Stock will be converted into (i) a
specified amount of cash consideration and (ii) a number of shares of
fully-paid and nonassessable Company Common Stock as more fully described
herein.
2. Other Business. To transact such other business as may properly come
before the Meeting, including adjourning the Meeting to permit, if
necessary, further solicitation of proxies.
Approval of the Agreement and the Merger requires the affirmative vote of
(i) the holders of two-thirds of the outstanding shares of Series A Stock,
(ii) the holders of two-thirds of the outstanding shares of Series B Stock and
(iii) the holders of two-thirds of the outstanding shares of ELEKOM Common
Stock. Only shareholders of record at the close of business September ,
1998, are entitled to receive notice of and to vote at the Meeting or any
adjournment or postponement thereof. Pursuant to an agreement with the
Company, ELEKOM Shareholders who hold 100% of the outstanding shares of Series
A Stock, 67% of the outstanding shares of ELEKOM Series B Stock and 49% of the
outstanding shares of Common Stock have agreed to vote for approval of the
Merger and Agreement. Accordingly, approval of the Agreement and the Merger by
the holders of Series A Stock and Series B Stock is assured.
The ELEKOM Board unanimously recommends that ELEKOM Shareholders vote "FOR"
approval of the Agreement and the Merger.
ELEKOM's Board is also seeking the ELEKOM Shareholders' written consent in
lieu of the Meeting to approve the Agreement and the Merger. In the event such
consents are received from ELEKOM Shareholders unanimously approving the
Agreement and the Merger, the proposal will be deemed properly adopted by the
unanimous consent of the ELEKOM Shareholders in lieu of the Meeting, and the
Meeting will be cancelled. If this is the case, the ELEKOM Shareholders will
be notified that the Agreement and the Merger have been approved and that the
Meeting has been cancelled.
ELEKOM Shareholders are requested to promptly sign, date, and fax or hand
deliver the accompanying Proxy and Consent to Wayne Burns, Chief Financial
Officer of ELEKOM at (425) 586-2781 as soon as possible,
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but in no event later than October , 1998. Please mail the Proxy and Consent
to ELEKOM in the enclosed postage-paid envelope. Any ELEKOM Shareholder who
has delivered a proxy may revoke it at any time before it is voted by giving
notice of revocation in writing or submitting to ELEKOM a signed proxy bearing
a later date, provided that such notice or proxy is actually received by
ELEKOM prior to the taking of the shareholder vote or by electing to vote in
person at the ELEKOM Meeting. Any notice of revocation should be sent to 155-
108th Avenue, NE, Eighth Floor, Bellevue, Washington 98004. Attention: Wayne
Burns. The shares represented by properly executed proxies received at or
prior to the ELEKOM Meeting and not subsequently revoked will be voted as
directed in such proxies. IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY
PROXIES RECEIVED WILL BE VOTED FOR APPROVAL OF THE AGREEMENT AND THE MERGER
AND IN THE DISCRETION OF THE PROXY HOLDER AS TO ANY OTHER MATTERS THAT
PROPERLY MAY COME BEFORE THE ELEKOM MEETING. As of the date of this Proxy
Statement/Prospectus, ELEKOM is unaware of any other matters to be presented
at the ELEKOM Meeting.
Solicitation of proxies will be made by mail but also may be made by
telephone or in person by the directors, officers, and employees of ELEKOM,
who will receive no additional compensation for such solicitation but may be
reimbursed for out-of-pocket expenses. Brokerage houses, nominees,
fiduciaries, and other custodians will be requested to forward solicitation
materials to the beneficial owners and will be reimbursed for their reasonable
out-of-pocket expenses.
ELEKOM Shareholders should not forward any stock certificates with their
forms of Proxy and Consent.
The ELEKOM Board will continue to evaluate the terms and conditions of the
Merger, including the total consideration (cash plus the value of the shares
of Company Common Stock) to be received by the ELEKOM Shareholders in the
Merger, the fairness of the Merger Consideration to each class of ELEKOM
Shareholders and the likelihood that the Merger will qualify as a tax-free
reorganization. If the ELEKOM Board determines that the economic terms of the
Agreement are unfair to the ELEKOM Shareholders in light of all relevant
circumstances, including ELEKOM's other financing options and business
opportunities, it will seek to amend or terminate the Agreement in accordance
with its terms. See "The Merger--Termination; Amendment." If the ELEKOM Board
decides for any reason to amend or terminate the Agreement after the mailing
of this Proxy Statement/Prospectus, it will notify the ELEKOM Shareholders of
the amendment or termination. In the event that the Agreement is amended or
renegotiated to provide terms that are satisfactory to the Board and will
result in fair consideration for the ELEKOM Shareholders, the Board will
submit the new Agreement to the ELEKOM Shareholders for approval and will
resolicit the ELEKOM Shareholders' proxies to vote at a meeting called for
that purpose and/or obtain the ELEKOM Shareholders' unanimous written consent.
RECORD DATE; VOTE REQUIRED
ELEKOM's Board has established the close of business on September , 1998,
as the Record Date for determining the shareholders entitled to notice of and
to vote at the ELEKOM Meeting. Only record holders of ELEKOM Stock as of the
Record Date will be entitled to vote at the ELEKOM Meeting. Approval of the
Agreement and the Merger requires the affirmative vote of (i) the holders of
two-thirds of the outstanding shares of the Series A Stock, (ii) the holders
of two-thirds of the outstanding shares of the Series B Stock and (iii) the
holders of two-thirds of the outstanding shares of ELEKOM Common Stock.
Therefore, an abstention or failure to return a properly executed Proxy and
Consent will have the same effect as a vote against the Agreement and the
Merger. As of the Record Date, there were approximately holders of
shares of ELEKOM Common Stock, holders of shares of
Series A Stock and holders of shares of Series B Stock
outstanding and entitled to vote at the ELEKOM Meeting, with each share
entitled to one vote.
The presence, in person or by proxy, of a majority of the outstanding shares
of ELEKOM Stock is necessary to constitute a quorum of the ELEKOM Shareholders
for the taking of any action at the ELEKOM Meeting. For these purposes,
holders of shares of ELEKOM Stock that are present, or represented by proxy,
at the ELEKOM Meeting will be counted for quorum purposes regardless of
whether the holder of the shares or proxy fails to vote on the Agreement.
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The directors and executive officers of ELEKOM and their affiliates
beneficially owned, as of the Record Date, shares (or
approximately % of the outstanding shares) of ELEKOM Stock.
Pursuant to an agreement with the Company, ELEKOM Shareholders who hold 100%
of the outstanding shares of Series A Stock, 67% of the outstanding shares of
Series B Stock and 49% of the outstanding shares of ELEKOM Common Stock have
agreed to vote for approval of the Agreement. Accordingly, approval of the
Agreement and the Merger by the holders of Series A Stock and Series B Stock
is assured.
As of the Record Date, the directors and executive officers of the Company
and their affiliates did not beneficially own any shares of ELEKOM Stock. As
of that date, neither ELEKOM nor the Company held any shares of ELEKOM Stock
in a fiduciary capacity for others.
The portion of the total Merger Consideration to be received by each ELEKOM
Shareholder in the Merger will be established pursuant to a formula that is
based on certain requirements and liquidation preferences established by
ELEKOM's Articles of Incorporation. The formula is designed to allocate the
Company Common Stock and the $8.0 million cash consideration among the ELEKOM
Shareholders as follows: first, to the holders of Series B Stock in an amount
that satisfies the liquidation preference applicable to the Series B Stock of
$.6814 per share; second, to the holders of Series A Stock, Series B Stock and
ELEKOM Common Stock, such that the holders of Series A Stock are entitled to
17.28% of the remaining consideration, and the holders of Series B Stock and
the holders of ELEKOM Common Stock share, on a pro rata basis, 82.72% of the
remaining consideration, all until the holders of Series A Stock have received
consideration equal to $7.2092 per share. In the event any Merger
Consideration remains to be distributed after the steps described above (which
is not expected to occur), such consideration will be allocated among the
holders of the Series A Stock, Series B Stock and the ELEKOM Common Stock on a
pro rata basis. For purposes of this allocation, the value of each share of
Company Common Stock to be received in the Merger will be deemed to be the
Closing Price. The Closing Price of the Company Common Stock on September ,
1998 was $ per share. If the Closing Price were $ , the holders of
Series A Stock would be entitled to receive Merger Consideration of $
in cash and shares of Company Common Stock per share, the holders of
Series B stock would be entitled to receive Merger Consideration of $
in cash and shares of Company Common Stock per share, and the holders of
ELEKOM Common Stock would be entitled to receive Merger Consideration of
$ in cash and shares of Company Common Stock per share
(assuming exercise at or prior to the Effective Time of all outstanding vested
options and warrants to purchase ELEKOM Stock and repurchase by ELEKOM, at or
prior to the Effective Time, of all outstanding shares of ELEKOM Common Stock
that are subject to ELEKOM's right of repurchase). As discussed below,
however, each of the ELEKOM Shareholders will be given the opportunity to
elect to receive his, her or its portion of the Merger Consideration in cash
or stock, subject to adjustment as described in this Proxy
Statement/Prospectus. See "The Merger--Basic Term of the Merger.
Each ELEKOM Shareholder may elect either to receive his or her share of the
Merger Consideration in cash and Company Common Stock in the pro rata amounts
that would be applicable in the absence of a cash or stock election option (a
"Pro Rata Election"), or to receive his or her share of the Merger
Consideration in either as much cash as possible (a "Cash Election") or as
much Company Common Stock as possible (a "Stock Election") (with any balance,
if any, of such ELEKOM Shareholder's Merger Consideration payable in Company
Common Stock or cash, as the case may be). If an ELEKOM Shareholder makes a
Cash Election or a Stock Election, the actual amounts of cash and Company
Common Stock he or she receives will depend on the valid elections made by
other ELEKOM Shareholders and the ability of the Company to give effect to
such elections given the fixed composition of the Merger Consideration.
However, an ELEKOM Shareholder making a Cash Election will receive no less
than the applicable Pro Rata Election amount of cash for his or her ELEKOM
Stock, and an ELEKOM Shareholder making a Stock Election will receive no less
than the applicable Pro Rata Election amount of Company Common Stock for his
or her ELEKOM Stock. ELEKOM Shareholders who do not make any election will be
deemed to have made a Pro Rata Election and thus will receive in exchange for
their shares of ELEKOM Stock the amounts of cash and Company Common Stock that
they would have received in the absence of a cash or stock election option.
See "The Merger--Election Procedures."
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ELECTION PROCEDURES
As described above, holders of ELEKOM Stock will be entitled to make a Pro
Rata Election, a Cash Election or a Stock Election. The election must be made
on the form designed for that purpose (the "Cash/Stock Election Form"). A
Cash/Stock Election Form is being mailed with this Proxy Statement/Prospectus
to all holders of ELEKOM Stock on the Record Date. Additional Cash/Stock
Election Forms will be made available for all persons who become holders of
ELEKOM Stock after the Record Date but before the date of the ELEKOM Meeting.
ELEKOM Shareholders must submit their Cash/Stock Election Forms no later
than one business day before the earlier of the ELEKOM Meeting, or the Closing
(the "Election Deadline"). An election will be effective only if ELEKOM has
received a properly completed and duly executed Cash/Stock Election Form by
the Election Deadline. A Cash/Stock Election Form once submitted to ELEKOM,
may be revoked or changed by the person who submitted the Cash/Stock Election
Form, or by any person to whom the subject shares are subsequently
transferred, by written notice to ELEKOM prior to the Election Deadline.
Each ELEKOM Shareholder should:
. Complete and sign the Cash/Stock Election Form
. Complete and sign the Form of Proxy and Consent
. Send both the Cash/Stock Election Form and Form of Proxy and Consent to
ELEKOM in the enclosed prepaid, pre-addressed envelope as soon as
possible.
PLEASE DO NOT SEND IN YOUR ELEKOM STOCK CERTIFICATE(S) AT THIS TIME. PLEASE,
HOWEVER, CAREFULLY REVIEW THE TRANSMITTAL FORM PURSUANT TO WHICH YOU WILL BE
REQUIRED TO REPRESENT AND WARRANT THAT YOU ARE THE SOLE OWNER OF THE SHARES OF
ELEKOM STOCK FREE AND CLEAR OF LIENS AND ENCUMBRANCES AND PURSUANT TO WHICH
YOU WILL AGREE TO INDEMNIFY THE HOLDERS OF ELEKOM PREFERRED STOCK FOR ANY
LOSSES THEY MAY SUFFER AS A RESULT OF THEIR AGREEMENT TO INDEMNIFY THE COMPANY
WITH RESPECT TO SUCH MATTERS. SEE "--EXCHANGE OF CERTIFICATES."
If a holder of ELEKOM stock does not submit a properly completed and signed
Cash/Stock Election Form that is received by ELEKOM prior to the Election
Deadline, or if any shareholder has withdrawn from or otherwise failed to
perfect his or her Dissenters' Rights, such shareholder will be deemed to have
made a Pro Rata Election for the purpose of the allocation of cash and Company
Common Stock. The Company will have the discretion to determine whether
Cash/Stock Election Forms have been properly completed and signed, and to
disregard immaterial defects in Cash/Stock Election Forms. If a Cash/Stock
Election Form is determined not to have been properly made, the person having
made the election will be deemed to have made a Pro Rata Election.
BACKGROUND AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
The Company and ELEKOM have had a working relationship since January 1998
when the Company and ELEKOM began discussions regarding the sale by ELEKOM of
ELEKOM's internet procurement software and technology to the Company on an OEM
private label basis. In April 1998 the Company and ELEKOM entered into an OEM
License Agreement pursuant to which the parties agreed to combine their
efforts to complete the
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development and integration of the ELEKOM Procurement product which the
Company is licensed to market and distribute under the brand name Clarus E-
Procurement. This business relationship and resulting mutual familiarity with
each company's products, technology and management created the opportunity for
the two companies to explore a combination of their businesses.
On June 30,1998, the Chairman of the Board and Chief Executive Officer of
the Company met with the Chief Executive Officer of ELEKOM to explore the
possibility of a merger of the two companies or an acquisition by the Company
of substantially all of the assets of ELEKOM.
On July 10, 1998, the Chief Executive Officers and Chief Financial Officers
of both the Company and ELEKOM met in Atlanta, Georgia to discuss the
Company's existing OEM Agreement with ELEKOM and a possible acquisition of
ELEKOM by the Company. At that time, the Company and ELEKOM entered into a
confidentiality agreement, and ELEKOM provided the Company with certain
confidential information describing ELEKOM and its products and operations in
order for the Company to further evaluate a possible acquisition of ELEKOM.
From July 28, 1998 through July 31, 1998, the Chief Executive Officer and
Chief Financial Officer of the Company and the Company's legal counsel met
with the Chief Executive Officer and Chief Financial Officer of ELEKOM and
ELEKOM's legal counsel in Bellevue, Washington to discuss the possible
structure and terms of an acquisition of ELEKOM by the Company. These
discussions were preliminary and inconclusive. Each party made a commitment to
seek approval by its board of directors to the proposed terms of an asset
purchase transaction before taking further action or conducting additional due
diligence.
On July 30, 1998, the ELEKOM Board met to discuss the proposed structure of
the transaction as an asset purchase. After a lengthy discussion of the
proposal, the ELEKOM Board instructed management to negotiate, together with
ELEKOM's legal counsel, the terms of a sale of ELEKOM's assets to the Company.
On August 4, 1998, at a meeting of the Board of Directors of the Company,
the Company's management discussed with the Company's Board of Directors the
terms of a possible asset acquisition of ELEKOM. After a lengthy discussion
between the Company's management and the Company Board, the Company's Chief
Executive Officer was authorized to negotiate the terms of an asset
acquisition agreement subject to further review by Company's Board and the
Company's financial advisor which would reflect the structure and provisions
discussed with ELEKOM management on July 30, 1998.
On August 5, 1998, the Company engaged NMS to serve as its financial advisor
in connection with the possible acquisition of ELEKOM and to render advice to
the Company concerning the financial aspects of a potential acquisition. From
August 5, 1998 to August 19, 1998, the Company's Chief Executive Officer,
Chief Financial Officer and other key members of management met with NMS and
conducted a review of the business and financial condition of the Company and
ELEKOM and discussed the financial implications of an acquisition of ELEKOM,
as well as the expected purchase price.
ELEKOM's Chief Executive Officer informed the Company's Chief Executive
Officer on August 6, 1998 that ELEKOM required that the proposed transaction
be structured in a tax-free manner. The parties thereafter agreed that the
transaction would be structured to qualify as a tax-free reorganization under
Section 368 of the Code. From August 6, 1998 through August 10, 1998,
representatives of both the Company and ELEKOM held various teleconferences to
analyze possible ways to restructure the transaction in a manner acceptable to
the Boards of Directors of both companies. In addition, the Company continued
in-depth due diligence review of ELEKOM. Additional off-site due diligence,
and discussions with legal counsel and financial advisors, were also
undertaken by both companies.
On August 10, 1998, senior management of both companies and their respective
legal counsel concluded that the transaction could be restructured as a
forward triangular merger on terms acceptable to both parties. Later that day,
the Chief Executive Officer and Chief Financial Officer of ELEKOM presented to
the ELEKOM Board the proposed new transaction structure, and the ELEKOM Board
authorized ELEKOM management to continue negotiations with the Company.
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From August 14, 1998 through August 18, 1998, management of both companies
and their respective legal counsel met in Bellevue, Washington and negotiated
proposed terms of an acquisition structured as a forward triangular merger.
On August 19, 1998, at a special meeting of the Board of Directors of the
Company, the Company's management presented to the Company's Board an analysis
of the proposed Merger with ELEKOM. The Chief Executive Officer of ELEKOM also
presented to the Company's Board various information regarding ELEKOM and its
products. Following the presentations and subsequent discussions, the
Company's Board scheduled another meeting on August 24, 1998 to determine
whether to approve the Merger.
On August 24, 1998, the Company's Board of Directors held a special meeting
and discussed the results of its due diligence investigation of ELEKOM. NMS
presented the board with its financial analysis of the proposed merger and
submitted its fairness opinion to the Board of Directors. Following a lengthy
discussion regarding the Company's due diligence investigation of ELEKOM, the
terms of the proposed Merger and the analysis prepared by NMS, the Company's
Board determined that the Merger was desirable and authorized the Chief
Executive Officer to execute the Agreement.
At a special meeting of the ELEKOM Board on August 24, 1998, ELEKOM's
management reviewed the results of its due diligence investigation of the
Company and reviewed the terms of the proposed Agreement. Following the
presentations and subsequent discussions, the ELEKOM Board concluded that
additional substantive changes to the Agreement would be required before it
could be executed on behalf of ELEKOM.
Following the ELEKOM Board Meeting, the parties continued negotiations
regarding certain terms of the Agreement.
On August 27, 1998, ELEKOM's Board held a special meeting and authorized its
Chief Executive Officer to execute the Agreement. On August 28, 1998, the
Company's Board held a special meeting and authorized its Chief Executive
Officer to execute the Agreement.
On August 31, 1998, at 4:35 p.m. eastern time, the parties executed the
Agreement and the Company issued a press release. On September 1, 1998, the
Company filed a Current Report on Form 8-K reporting the execution of the
Agreement.
ELEKOM'S REASONS FOR THE MERGER
ELEKOM's Board of Directors has unanimously approved the Agreement and has
determined that the Merger is in the best interests of ELEKOM and its
shareholders. The terms of the Merger were the result of arm's length
negotiations between representatives of ELEKOM and representatives of the
Company. Without assigning any relative or specific weights to the factors,
the Board of Directors of ELEKOM considered the following material factors:
(i) the information presented to the directors by ELEKOM's management
concerning the business, operations, earnings and financial condition of the
Company, and the results of a due diligence review of the Company by ELEKOM's
representatives;
(ii) the alternatives to the Merger, including possible venture capital
financing;
(iii) the enhancement of shareholder value as a result of the value of the
consideration to be received by ELEKOM Shareholders relative to ELEKOM's book
value and lack of earnings;
(iv) the anticipated synergies and operating efficiencies, and the increased
technical resources and enhanced service capabilities that would result from
the Merger;
(v) the competitive environment for Internet procurement software companies
generally; and
(vi) the current lack of marketability of the ELEKOM capital stock,
contrasted with the ability of ELEKOM's shareholders to trade the Company's
Common Stock to be received by them as a result of the Merger.
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Each member of the Board of Directors of ELEKOM has agreed to vote such
member's shares of ELEKOM capital stock in favor of the Merger.
ELEKOM'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ELEKOM SHAREHOLDERS
VOTE FOR APPROVAL OF THE AGREEMENT AND THE MERGER.
The ELEKOM Board will continue to evaluate the terms and conditions of the
Merger, including the total consideration (cash plus the value of the shares
of Company Common Stock) to be received by the ELEKOM Shareholders in the
Merger, the fairness of the Merger Consideration to each class of ELEKOM
Shareholders and the likelihood that the Merger will qualify as a tax-free
reorganization. If the ELEKOM Board determines that the economic terms of the
Agreement are unfair to the ELEKOM Shareholders in light of all relevant
circumstances, including ELEKOM's other financing options and business
opportunities, it will seek to amend or terminate the Agreement in accordance
with its terms. See "The Merger--Termination; Amendment." If the ELEKOM Board
decides for any reason to amend or terminate the Agreement after the mailing
of this Proxy Statement/Prospectus, it will notify the ELEKOM Shareholders of
the amendment or termination. In the event that the Agreement is amended or
renegotiated to provide terms that are satisfactory to the Board and will
result in fair consideration for the ELEKOM Shareholders, the Board will
submit the new Agreement to the ELEKOM Shareholders for approval and will
resolicit the ELEKOM Shareholders' proxies to vote at a meeting called for
that purpose and/or obtain the ELEKOM Shareholders' unanimous written consent.
THE COMPANY'S REASONS FOR THE MERGER
The Company's Board of Directors has approved the Agreement and has
determined that the Merger is desirable. In approving the Agreement and the
Merger, the Company's Board considered a number of factors. Without assigning
any relative or specific weights to the factors, the Company's Board of
Directors considered the following material factors:
(i) ELEKOM's market presence and recognition in the business-to-business
electronic procurement market and the Company's desire to gain entry into and
exploit this market;
(ii) ELEKOM's business, operations, earnings, and financial condition, on a
prospective basis and the expected high growth potential of the electronic
commerce procurement market, which is expected to experience a higher rate of
revenue growth than for Company's other financial applications;
(iii) the increased revenues and resources of the Company as a result of the
Merger which are expected to allow the Company to meet increasing competitive
challenges from larger competitors;
(iv) a variety of factors affecting and relating to the overall strategic
focus of the Company including the ability to enter the emerging electronic
procurement market at an early stage; and
(v) the management philosophy of ELEKOM and its compatibility with that of
the Company.
In addition, in the course of its deliberations, the Company's Board of
Directors considered and discussed a number of other factors including the
following: (i) a financial presentation prepared by NationsBanc, including
NMS's fairness opinion, (ii) reports from management and the Company's legal
advisors on the results of the Company's due diligence investigation of
ELEKOM, (iii) the terms of the Agreement, including ELEKOM's agreement not to
solicit other acquisition transactions and the escrow and indemnification
provisions; and (iv) the proposed employment agreements with key members of
management of ELEKOM in connection with the Merger.
FAIRNESS OPINION
Pursuant to an engagement letter signed as of August 6, 1998, the Company
engaged NMS to render to the Company's Board of Directors ("Company Board")
NMS's opinion with respect to the fairness to the Company, from a financial
point of view, of the consideration to be paid by the Company in connection
with its acquisition of ELEKOM. NMS is a nationally recognized firm and, as
part of its investment banking activities, is regularly
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engaged in the valuation of businesses and their securities in connection with
merger transactions and other types of acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. The Company selected NMS to
render a fairness opinion on the basis of NMS's experience and expertise in
transactions similar to the Merger, its experience in working with the Company
as an underwriter in the Company's initial public offering, and its reputation
as an investment banker in transactions involving technology companies.
At the August 24, 1998, meeting of the Company Board, NMS delivered its
opinion that the consideration to be paid by the Company to ELEKOM in the
Merger is fair to the Company from a financial point of view, as of the date
of such opinion. The amount of such consideration was determined pursuant to
arms length negotiations between ELEKOM and the Company and NMS was not
retained by the Company to provide advisory services. No limitations were
imposed by the Company on NMS with respect to the investigations made or
procedures followed in rendering its opinion. The full text of NMS's written
opinion to the Company Board, which sets forth the assumptions made, matters
considered and limitations of review by NMS, is attached hereto as Appendix B,
and is incorporated herein by reference and should be read carefully in its
entirety. The following summary of NMS's opinion is qualified in its entirety
by reference to the full text of the opinion, attached as Appendix B.
NMS has informed the Company that in arriving at its opinion it: (i)
reviewed certain publicly available financial and other data with respect to
ELEKOM and the Company, including the consolidated financial statements for
recent years and interim periods to June 30, 1998, and certain other relevant
financial and operating data relating to ELEKOM and the Company made available
to NMS from published sources and from the internal records of ELEKOM and the
Company; (ii) reviewed the financial terms and conditions of the draft
Agreement; (iii) considered the financial terms, to the extent publicly
available, of selected recent business combinations of companies in the
Internet-based applications and services industry and communications industry
which NMS deemed to be comparable, in whole or in part, to the Merger; (iv)
considered the return on investment to private equity investors, to the extent
publicly available, in the targets of selected recent business combinations of
companies in the Internet applications and communications industry which NMS
deemed to be comparable, in whole or in part, to the Merger; (v) compared
ELEKOM and the Company from a financial point of view with certain other
companies in the Internet applications industry which NMS deemed to be
relevant; (vi) reviewed and discussed with representatives of the management
of ELEKOM and the Company certain information of a business and financial
nature regarding ELEKOM and the Company, furnished to NMS by them, including
financial forecasts and related assumptions of ELEKOM and the Company; and
(vii) performed other such analyses and examinations as NMS deemed
appropriate.
In connection with its review, NMS did not independently verify the
foregoing information and relied on its being accurate and complete in all
material respects. With respect to the financial forecasts for ELEKOM and the
Company provided to NMS by their respective managements, NMS assumed for
purposes of its opinion that the forecasts were reasonably prepared on bases
reflecting the best available estimates and judgments of their respective
managements at the time of preparation as to the future financial performance
of ELEKOM and the Company and that they provided a reasonable basis upon which
NMS could form its opinion. NMS also assumed that there had been no material
changes in the assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to it by the Company and ELEKOM. In addition, NMS did not assume
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
ELEKOM and the Company, nor was it furnished with any such appraisals. The
Company informed NMS, and NMS assumed, that the Merger will be recorded as a
purchase under generally accepted accounting principles and that it will be a
tax-free reorganization. NMS also assumed the Merger will be consummated in
accordance with the terms described in the Agreement, without any further
amendments thereto, and without waiver by either the Company or ELEKOM of any
of the conditions to its obligations thereunder.
The following is a summary of certain analyses performed by NMS to arrive at
it opinion. NMS performed certain procedures, including each of the analyses
described below, and reviewed with the Company management and the Company
Board the assumptions on which such analyses were based and other factors.
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Comparable Merger and Acquisition Transaction Analysis. NMS reviewed the
consideration paid in several acquisition transactions involving Internet-
based applications and services companies. NMS analyzed the consideration paid
in such transactions as a multiple of the target company's revenues for the
last twelve months reported prior to announcement of the transaction ("LTM
revenues"). The transactions reviewed by NMS for purposes of this analysis
included the acquisitions of: (i) Viaweb, Inc. by Yahoo Inc.; (ii) Accipiter
Inc. by CMG Information Services, Inc.; (iii) Tripod, Inc. by Lycos Inc.; (iv)
MatchLogic, Inc. by Excite, Inc.; (v) Golfweb by SportsLine USA, Inc.; (vi)
GlobalCenter by Frontier Corp.; (vii) Raptor Systems, Inc. by AXENT
Technologies, Inc.; (viii) Kiva Software Corp. by Netscape Communications
Corp.; and (ix) WebTV Networks Inc. by Microsoft Corporation. Such analysis
yielded a range of transaction multiples between 7x to 93x (with a median of
30x) LTM revenues. NMS then applied a 25x to 35x multiple range to ELEKOM's
estimated LTM revenues as of September 30, 1998 (due to the certainty of
ELEKOM's billed and contracted revenue as of August 14, 1998) resulting in a
range of implied equity values for ELEKOM of between $19 million and $26
million.
Summary of Return on Investment Analysis. NMS analyzed the return on
investment received by initial private equity investors (as determined by the
difference between the post-investment valuation of the initial and most
recent round of financing) of Ariba Technologies, Inc. ("Ariba"), ELEKOM's
closest competitor, between Ariba's initial and most recent round of capital
investment. In addition, NMS reviewed the return on investment achieved by
initial private investors (determined by the difference between the valuation
of the target at the initial round of financing and the consideration received
to target shareholders upon the sale of the target) of targets of several
Internet applications and communications acquisitions including: (i) Tripod
Inc.'s acquisition by Lycos Inc.; (ii) Aptis Communications, Inc.'s
acquisition by Northern Telecom Ltd.; (iii) Prominet Corporation's acquisition
by Lucent Technologies Inc.; and (iv) Ardent Communications Corp.'s
acquisition by Cisco Systems, Inc. As to Ariba, such analysis yielded a 606%
return on the initial investment in Ariba which NMS then applied to the
initial post-investment valuation of ELEKOM to imply a valuation for ELEKOM of
$27 million. A review of Internet applications and communications acquisitions
yielded a 178% to 762% return on initial investment in the target which, when
applied to the initial post-investment valuation of ELEKOM, implies a
valuation range of ELEKOM of $11 to $33 million.
Comparable Public Company Analysis. Using public and other available
information, NMS determined a range of implied equity values for ELEKOM based
on the multiples of estimated calendar year 1999 revenues and estimated
calendar year 1999 earnings at which the following Internet applications
companies traded on August 17, 1998: Broadvision, Inc.; Macromedia, Inc.;
MicroStrategy, Inc.; NetGravity, Inc.; Netscape Communications Corp.; Open
Market, Inc.; and RealNetworks, Inc. (the "Comparable Companies"). The August
17, 1998, stock prices of the Comparable Companies reflected a range of
valuations of between 4x and 10x (with a median of 8x) estimated calendar year
1999 revenues and between 28x and 87x (with a median of 59x) estimated
calendar year 1999 earnings. NMS then applied 6x to 10x and 55x to 60x
multiple ranges to ELEKOM's estimated calendar year 1999 revenues and
earnings, respectively. This analysis indicated a range of implied equity
values for ELEKOM of between $45 million and $81 million based on estimated
calendar year 1999 revenues and a range of implied equity values of between
$34 million and $37 million based on estimated calendar year 1999 earnings,
both sets of implied equity values adjusted for debt, cash and cash
equivalents.
Discounted Cash Flow Analysis. NMS performed a discounted cash flow analysis
for ELEKOM. The analysis aggregated (i) the present value of the projected
free cash flow (defined as after-tax operating cash, minus increases in
working capital requirements) from 1998 through 2002; and (ii) the present
value of a range of terminal values for the year 2002. The terminal values for
ELEKOM were determined by applying multiples of 3x (as a low estimate) and 4x
(as a high estimate) to ELEKOM's estimated revenue for 2002. ELEKOM's cash
flow streams and terminal values were discounted to present value using
discount rates ranging from 25% to 35%, chosen to reflect different
assumptions reflecting the revenue multiples of competitors with a range of
market capitalizations, ELEKOM's limited history of realizing its projections
and competition in the electronic procurement applications industry. Such
analysis indicated a range of implied equity values for ELEKOM of between $35
million and $67 million.
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Pro Forma Earnings Analysis. NMS analyzed the potential effect of the Merger
on the projected combined income statement of ELEKOM and the Company for the
1999 calendar year. This analysis was based on (i) published third-party
estimates of future financial results for the Company; (ii) estimates of
ELEKOM future financial results based on ELEKOM management's projections;
(iii) the Company's prevailing market price of $6.38 per share as of August
18, 1998 and (iv) the assumption that the Company would be able to write off
approximately $14.0 million of the approximately $16.0 million of
consideration (based on a trading price of the Company's Common Stock of
approximately $5.88 per share) as purchased "in-process research and
development." This analysis concluded that the Merger would decrease the
Company's projected calendar year 1999 earnings by approximately 4% or $0.02
per share.
While the foregoing summary describes the analyses and examinations that NMS
deemed material to its opinion, it is not a comprehensive description of all
analyses and examinations actually performed. The preparation of a fairness
opinion necessarily is not susceptible to partial analysis or summary
description. NMS believes that such analyses and the summary set forth above
must be considered as a whole and that selecting portions of its analyses and
of the factors considered, without considering all such analyses and factors,
would create an incomplete view of the analyses set forth in its presentation
to the Company Board. In addition, NMS may have given various analyses more or
less weight than other analyses, and may have deemed various assumptions more
or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis should not be taken to be NMS's view of
the actual value of ELEKOM, the Company or the combined company.
In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of ELEKOM or the Company. The
analyses performed by NMS are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
NMS's analysis of the fairness to the Company, from a financial point of view,
of the consideration to be paid by the Company to ELEKOM pursuant to the
Merger and were provided to the Company Board in connection with the delivery
of NMS's opinion. The analyses do not purport to be appraisals or to reflect
the prices at which a company might actually be sold or the prices at which
any securities may trade at the present time or at any time in the future. NMS
used in its analyses various projections of results of operations prepared by
the managements of ELEKOM and the Company and by its research analysts. The
projections are based on numerous variables and assumptions that are
inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those set
forth in such projections.
As described above, NMS's opinion and presentation to the Company Board were
among the many factors taken into consideration by the Company Board in making
its determination to approve the Merger.
In connection with the Merger, the Company has agreed to pay NMS a fee of
$200,000 which became due upon NMS's delivery of its fairness opinion. The
Company has also agreed to reimburse NMS for its reasonable out-of-pocket
expenses. Pursuant to a separate Indemnification and Contribution Agreement,
the Company has agreed to indemnify NMS, its affiliates, and their respective
directors, officers, agents, shareholders, consultants, employees and
controlling persons against certain liabilities, including liabilities under
the federal securities laws.
In the ordinary course of its business, NMS actively trades securities of
the Company for its own account and for the accounts of customers and,
accordingly, may at time hold a long or short position in such securities.
Certain employees of NMS may also own shares of common stock of the Company.
The full text of NMS's opinion, dated August 24, 1998, which sets forth the
assumptions made, general procedures followed, matters considered and
limitations on the scope of review undertaken by NMS in rendering its opinion,
is attached as Appendix B to this Proxy Statement/Prospectus and is
incorporated herein by reference. NMS's opinion is addressed to the Board of
Directors of the Company and is directed only to the fairness to the Company,
from a financial point of view, as of August 24, 1998, of the consideration to
be paid by the Company in the Merger and does not constitute a recommendation
to either the Company or any ELEKOM Shareholder with respect to the Merger.
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THE MERGER
The following material describes certain aspects of the Merger and the
Agreement. This description does not purport to be complete and is qualified
in its entirety by reference to the Appendices hereto, including the
Agreement, which is attached as Appendix A to this Proxy Statement/Prospectus
and incorporated herein by reference. ELEKOM Shareholders are urged to read
the Appendices in their entirety.
BASIC TERMS OF THE MERGER
Subject to the terms and conditions of the Agreement, ELEKOM will merge into
Clarus CSA at the Effective Time, at which time the separate corporate
existence of ELEKOM will cease. Clarus CSA will succeed to the ownership of
ELEKOM's assets and liabilities and will remain a wholly-owned subsidiary of
the Company.
Subject to the terms and conditions set forth in the Agreement, at the
Effective Time, each outstanding share of ELEKOM Stock will be converted into
the right to receive an amount in cash (without interest) and a certain number
of shares of Company Common Stock. The Agreement provides that the total
consideration to be paid by the Company to the ELEKOM Shareholders (the
"Merger Consideration") will consist of $8.0 million in cash and 1,350,000
shares of Company Common Stock (subject to possible adjustment as described
below). The portion of the total Merger Consideration to be received by each
ELEKOM Shareholder in the Merger will be established pursuant to a formula
that is based on certain requirements and liquidation preferences established
by ELEKOM's Articles of Incorporation. The formula is designed to allocate the
Company Common Stock and the $8.0 million cash payment among the ELEKOM
Shareholders as follows: first, to the holders of Series B Stock in an amount
that satisfies the liquidation preference applicable to the Series B Stock of
$.6814 per share; second to the holders of Series A Stock, Series B Stock and
ELEKOM Common Stock, such that the holders of Series A Stock are entitled to
17.28% of the remaining consideration, and the holders of Series B Stock and
the holders of ELEKOM Common Stock share, on a pro rata basis, 82.72% of the
remaining consideration, all until the holders of Series A Stock have received
consideration equal to $7.2092 per share. In the event any Merger
Consideration remains to be distributed after the steps described above (which
is not expected to occur), such consideration will be allocated among the
holders of the Series A Stock, Series B Stock and the ELEKOM Common Stock on a
pro rata basis. For purposes of this allocation, the value of each share of
Company Common Stock to be received in the Merger will be deemed to be the
last reported price of such shares on the Nasdaq/NMS on the last trading day
immediately preceding the Closing Date (the "Closing Price"). The closing
price of the Company Common Stock on September , 1998 was $ per share.
If the Closing Price were $ , the holders of Series A Stock would be
entitled to receive Merger Consideration of $ in cash and
shares of Company Common Stock per share, the holders of Series B Stock would
be entitled to receive Merger Consideration of $ in cash and
shares of Company Common Stock per share, and the holders of ELEKOM Common
Stock (at or prior to the Effective Time) would be entitled to receive Merger
Consideration of $ per share (assuming exercise of all outstanding
vested options to purchase ELEKOM Common Stock and repurchase by ELEKOM, prior
to the Effective Time, of all outstanding shares of ELEKOM Common Stock that
are subject to repurchase). As discussed below, each of the ELEKOM
Shareholders will be given the opportunity to elect to receive his, her or its
portion of the Merger Consideration in cash or stock, subject to adjustment as
described below.
Each ELEKOM Shareholder may elect either to receive his or her share of the
Merger Consideration in cash and Company Common Stock in the pro rata amounts
that would be applicable in the absence of a cash or stock election (a "Pro
Rata Election"), or to receive his or her share of the Merger Consideration in
either as much cash as possible (a "Cash Election") or as much Company Common
Stock as possible (a "Stock Election") (with any balance, if any, of such
ELEKOM Shareholder's Merger Consideration in Company Common Stock or cash, as
the case may be). If an ELEKOM Shareholder makes a Cash Election or a Stock
Election, the actual amounts of cash and Company Common Stock he or she
receives will depend on the valid elections made by other ELEKOM Shareholders
and the ability of the Company to give effect to such elections given the
fixed composition of the Merger Consideration. However, an ELEKOM Shareholder
making a Cash
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Election will receive no less than the applicable Pro Rata Election amount of
cash for his or her ELEKOM Stock, and an ELEKOM Shareholder making a Stock
Election will receive no less than the applicable Pro Rata Election amount of
Company Common Stock for his or her ELEKOM Stock. ELEKOM Shareholders who do
not make any election will be deemed to have made a Pro Rata Election and thus
will receive in exchange for their shares of ELEKOM Stock the amounts of cash
and Company Common Stock that they would have received in the absence of a
cash or stock election option.
The amounts of cash and Company Common Stock to be received by ELEKOM
Shareholders who make a Cash Election or a Stock Election will be determined
by attributing a value to the Company Common Stock equal to the Closing Price.
The implied market value (based on the Closing Price) of the Merger
Consideration attributable to each share of ELEKOM Common Stock, Series A
Stock and Series B Stock will be calculated using the applicable pro rata
amounts of cash and Company Common Stock attributable to each such class and
series of ELEKOM Stock. The amounts of cash and Company Common Stock to be
received by ELEKOM Shareholders who make a Cash Election or a Stock Election
will be equal to this implied market value, with shares of Company Common
Stock being valued at the Closing Price.
The market price of Company Common Stock is subject to fluctuation, and the
market value of the shares of Company Common Stock that ELEKOM Shareholders
receive in the Merger may decrease or increase prior to the date such stock is
actually issued. ELEKOM SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR COMPANY COMMON STOCK.
No fractional shares of Company Common Stock will be issued in the Merger;
instead, an ELEKOM Shareholder who would otherwise have been entitled to a
fractional share will be paid cash equal to such fraction multiplied by the
Closing Price.
Holders of ELEKOM Stock should carefully consider the federal income tax
consequences of their elections. Cash received in the Merger will be
immediately taxable, while taxation may in certain circumstances be deferred
on shares of Company Common Stock received in the Merger. Tax rates may differ
depending on how long the ELEKOM Shareholder has held ELEKOM Stock. For a
discussion of the federal income tax consequences to ELEKOM Shareholders, see
"--Federal Income Tax Consequences of the Merger." ELEKOM SHAREHOLDERS ARE
URGED TO CONSULT WITH THEIR ADVISORS TO DETERMINE THE PERSONAL TAX
CONSEQUENCES OF THE MERGER.
Holders of ELEKOM Stock who do not make a valid election as to the
components of their share of the Merger Consideration will be presumed to have
made a Pro Rata Election. Shareholders who dissent from the Merger and
preserve their dissenters' rights will receive the cash appraisal value of
their dissenting shares from the Company. Shareholders who initially dissent
but who fail to preserve their dissenters' rights will be deemed to have made
a Pro Rata Election.
The Agreement provides that if the Closing Price is less than $5.93, then
the aggregate number of shares of Company Common Stock to be issued to ELEKOM
Shareholders in connection in the Merger will be increased by the number of
shares necessary to ensure that the aggregate value of such shares, based on
Closing Price, equals at least $8.0 million, provided that the number of
additional shares of Company Common Stock will not exceed 41,305 shares. For
example, if the Closing Price were equal to $5.85, then a total of 1,367,521
shares of Company Common Stock would be issued to ELEKOM Shareholders in the
Merger, and the amount of Company Common Stock attributable to each share of
ELEKOM Common Stock, Series A Stock and Series B Stock would increase. ELEKOM
may terminate the Agreement if the Closing Price is $5.75 or less, and either
the Company or ELEKOM may terminate the Agreement if the Closing Price is
$5.00 or less. See "--Termination; Amendment."
INDEMNIFICATION; ESCROW
Pursuant to the Agreement, the holders of ELEKOM Preferred Stock have
agreed, subject to the limitations set forth below, to indemnify and hold
harmless the Company and its officers, directors and affiliates against any
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loss arising out of or in connection with (i) any breach of any of the
representations or warranties of ELEKOM contained in or made pursuant to the
Agreement or any of the respective representations and warranties of any
ELEKOM Shareholder in certain related agreements; (ii) any failure by ELEKOM
or any ELEKOM Shareholder to perform or observe any agreement or condition to
be performed or observed by it pursuant to the Agreement or certain related
agreements; (iii) any breach by ELEKOM of certain representations relating to
its intellectual property (an " IP Claim"); (iv) any claim by an ELEKOM
Shareholder relating to the allocation by ELEKOM of the cash and stock
consideration to be received by each ELEKOM Shareholder in connection with the
Merger; or (v) certain amounts that may be paid by the Company to ELEKOM
Shareholders in respect of shares with respect to which dissenters' rights are
perfected.
At the Closing, pursuant to the Escrow and Indemnity Agreement, the Company
will place $2.5 million of the cash Merger Consideration in escrow to secure
these indemnification obligations. Any claims against the escrowed funds must
be asserted by the Company not later than April 30, 2000, which date is the
end of the escrow period. The Company's claims for indemnification pursuant to
the Agreement are limited to the escrowed funds except for IP Claims and
certain other claims. At the end of the escrow period, the Company will
release the escrowed merger consideration (net of any funds retained to
satisfy claims for losses or held in reserve pending resolution of claims) to
the ELEKOM Shareholders. Upon final resolution of open claims that were
pending at the end of the escrow period, the Company will distribute funds not
transferred to the Company to satisfy such claims to the ELEKOM Shareholders.
Subject to completion of the Merger, the Company has agreed to indemnify
ELEKOM and its officers, directors, shareholders and affiliates against any
loss arising out of or in connection with (i) any breach of any of the
representations and warranties of the Company in the Agreement or certain
related agreements or (ii) any failure by the Company to perform or observe
any agreement or condition to be performed or observed by it pursuant to the
Agreement or certain related agreements.
STOCK OPTIONS
The Agreement provides that there will be no options to acquire ELEKOM stock
outstanding at Closing. The Company will not assume any warrants, stock
options or other similar rights to acquire stock or any other equity interest
in, or liabilities of, ELEKOM in the Merger. See "--Effect on Employees,
Employee Benefit Plans and Stock Options."
Pursuant to the terms of ELEKOM's 1996 Stock Option Plan, immediately prior
to the Merger 50% of all unvested shares subject to option awards shall
immediately become exercisable, and all remaining unvested options shall be
canceled. Holders of options to purchase ELEKOM Common Stock will be given an
opportunity to exercise their options with respect to all shares that will be
vested at the Effective Time, subject to consummation of the Merger, in
advance of the Closing. ELEKOM currently has issued and outstanding
shares of ELEKOM Common Stock that were issued upon exercise of unvested
option awards and that are subject to repurchase. It is anticipated that,
after the acceleration of vesting in accordance with the plan, approximately
of such shares will be subject to repurchase (assuming that the
Closing occurs on or about October , 1998). The Company currently intends to
repurchase all such unvested shares.
WARRANTS
In connection with a recent bank financing, ELEKOM has agreed to issue to
Silicon Valley Bank ("SVB") a warrant (the "Warrant") to purchase up to 14,676
shares of Series B Stock in the event that ELEKOM draws on its line of credit
with SVB. Currently, ELEKOM has no outstanding borrowings under the line of
credit so the Warrant has not been issued. If ELEKOM issues the Warrant and
SVB does not exercise the Warrant prior to the Closing Date, then, at the
election of SVB, ELEKOM may be required to purchase the unexercised portion of
the Warrant for cash equal to (i) the fair market value of any consideration
that would have been received by SVB in consideration of the shares SVB would
have received if it had exercised the Warrant immediately before the record
date for determining the shareholders entitled to participate in the proceeds
of the Merger, minus (ii) the aggregate exercise price of the shares subject
to the Warrant.
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EFFECTIVE TIME OF THE MERGER
Closing of the Merger is subject to a number of conditions, including, but
not limited to, approval of the Agreement and the Merger by the affirmative
vote of two-thirds of each class and series of the outstanding ELEKOM Stock.
Pursuant to an agreement with the Company, ELEKOM Shareholders who hold 100%
of the outstanding shares of Series A Stock, 67% of the outstanding shares of
Series B Stock and 49% of the outstanding shares of ELEKOM Common Stock have
agreed to vote for approval of the Agreement.
Following approval of the Agreement by ELEKOM Shareholders and satisfaction
or waiver (where permissible) of the other conditions to the Merger, a
Certificate of Merger will be filed with the Secretary of State of the State
of Delaware and Articles of Merger will be filed with the Secretary of State
of the State of Washington. The Effective Time will be the date and time that
the Certificate of Merger is filed with the Secretary of State of Delaware and
the Merger thereby becomes effective. Unless otherwise agreed upon by the
Company and ELEKOM, and subject to the conditions to the obligations of the
parties to effect the Merger, the parties will use their reasonable efforts to
cause the Merger to occur on the date on which the Agreement and Merger is
approved by the requisite vote of the ELEKOM Shareholders. The parties expect
that all conditions to consummation of the Merger will be satisfied so that
the Merger can be consummated by November 15, 1998, although there can be no
assurance as to whether or when the Merger will occur. See "--Conditions to
the Merger" and "--Termination; Amendment."
EXCHANGE OF CERTIFICATES
After the Effective Time, each ELEKOM Shareholder must surrender the
certificate or certificates representing his or her shares to the Company, and
will thereupon promptly receive in exchange his or her share of the Merger
Consideration. The Company will not be obligated to deliver the consideration
to which any ELEKOM Shareholder is entitled until such holder (i) surrenders
his or her certificate or certificates, (ii) warrants that he or she is the
sole owner of the shares and holds such shares free of any liens, claims or
encumbrances and (iii) indemnifies ELEKOM and each holder of ELEKOM Preferred
Stock for breach of this warranty of title. Surrendered certificates
representing shares of ELEKOM Stock must be duly endorsed as required by the
Company's transfer agent.
At the Effective Time, the stock transfer books of ELEKOM will be closed,
and no transfer of ELEKOM Stock by any ELEKOM Shareholder may thereafter be
made or recognized. Until surrendered for exchange as described above, each
certificate representing shares of ELEKOM Stock (other than shares as to which
dissenters' rights have been perfected) will, after the Effective Time,
represent for all purposes only the right to receive the share of the Merger
Consideration attributable to such shares.
REPRESENTATIONS AND WARRANTIES
The Merger contains various representations and warranties by ELEKOM and the
Company. ELEKOM represents and warrants as to matters relating to (i) its
capitalization, the existence of rights to acquire capital stock, its
ownership of subsidiaries and the right of ELEKOM Shareholders to exchange
their shares for shares of the Company Common Stock in the Merger; (ii) its
corporate organization and good standing, its power to conduct its business
and its governing instruments; (iii) its authority to execute and deliver the
Agreement and to carry out the transactions contemplated therein, and the
enforceability of the Agreement and related agreements; (iv) the effect of the
performance of the Agreement and related agreements on its governing
instruments, applicable laws and agreements to which it is a party; (v) the
need for consents and approvals to be obtained by it in connection with the
Merger; (vi) the accuracy of its financial statements and their consistency
with its books and records and the absence of material undisclosed
liabilities; (vii) the accuracy and completeness of its books and records;
(viii) its title to, and the existence of liens, encumbrances and other claims
upon, its assets, and the sufficiency of its assets for the conduct of its
business; (ix) its real property lease and tangible personal property; (x) the
compliance of its software products with respect to Year 2000 issues; (xi) its
existing material contracts and their enforceability; (xii) its accounts
receivable and trade accounts and their collectability; (xiii) its
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ownership of intellectual property, the measures it has taken to protect its
intellectual property and the absence of any computer viruses in its software;
(xiv) its major suppliers and customers; (xv) any pending or threatened
litigation involving ELEKOM; (xvi) its compliance with applicable legal
requirements; (xvii) its ownership of required governmental permits and
licenses and the effect thereon of the Merger; (xviii) its preparation and
filing of tax returns and payment of taxes, and related matters; (xix) its
compliance with environmental protection requirements; (xx) its ownership, and
the adequacy, of its insurance policies; (xxi) various labor and employment
matters; (xxii) its employees, rates of compensation and employee benefit
plans and liabilities related thereto; (xxiii) the absence of certain changes
in its operations and business since June 30, 1998; (xxiv) the conformity of
its products with applicable warranties; (xxv) transactions with related
parties; (xxvi) the non-involvement of brokers or other intermediaries in
connection with the Agreement; (xxvii) the names under which it has conducted
business; and (xxviii) the accuracy and completeness of its representations
and warranties.
The Agreement also includes representations and warranties by the Company
and Clarus CSA as to matters relating to (i) the Company Common Stock to be
issued in the Merger; (ii) their corporate organization and good standing and
their power to conduct their business; (iii) their authority to execute and
deliver the Agreement and to carry out the transactions contemplated therein,
and the enforceability of the Agreement and related agreements; (iv) the
effect of the performance of the Agreement and related agreements on its
governing instruments, applicable laws and agreements to which the Company is
a party; (v) the need for consents and approvals to be obtained by them in
connection with the Merger; (vi) their ownership of intellectual property;
(vii) any pending or threatened litigation involving the Company; (viii) their
compliance with applicable legal requirements; (ix) the absence of certain
changes in their operations and business since June 30, 1998; (x) the non-
involvement of brokers or other intermediaries in connection with the
Agreement, other than NMS; (xi) their filing of reports with the Commission
and the completeness and accuracy of such reports; (xii) the names under which
they have conducted business; (xiii) the accuracy and completeness of their
representations and warranties; and (xiv) their receipt of NMS's opinion.
All representations and warranties contained in the Agreement or otherwise
made in connection with the Merger will survive until April 30, 2000, except
that ELEKOM's representation and warranty regarding intellectual property will
survive for a one-year period following the Closing and ELEKOM's
representations and warranties concerning its capitalization, taxes and
employee benefit plans will survive until the earlier of ten years following
the execution of the Agreement or the running of the applicable statutes of
limitations. See "--Indemnification; Escrow."
BUSINESS OF ELEKOM PENDING THE MERGER
The Agreement provides that ELEKOM will, until the Closing and except as
otherwise provided in the Agreement, (i) conduct its operations in the normal
and customary manner in the ordinary course of business and pay its trade
payables and other obligations currently in accordance with their terms; (ii)
maintain and preserve the confidentiality of its intellectual property; (iii)
keep in full force and effect all insurance policies; (iv) perform all of its
obligations under certain contracts and property leases, and not amend or
terminate any of their provisions; (v) use reasonable efforts to preserve its
organization intact and maintain its relationships with its employees,
suppliers and customers; (vi) promptly advise the Company of any adverse
change in its condition or the condition of its business, or of any event or
circumstance that affects the completion of the transactions contemplated by
the Agreement or that, if in existence when the Agreement was executed, would
have been required to have been disclosed in a schedule to the Agreement;
(vii) maintain and collect its receivables and extend credit terms to its
customers in the ordinary course of business consistent with past practices;
(viii) furnish the Company with a list of its personal property; and (ix)
effect a conversion of its 401(k) plan.
In addition, ELEKOM has agreed that, prior to the Closing and except as
otherwise provided in the Agreement, it will not:
(i) Create or permit to exist any liens, encumbrances, claims, security
interests, mortgages or pledges of any nature with respect to its assets,
except for those already disclosed and agreed to by the Company;
(ii) Sell or dispose of any assets or license any assets other than in
the ordinary course of business;
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(iii) Enter into or amend any employment or severance agreement or grant
any increase in compensation or benefits to any of its employees (including
such discretionary increases as may be contemplated by existing employment
agreements), except in accordance with past practice or previously approved
by and reflected in the written minutes of the ELEKOM Board;
(iv) Make any capital improvement or expenditure individually in excess
of $10,000 or in the aggregate in excess of $50,000 without the Company's
written consent;
(v) Incur any additional debt obligation or other obligation for borrowed
money except as disclosed and agreed to by the Company;
(vi) Except pursuant to the exercise of disclosed outstanding stock
options and their existing terms, issue, sell, pledge, encumber, authorize
the issuance of or enter into any contract to issue, sell, pledge,
encumber, or authorize the issuance of or otherwise permit to become
outstanding, any additional shares of capital stock, or any stock
appreciation rights, or any option, warrant, conversion, or other right to
acquire any such stock, or any security convertible into any such stock;
(vii) Amend its articles of incorporation, bylaws or other governing
instruments;
(viii) Repurchase, redeem, or otherwise acquire or exchange, directly or
indirectly, any shares, or any securities convertible into any shares, of
ELEKOM capital stock, or declare or pay any dividend or make any other
distribution, except for certain actions in connection with its stock
option plan;
(ix) Purchase any securities of, or make any material investment in,
either by purchase of stock or securities, any person;
(x) Adopt any new employee benefit plan or make any material change in or
to any existing employee benefit plans other than any such change that is
required by law or contemplated in the Agreement or that, in the opinion of
counsel, is necessary or advisable to maintain the tax qualified status of
any such plan;
(xi) Make any significant change in any tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in tax laws or regulatory accounting requirements or
generally accepted accounting principles; or
(xii) Except as otherwise provided, commence any litigation or settle any
litigation involving any liability of ELEKOM for money damages or which
imposes material restrictions upon its operations.
STANDSTILL AGREEMENT
ELEKOM has agreed that if the Agreement is terminated for any reason before
the Closing, then until 18 months after such termination, neither ELEKOM, nor
its affiliates or certain affiliates of its representatives (other than
companies in which a holder of ELEKOM Preferred Stock owns less than 50%) may,
without the prior written consent of the Company's Board, (i) in any manner
acquire, agree to acquire, or make any proposal to acquire, directly or
indirectly, a material portion of the assets of the Company; (ii) propose to
enter into, directly or indirectly, any merger or business combination
involving the Company; (iii) make, or in any way participate, directly or
indirectly, in any solicitation of proxies to vote or seek to advise or
influence any person with respect to the voting of any voting securities of
the Company; (iv) form, join or in any way participate in a group with respect
to any voting securities of the Company; (v) otherwise act, alone or in
concert with others, to seek to control or influence the Company's management,
the Company Board or the Company's policies; or (vi) publicly disclose any
intention, plan or arrangement inconsistent with the foregoing.
CERTAIN COVENANTS OF THE COMPANY
In the Agreement, the Company has agreed that it will prepay to ELEKOM
royalties accruing pursuant to the existing OEM License Agreement between the
Company and ELEKOM as working capital to fund ELEKOM's operations, to the
extent needed, in an amount up to $250,000 for each two-week period beginning
on October 1, 1998 through Closing (or the date on which the Agreement is
earlier terminated).
The Company has also agreed that it will use its reasonable efforts to list
on the Nasdaq/NMS, prior to the Effective Time, the shares of Company Common
Stock to be issued to ELEKOM Shareholders pursuant to the
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Merger. In addition, at the Closing, the Company will enter into a
Registration Rights Agreement granting piggyback registration rights to Mr.
Norman Behar and the holders of ELEKOM Preferred Stock substantially similar
to those currently held by the stockholders of the Company who purchased the
Company's preferred stock prior to its initial public offering. See "--
Interests of Certain Persons in the Merger" and "Description of the Company's
Capital Stock."
The Company has further agreed that Mr. Behar will have the right to receive
notice of and to attend each meeting of the Company's Board, and that the
Company will reimburse Mr. Behar's reasonable expenses incurred in attending
such meetings. Subject to the exercise of its fiduciary duties, the Company
has agreed to nominate and recommend election of Mr. Behar for election to its
Board of Directors at its next annual stockholders meeting, to serve in the
class of directors with terms expiring in 2000. The rights granted to Mr.
Behar in this regard will expire on June 30, 2000. The Company will provide
coverage for Mr. Behar under its director and officer insurance policy
identical to that provided to the other directors and officers of the Company.
See "--Interests of Certain Persons in the Merger."
The Company has also agreed that it will (i) act in manner consistent with
the treatment of the Merger as a tax-free reorganization; (ii) use ELEKOM's
leased premises only as permitted by the lease, and guarantee the obligations
of ELEKOM or Clarus CSA as tenant under the lease if required by the landlord;
(iii) take certain actions with respect to employee benefits; and (iv) use
commercially reasonable best efforts to negotiate and enter into, before
Closing, employment agreements with certain ELEKOM employees. See "--Effect on
Employees, Employee Benefit Plans and Stock Options."
THIRD PARTY PROPOSALS; BREAK-UP FEE
ELEKOM
The Agreement provides that during the term of the Agreement neither ELEKOM
nor any of its affiliates or representatives may directly or indirectly
solicit any proposal for a business combination involving ELEKOM. The ELEKOM
Board could, however, after consulting with its financial advisors and
determining after consulting with counsel that it must do so to discharge its
fiduciary duties, and subject to other conditions, consider and approve an
unsolicited acquisition proposal that provides at least $5.0 million in
aggregate consideration to ELEKOM Shareholders in excess of the Merger
Consideration and is on terms that a majority of the ELEKOM Board determined
in good faith (based on the advice of an independent financial advisor) to be
more favorable to the ELEKOM Shareholders than those in the Agreement and for
which any required financing was committed or reasonably capable of being
obtained (a "Superior Proposal").
ELEKOM must promptly notify the Company if it receives any communication
relating to an acquisition proposal. If the ELEKOM Board determines a proposal
to be a Superior Proposal, ELEKOM could, subject to entering into a
confidentiality agreement similar to that between ELEKOM and the Company,
provide the party making the proposal with access to confidential information
regarding ELEKOM. ELEKOM must promptly notify the Company of any determination
by the ELEKOM Board that a Superior Proposal has been made. ELEKOM may not
release any third party from any confidentiality or standstill agreement in
effect.
If the ELEKOM Board recommends a Superior Proposal to the ELEKOM
Shareholders, the Company may terminate the Agreement immediately without
liability. If the ELEKOM Shareholders approve a Superior Proposal, ELEKOM may
terminate the Agreement, although it would have to pay to the Company a break-
up fee of $5.0 million plus the Company's expenses incurred in connection with
the Agreement. ELEKOM also must pay such a break-up fee if it enters into any
acquisition agreement within nine months after any termination of the
Agreement by ELEKOM other than on the basis of the market price of the Company
Common Stock (see "--Termination; Amendment") or on the basis of the failure
to fulfill certain conditions to the obligations of the parties to complete
the Merger (see "--Conditions to the Merger").
The Company
Except with respect to the Agreement, neither the Company nor any of its
affiliates or representatives may directly or indirectly solicit any proposal
or negotiate or enter into any agreement regarding either (i) a business
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combination with a third party that is engaged in the development, marketing,
licensing or sale of electronic procurement software or (ii) an acquisition of
the Company by a third party. The Company must promptly notify ELEKOM if it
receives any inquiry or proposal relating to any such transaction and, unless
ELEKOM's prior written consent is obtained, must immediately cease any
activities, discussions or negotiations with respect to the foregoing.
CONDITIONS TO THE MERGER
Conditions to Each Party's Obligations to Effect the Merger
The obligations of each party to complete the Merger are subject to the
satisfaction of the following conditions on or before the Closing, unless
specifically waived in writing by such party before the Closing:
(i) The representations and warranties of the other party contained in
the Agreement or as subsequently updated in writing must have been true and
correct as of the date the Agreement was executed or updated and must be
true and correct as of the Closing;
(ii) The other party must have duly performed and complied with all
covenants, agreements and obligations required by the Agreement to be
performed or complied with by it on or prior to the Closing;
(iii) No action or proceeding may be pending or, in the reasonable
opinion of the Company, threatened by or before any court or other
governmental body or agency seeking to restrain, prohibit or invalidate the
transactions contemplated by the Agreement or that would affect the right
of the Company in a material adverse manner to own, operate or control
ELEKOM's business after the Effective Time;
(iv) The other party must have obtained all of the third party consents
required to be obtained by it in connection with the Merger;
(v) The Registration Statement must have been declared effective by the
SEC and no stop order suspending the effectiveness or proceeding for that
purpose may have been issued and remain in effect, and shares of Company
Common Stock to be issued in the Merger must shall have been approved for
quotation on the Nasdaq/NMS; and
(vi) Each party must have received from legal counsel to the other party
an opinion, dated the Effective Time, in the form previously agreed upon.
Additional Conditions to ELEKOM's Obligations to Effect the Merger
ELEKOM must have received an opinion from its counsel dated as of the
Closing and substantially to the effect that, on the basis of the facts and
representations set forth in that opinion that are consistent with the state
of facts in existence at the Effective Time, (i) the Merger will be a
reorganization under Section 368(a) of the Code and (ii) no gain or loss will
be recognized by the ELEKOM Shareholders or by the Company or Clarus CSA upon
the exchange of shares of ELEKOM Common Stock or ELEKOM Preferred Stock for
Company Common Stock.
The Merger must also be approved by the affirmative vote of two-thirds of
each class and series of the outstanding capital stock of ELEKOM. Pursuant to
an agreement with the Company, ELEKOM Shareholders who hold 100% of the
outstanding shares of Series A Stock, 67% of the outstanding shares of Series
B Stock and 49% of the outstanding shares of ELEKOM Common Stock have agreed
to vote for approval of the Agreement. Accordingly, approval of the Merger by
the holders of Series A Stock and Series B Stock is assured.
Additional Conditions to the Company's Obligations to Effect the Merger
The obligations of the Company to complete the Merger are subject to the
satisfaction of the additional conditions on or before the Effective Time,
unless specifically waived in writing by the Company before the Effective
Time:
(i) The Company must have received, at its expense, a legal opinion as to
certain intellectual property matters;
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(ii) The Company must have received from those affiliates of ELEKOM as it
determines necessary a letter of undertaking acknowledging the restrictions
imposed by the federal securities laws on the shares of Company Common
Stock to be received by such persons and agreeing to be bound by such
restrictions and, in the case of the letters from each of the holders of
ELEKOM Preferred Stock and Mr. Behar, agreeing not to sell or otherwise
dispose of any shares of Company Common Stock on or before the earlier of
October 1, 1999, or the nine month anniversary of the Closing and not to
engage in any short sales of Company Common Stock; and
(iii) The Company must have entered into employment agreements with
certain designated ELEKOM employees, including Mr. Behar (see "--Effect on
Employees, Employee Benefit Plans and Stock Options" and "--Interests of
Certain Persons in the Merger").
TERMINATION; AMENDMENT
Termination
The Agreement may be terminated at any time before Closing:
(i) By the mutual written consent of ELEKOM and the Company;
(ii) By either party (if it is not then in breach of any term of the
Agreement), if the other party fails to perform its agreements required to
be performed by or on the Closing or breaches any of its representations or
warranties, and the failure or breach is not cured within ten days after
the terminating party has notified the other party of its intent to
terminate the Agreement pursuant to this provision;
(iii) By either party, if there is any order of any court or governmental
or regulatory agency binding on ELEKOM or the Company that prohibits or
restrains ELEKOM or the Company from consummating the transactions
contemplated by the Agreement;
(iv) By either party, if the Closing has not occurred by November 15,
1998, for any reason other than delay or nonperformance of the party
seeking termination;
(v) By either party, if the average closing sales price of the Company
Common Stock as reported by the Nasdaq/NMS for any 10 consecutive trading
days is less than $5.00 per share;
(vi) By ELEKOM, if the Closing Price of the Company Common Stock is less
than $5.75; or
(vii) By either party, if the Closing Price of the Company Common Stock
is less than $5.00.
Termination of the Agreement as described above would terminate all
obligations of the parties thereunder, except for certain obligations with
respect to expenses, publicity and confidentiality, the Company's obligation
to make the minority investment described below, and except that termination
on the basis of a failure to perform or a breach of a representation or
warranty would not relieve the defaulting or breaching party from any
liability to the other party.
Minority Investment
Pursuant to the Agreement, the Company has placed $2.0 million in an escrow
account. If the Merger is not completed by November 15, 1998, due to either
the Company's nonfulfillment of certain conditions to ELEKOM's obligations to
complete the Merger (other than the conditions concerning the absence of
litigation preventing the Merger, the obtaining of required consents or the
receipt of a tax opinion) or ELEKOM's termination of the Agreement based on
the market price of the Company Common Stock being less than $5.00, then
ELEKOM will be entitled to receive the $2.0 million from escrow as a non-
interest bearing bridge loan. This loan will be converted into shares of
ELEKOM Preferred Stock by the later of December 31, 1998, or 90 days after the
nonfulfillment of the condition to ELEKOM's obligations. If ELEKOM has
completed a Series C Preferred Stock financing involving one or more investors
who were not ELEKOM Shareholders on the date of the Agreement and has raised a
minimum of $4.0 million in capital as a result of such financing (including
the Company's $2.0 million), the loan will be converted into shares of Series
C Stock on the same terms offered to such investors; otherwise, it will be
converted into shares of Series B Stock on the same price, terms, rights and
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preferences as previously issued. The Company shall be entitled to designate
one person to ELEKOM's Board of Directors as long as it continues to own the
preferred shares.
Termination Fee
If the Merger is not completed by November 15, 1998, due to ELEKOM's
nonfulfillment of certain conditions to the Company's obligations to complete
the Merger (other than the conditions concerning the absence of litigation
preventing the Merger, the effectiveness of the Registration Statement, or the
employment of current ELEKOM employees other than Mr. Behar), then ELEKOM will
reimburse the Company for two-thirds of the amount of all legal, accounting,
investment banking, appraisal, Commission, NASDAQ/NMS and printing costs and
expenses incurred by the Company in connection with the negotiation and
preparation of the Agreement and related documents and the other actions of
the Company required to be taken thereunder, up to a maximum reimbursement of
$500,000. Such reimbursement would be made in the form of a credit by ELEKOM
against future license fees owed or to be owed by the Company under the OEM
Agreement, including minimum payments due thereunder. Any such credit against
future license fees would be applied to fees owing for the 1999 calendar year
in the amount of 25% of the total credit per quarter.
Amendment
Any waiver, amendment, modification or supplement of or to any term or
condition of the Agreement can be effective only if in writing and signed by
both ELEKOM and the Company. The Agreement provides that ELEKOM and the
Company have waived the right to amend orally the terms of this requirement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material federal income tax consequences
of the Merger to the holders of ELEKOM capital stock and certain additional
tax consequences of the Merger. The discussion does not address all aspects of
U.S. federal income taxation that may be material to shareholders in
connection with the Merger in light of their particular status or
circumstances, including, without limitation, foreign persons, insurance
companies, tax-exempt entities, retirement plans, dealers in securities,
persons whose shares are subject to employment-related restrictions, persons
subject to the alternative minimum tax and persons in whose hands the ELEKOM
capital stock does not represent a capital asset. This discussion and the
opinion of Perkins Coie LLP, tax counsel to ELEKOM ("Tax Counsel"), described
below is based on the Code, the Treasury Regulations proposed or promulgated
thereunder and administrative interpretations as in effect on the date hereof
and judicial precedents relating thereto, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
considerations discussed herein. The discussion below addresses neither the
effect of any applicable state, local or foreign tax laws, nor the effect of
any federal tax laws other than those pertaining to the U.S. federal income
tax. HOLDERS OF ELEKOM CAPITAL STOCK ARE URGED TO CONSULT WITH THEIR OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PARTICULAR TAX CIRCUMSTANCES AND
THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
Qualification as a Reorganization. ELEKOM has received an opinion from Tax
Counsel that the Merger will be treated as a reorganization within the meaning
of Section 368(a) of the Code. The opinion of Tax Counsel also describes the
material federal income tax consequences resulting from the treatment of the
Merger as a reorganization for an ELEKOM Shareholder as summarized below. See
"--Material Federal Income Tax Consequences of the Merger for ELEKOM
Shareholders." In rendering its opinion regarding the Merger, Tax Counsel has
relied upon certain assumptions, including the assumptions described below,
and has received and relied upon representations contained in certificates of
ELEKOM, Clarus CSA, and the Company.
Tax Counsel's opinion neither binds the IRS nor precludes the IRS from
adopting a contrary position. An opinion of counsel only represents such
counsel's best legal judgment and has no binding effect or official status of
any kind, and no assurance can be given that contrary positions will not be
taken by the IRS or a court
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considering the issues. The parties will not request a ruling from the IRS in
connection with any of the federal income tax considerations of the Merger.
Continuity of Interest Requirement for a Reorganization and Related
Assumptions. To qualify as a reorganization for federal income tax purposes,
the Merger must satisfy certain requirements, including the "continuity of
interest" requirement. To satisfy the "continuity of interest" requirement,
the portion of the total Merger Consideration that must constitute stock in
the Company must be sufficient to give the ELEKOM Shareholder a substantial
ongoing equity interest in the business of ELEKOM being conducted by the
Company after the Merger. The precise percentage of acquiring corporation
stock that constitutes a "substantial" equity interest for these purposes is
not known. However, the IRS has established a safe harbor under which the
continuity requirement is deemed satisfied if the value of the acquiring
corporation stock received in the reorganization equals or exceeds 50% of the
aggregate value of the acquired corporation's stock at the time of the
reorganization.
In connection with the continuity of interest requirement, Tax Counsel has
assumed that the portion of the total Merger Consideration (including for
purposes of Tax Counsel's opinion and this entire "Material Federal Income Tax
Consequences" discussion and, except as expressly noted, the "Risk of Taxable
Transaction" discussion, amounts paid out of the advances made pursuant to
Section 4.6 of the Merger Agreement and amounts used to repurchase stock from
employees of ELEKOM pursuant to buyback rights contained in employment related
agreements governing the stock issued to those employees (the "ELEKOM Buyback
Provisions"), based on value at the Effective Time, received by the ELEKOM
Shareholders constituting Company Common Stock will not be less than 50%. The
Company has represented that there will be no consideration, arrangements or
payments (other than amounts payable pursuant to the ELEKOM Buyback Provisions
would be so considered) that would increase the non-Company Common Stock
percentage of the total value of the Merger Consideration above the percentage
determined solely by reference to the stock and cash consideration provided in
Sections 1.1 and 1.7 of the Agreement. It is likely that amounts paid pursuant
to the ELEKOM Buyback Provisions will be considered a cash portion of the
total Merger Consideration. It is also possible that the remaining portion of
the advances made pursuant to Section 4.6 of the Agreement will be so
considered. If, for any reason, including, but not limited to, the price per
share of the Company Common Stock at the Effective Time, treatment of the
advances under Section 4.6 of the Agreement, or the inaccuracy of the
representation by the Company regarding other consideration, arrangements or
payments, the value of the stock portion of the total Merger Consideration
were to fall below 50% but not below 40%, Tax Counsel believes that the Merger
should still qualify as a reorganization but cannot give any assurances that
the Internal Revenue Service will not challenge the Merger. If for any reason
the stock portion of the total Merger Consideration were to fall below 40%,
Tax Counsel believes that there would be a significant risk that the Merger
would not qualify as a reorganization, and in that case it could not render a
favorable opinion on the reorganization status of the Merger for federal
income tax purposes.
In January 1998, the IRS published final regulations that generally
eliminate any requirement under the continuity of interest test that
shareholders of an acquired corporation retain any stock issued in a
reorganization transaction such as the Merger. However, if the Company were
involved in a plan to redeem or otherwise reacquire Company Common Stock
issued to ELEKOM Shareholders in the Merger, such dispositions could affect
the eligibility of the Merger as a reorganization for federal income tax
purposes. The Company has represented to Tax Counsel that neither it nor any
related party has any plan to redeem, acquire or make any extraordinary
distribution with respect to the Company Common Stock issued in the Merger.
Material Federal Income Tax Consequences of the Merger for ELEKOM
Shareholders. Assuming that the Merger qualifies as a reorganization, Tax
Counsel is of the opinion that the following are the material federal income
tax consequences for a ELEKOM Shareholder as a result of the Merger:
(i) No gain or loss will be recognized by an ELEKOM Shareholder as a
result of the Merger with respect to ELEKOM capital stock converted solely
into Company Common Stock.
(ii) The tax basis of Company Common Stock received by a shareholder in
the Merger will equal the tax basis of that shareholder in the ELEKOM
capital stock surrendered by that shareholder in the Merger,
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decreased by any basis allocable to fractional share interests in Company
Common Stock for which cash is received and any other cash received by that
shareholder in exchange for ELEKOM capital stock and increased by any gain
recognized by such shareholders in the Merger.
(iii) The holding period of the Company Common Stock received in the
Merger will include the period during which the shareholder held the ELEKOM
capital stock, assuming such ELEKOM capital stock is held as a capital
asset at the Effective Time.
(iv) ELEKOM Shareholders who receive cash upon the exercise of dissenter
rights or receive cash (including amounts payable pursuant to the ELEKOM
Buyback Provisions) as their entire Merger Consideration will recognize
gain or loss for federal income tax purposes, measured by the difference
between the amount of cash received and the basis of the ELEKOM capital
stock surrendered in the Merger. Any gain or loss recognized will be
capital gain or loss, provided that such share of ELEKOM capital stock is
held as a capital asset at the Effective Time and the receipt of cash is
not essentially equivalent to a dividend. Furthermore, such gain or loss
will be a long-term capital gain or loss if such share of ELEKOM capital
stock has been held for more than 12 months. Any Company Common Stock
received by a holder of ELEKOM Preferred Stock may be treated as taxable
ordinary income to the extent received for accrued but unpaid dividends or
as a liquidation preference.
(v) Any ELEKOM Shareholder who receives some cash (including amounts
payable pursuant to the ELEKOM Buyback Provisions) and some Company Common
stock in the Merger will recognize gain in an amount equal to the lesser of
the cash received or the gain realized with respect to all of their ELEKOM
stock. In contrast with the situation in which a shareholder receives only
cash for their entire Merger Consideration, this means that a shareholder
may have to pay tax with respect to all cash received by that shareholder
without reduction by the basis in the ELEKOM capital stock surrendered for
the cash if the gain realized with respect to all ELEKOM capital stock
surrendered by that shareholder (for both cash and Company Common Stock)
equals or exceeds the cash received. Such gain will be capital gain
provided that such share of ELEKOM capital stock was held as a capital
asset at the Effective Time and the receipt of cash is not essentially
equivalent to a dividend. No loss may be recognized by any such
shareholder.
(vi) The receipt of cash in lieu of a fractional share will be treated as
if the ELEKOM Shareholders had received the fractional share and then
received cash in redemption of that share, resulting in the recognition of
gain or loss. Such gain or loss will be treated as capital gain or loss
provided that such share of ELEKOM capital stock was held as a capital
asset at the Effective Time and the receipt of cash is not essentially
equivalent to a dividend.
(vii) No gain or loss will be recognized by ELEKOM as a result of the
Merger.
With respect to gain realized as a result of the receipt of cash from
escrowed funds, ELEKOM Shareholders should consult with their own tax advisers
to determine if installment method reporting is available with respect to such
gain.
Certain Additional Tax Consequences of the Merger. As a result of the
Merger, the taxable year of ELEKOM will end for federal income tax purposes as
of the close of business on the Effective Date and ELEKOM will be required to
file a final federal income tax return for its taxable year ending on such
date. As a result of the Merger, ELEKOM will experience an ownership change as
defined in Section 382(g) of the Code with the result that any tax credit
carryforwards, NOL carryovers, capital loss carryforwards or built-in
deductions may become subject to the limitations on use provided by Sections
382 and 383 of the Code. In addition, the Merger may result in the imposition
of certain consolidated return limitations on the ability of the ELEKOM
consolidated return group to utilize any ELEKOM tax credit carryovers, NOL
carryovers, capital loss carryforwards or built-in deductions pursuant to the
Treasury Regulations under Section 1502 of the Code. If any of the proceeds of
the interim funding to be provided by the Company to ELEKOM pursuant to
Section 4.6 of the Agreement were to be distributed to or otherwise accrue to
the benefit of the ELEKOM Shareholders, the funding could give rise to taxable
income for the shareholders or affect Tax Counsel's opinion as to the
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qualification of the Merger as a reorganization. ELEKOM has represented to its
shareholders that the interim funding will be used for business purposes by
ELEKOM and not for shareholder purposes (other than to the extent any amounts
payable pursuant to the ELEKOM Buyback Provisions were so considered.
Consequences of Failure to Qualify as a Tax-Free Reorganization. A
successful IRS challenge to the reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in ELEKOM being treated as having sold its assets in a taxable
sale and then as having distributed the proceeds to the shareholders in
redemption of their stock. In such event, each holder of ELEKOM capital stock
would recognize gain or loss with respect to each share of ELEKOM capital
stock surrendered equal to the difference between the shareholder's basis in
such share and the fair market value, at the Effective Time, of the Company
Common Stock received in exchange therefor plus any cash payable pursuant to
the Agreement. In such event, a shareholder's aggregate basis in the Company
Common Stock so received would equal its fair market value, and the
shareholder's holding period for such stock would begin the day after the
Effective Time. As the successor to ELEKOM's liabilities, Clarus CSA would be
responsible for the corporate (as opposed to shareholder) level tax
liabilities.
Assumptions made by Tax Counsel; Reissuance of Tax Opinion. Tax Counsel's
opinion is based on certain factual assumptions and the accuracy of the
representations as indicated above. In addition to the assumptions above, the
following assumptions, among others, have been made by Tax Counsel: (i) the
Merger will be consummated in accordance with the Agreement; (ii)
substantially all of ELEKOM's assets will be acquired by Clarus CSA in the
Merger, and (iii) after the Effective Time the Company intends to continue the
historic business of ELEKOM or use a significant portion of its business
assets in a business. Assuming the continuing accuracy of the foregoing
assumptions and representations as of the Effective Time and no change in the
Code, the Treasury Regulations proposed or promulgated thereunder, or any
other administrative or judicial interpretations thereof after the date hereof
and on or before the Effective Time, the opinion of Tax Counsel will be
reissued by Tax Counsel as of the Effective Time.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a purchase
business combination. See "Pro Forma Condensed Financial Statements."
The Company's allocation of the purchase price in the Merger will result in
the allocation of $14.0 million as in-process acquired research and
development which, under generally accepted accounting principles, will be
expensed upon completion of the Merger.
RESALE OF THE COMPANY'S COMMON STOCK
The shares of the Company Common Stock to be issued to ELEKOM Shareholders
in the Merger have been registered under the Securities Act, but that
registration does not cover resales of those shares by persons who control,
are controlled by, or are under common control with ELEKOM (such persons are
referred to hereinafter as "affiliates" and generally include executive
officers, directors and 10% shareholders) at the time of the ELEKOM Meeting.
Affiliates may not sell shares of Company Common Stock acquired by them in
connection with the Merger, except pursuant to an effective registration
statement under the Securities Act or in compliance with SEC Rule 145 or
another applicable exemption from the Securities Act registration
requirements.
Each person whom ELEKOM reasonably believes to be an affiliate of ELEKOM has
delivered to the Company a written agreement providing that such person
generally will not sell, pledge, transfer, or otherwise dispose of any the
Company's Common Stock to be received by such person in connection with the
Merger, except in compliance with the Securities Act; and the rules and
regulations of the SEC promulgated thereunder.
In addition, the holders of ELEKOM Preferred Stock and Norman N. Behar will
be subject to a lock-up agreement pursuant to which each has agreed not to
sell any Company Common Stock received by such Shareholder in connection with
the Merger before the earlier of (i) the nine month anniversary of the
Effective Time, or (ii) October 1, 1999.
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DIRECTORS AND EXECUTIVE OFFICERS FOLLOWING THE MERGER
The officers and directors of the Company will remain the same following the
Merger. Following the Merger, Norman N. Behar will serve as Executive Vice
President of Clarus CSA, pursuant to the terms of an employment agreement with
Clarus CSA with a termination date of March 31, 1999. The Company has agreed,
subject to the exercise by the Company's Board of its fiduciary duties, to
nominate Mr. Behar for election as a director of the Company at the Company's
next annual stockholders' meeting. The Agreement provides that Mr. Behar shall
have board observation rights until the time he is elected to the Company's
Board. If Mr. Behar is elected to the Company's Board and his term expires
before June 30, 2000, he will maintain board observation rights until June 30,
2000.
Mr. Behar, age 35, has served as President and Chief Executive Officer of
ELEKOM since January 1998. Prior to joining ELEKOM in January 1998, Mr. Behar
served from January1996 to December1998 as President and Chief Executive
Officer of Catapult, Inc., a leading provider of personal computer training
services. From April 1991 to December 1995, Mr. Behar was Chief Operating
Officer of Catapult, Inc.
EXPENSES AND FEES
The Agreement provides, in general, that each of the parties will bear and
pay its own expenses in connection with the transactions contemplated by the
Agreement, including fees and expenses of its own financial or other
consultants, investment bankers, and counsel. In the event that ELEKOM's
expenses in connection with the transactions contemplated by the Agreement
exceed $150,000, such expenses in excess of $150,000 will be payable from the
cash received by ELEKOM in the Merger.
RIGHTS OF DISSENTING ELEKOM SHAREHOLDERS
If the Merger occurs, ELEKOM Shareholders are entitled to dissenters' rights
under Chapter 23B.13 of the WBCA in connection with the Merger. The Company's
stockholders are not entitled to dissenters' rights in connection with the
Merger.
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the WBCA and is qualified in its entirety by
reference to the full text of Chapter 23B.13 of the WBCA, which is attached to
this Prospectus as Appendix C. Any shareholder of ELEKOM who wishes to
exercise, or to preserve his or her right to exercise, dissenters' rights
should review the following discussion and Appendix C carefully, because
failure to timely and properly comply with the specified procedures will
result in the loss of dissenters' rights under the WBCA.
Under the WBCA, ELEKOM Shareholders have the right to dissent with respect
to the Merger and, subject to certain conditions, may require purchase of
their shares for cash based upon the "fair value" of those shares in lieu of
the consideration provided for in the Agreement. Under the WBCA, the "fair
value" of dissenting shares means the value of the shares of ELEKOM
immediately before the Effective Time of the Merger, excluding any
appreciation or depreciation in anticipation of the Merger, unless exclusion
would be inequitable. The "fair value" could be more than, equal to or less
than the Merger Consideration. In the event the dissenting shareholder and the
corporation cannot agree on the "fair value" of the dissenter's shares, "fair
value" may ultimately be determined by a court in an appraisal proceeding.
Each shareholder owner asserting dissenters' rights must assert such rights
with respect to all shares that such shareholder beneficially owns or of which
such shareholder has power to direct the vote, and such shareholder must
submit to ELEKOM, with or prior to such shareholder's assertion of dissenters'
rights, the record shareholder's written consent to such dissent. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in such shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies ELEKOM
in writing of the name and address of each person on whose behalf such
shareholder asserts dissenters' rights. To properly exercise dissenters'
rights with respect to the Merger and to be entitled to payment under the
WBCA, an ELEKOM dissenting shareholder
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(i) must deliver to ELEKOM, before the vote on the Merger is taken, written
notice of such shareholder's intent to demand payment for such shareholder's
shares if the Merger occurs and (ii) must not vote such shareholder's shares
in favor of the Merger. Such notice should be delivered to ELEKOM at its
principal executive offices, located at 500 108th Avenue NE, Suite 1400,
Bellevue, Washington 98004, Attention: Corporate Secretary. A shareholder who
does not satisfy both of these requirements will not be entitled to
dissenters' rights. Thus, any ELEKOM Shareholder who wishes to dissent and who
executes and returns a proxy on one of the accompanying forms must specify
that such holder's shares are to be voted against the Merger or that the proxy
holder should abstain from voting such holder's shares in favor of the Merger.
A VOTE AGAINST THE MERGER IS NOT A PROPER EXERCISE OF DISSENTERS' RIGHTS. If
the shareholder returns a proxy without voting instructions, or with
instructions to vote in favor of the Merger, such holder's shares will
automatically be voted in favor of the Merger, and the shareholder will lose
any dissenters' rights.
If the Merger is approved by the ELEKOM Shareholders, ELEKOM will send a
written dissenter's notice not later than 10 days after the Effective Time to
each ELEKOM dissenting shareholder who satisfied the requirements of (i) and
(ii) above, (i) stating where such shareholder must send his or her written
payment demand, (ii) stating where and when certificates representing ELEKOM
capital stock must be deposited, (iii) containing a form for demanding
payment, which requires that the dissenter certify whether or not he or she
acquired beneficial ownership before the first public announcement of the
Merger on August 31, 1998, and (iv) setting a date by which such written
payment demand must be received, which date may not be less than 30 nor more
than 60 days after the dissenter's notice is delivered. Such notice must be
accompanied by a copy of Chapter 23B.13 of the WBCA. An ELEKOM Shareholder who
does not demand payment, certify that such shareholder acquired the shares
before August 31, 1998, and deposit his or her shares within the time provided
by such notice will not be entitled to dissenters' rights.
ELEKOM shall pay to each ELEKOM dissenting shareholder who complies with the
procedures described above, within 30 days after the Effective Time, the
amount that ELEKOM estimates to be the fair value of such dissenter's shares,
plus accrued interest. ELEKOM will provide, along with such payment, certain
financial information, including ELEKOM's balance sheet as of the end of a
fiscal year ended not more than 16 months before the date of payment, an
income statement for that year, and statement of changes in shareholders'
equity for its last fiscal year and ELEKOM's latest available interim
financial statements, an explanation of how the accrued interest was
calculated, and certain other information. ELEKOM may elect; however, to
withhold such payment from any dissenter who was not the beneficial owner of
the shares of ELEKOM capital stock as to which dissenters' rights are asserted
before the date of first public announcement of the Merger on August 31, 1998.
Any dissenting shareholder who is dissatisfied with such payment or such offer
may, within 30 days after such payment or offer for payment, notify ELEKOM in
writing of such shareholder's estimate of fair value of his or her shares and
the amount of interest due, and demand payment thereof if:
(a) The dissenter believes that the amount paid or offered is less than
the fair value of the dissenter's shares or that the interest due is
incorrectly calculated;
(b) ELEKOM fails to make payment within 60 days after the date set for
demanding payment; or
(c) The Merger is not effected, and ELEKOM does not return the deposited
certificates or release the transfer restrictions imposed on uncertificated
shares within 60 days after the date set forth for demanding payment.
If any ELEKOM dissenting shareholder's demand for payment is not settled
within 60 days after receipt by ELEKOM of such shareholder's payment demand
(as described above), the WBCA requires that ELEKOM commence a proceeding in
the Superior Court of King County, Washington, and petition the court to
determine the fair value of the shares and accrued interest, naming all ELEKOM
dissenting shareholders whose demands remain unsettled as parties to the
proceeding. If ELEKOM does not commence such proceeding within the 60-day
period, it will pay each dissenter whose demand remains unsettled the amount
demanded. If ELEKOM commences a proceeding in timely fashion, but the court
determines that a shareholder has not complied with the requirements of the
WBCA, the shareholder shall be dismissed as a party. The court may appoint one
or
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more persons as appraisers to receive evidence and recommend the fair value of
the shares. The dissenters will be entitled to the same discovery rights as
parties in other civil actions. Each dissenter made a party to the proceeding
will be entitled to judgment for the amount, if any, by which the court finds
that the fair value of his or her shares, plus accrued interest, exceeds the
amount paid by ELEKOM.
Court costs and approval fees generally will be assessed against ELEKOM,
except that the court may assess such costs against some or all of the
dissenters to the extent that the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment. The court
may also assess the fees and expenses of counsel and experts of the respective
parties in amounts that the court finds equitable: (i) against ELEKOM, if the
court finds that it did not substantially comply with provisions of the WBCA
concerning dissenter's rights and (ii) against either the dissenter or ELEKOM,
if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith. If the court
finds that services of counsel for any dissenter were of substantial benefit
to other dissenters similarly situated, and that the fees should not be
assessed against ELEKOM, the court may award to such counsel reasonable fees
to be paid out of the amounts awarded to dissenters who benefitted from the
proceedings.
If the Merger is not effected within 60 days after the date set for
demanding payment and depositing share certificates, ELEKOM shall return the
deposited certificates and release any transfer restrictions imposed on
uncertificated shares.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employee benefits and Option Grants. Employees of ELEKOM who become
employees of Clarus CSA will be eligible to receive awards of stock options
under the Company's 1998 Stock Option Plan.
Employment Agreements. Clarus CSA will enter into an employment agreement
with Norman N. Behar pursuant to which Mr. Behar will serve as Executive Vice
President of Clarus CSA following the Effective Time and until March 31, 1999.
Clarus CSA will also enter into employment agreements with Wayne Burns, Chief
Financial Officer of ELEKOM, Ona Karasa, Vice President Development of ELEKOM
and Todd Ostrander, Vice President Marketing of ELEKOM. None of the key
executives of ELEKOM currently serve pursuant to the terms of an employment
agreement with ELEKOM.
Registration Rights Agreement. The Company has agreed to enter into a
Registration Rights Agreement with the holders of ELEKOM Preferred Stock and
Mr. Behar pursuant to which the Company will agree, subject to certain
limitations, to include the Company Common Stock owned by such Shareholders in
any future registration of the Company's securities. See--"Registration Rights
Agreement."
As of the Record Date, the directors and executive officers of ELEKOM
beneficially owned shares of the Company's Common Stock.
Acceleration Under Option Plan. Pursuant to the terms of ELEKOM's 1996 Stock
Option Plan, immediately prior to the Merger, 50% of all unvested shares
subject to option awards shall immediately become exercisable, and all
remaining unexercisable shares shall be canceled. Holders of options to
purchase ELEKOM Common Stock will be given an opportunity to exercise of such
accelerated shares, subject to consummation of the Merger, in advance of the
Closing. On the date of this prospectus, ELEKOM had issued and outstanding
shares of ELEKOM Common Stock that were issued upon exercise of
unvested option awards and are subject to repurchase. It is anticipated that,
after the acceleration of vesting in accordance with the plan, approximately
of such shares will remain subject to repurchase (assuming that the
Closing occurs on or about October , 1998). The Company currently intends to
repurchase all such unvested shares. In addition, the ELEKOM Board intends to
accelerate all of the unvested shares subject to option awards granted to
Messrs. Wayne Burns and Jonathan Lazarus prior to the Effective Time of the
Merger.
SHAREHOLDERS' VOTING AGREEMENTS
Concurrently with the execution of the Agreement, ELEKOM, the holders of
ELEKOM Preferred Stock and Messrs. Behar and Burns entered into a Voting
Agreement, pursuant to which each ELEKOM preferred
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shareholder and Messrs. Behar and Burns have agreed to vote 49% of all shares
of ELEKOM Common Stock, 100% of Series A Stock and 67% of Series B Stock that
such shareholders have the right to vote in favor of approval of the Merger
and the Agreement. Pursuant to the Voting Agreement, such shareholders have
also acknowledged the applicability of the resale restrictions imposed by Rule
145 promulgated under the Securities Act on the Company Common Stock to be
received by them in the Merger.
REGISTRATION RIGHTS AGREEMENT
To induce the holders of ELEKOM Preferred Stock and Mr. Behar to sign the
Voting Agreement, the Company has agreed to enter into a registration rights
agreement (the "Registration Rights Agreement") with such shareholders prior
to the Effective Time. The Registration Rights Agreement provides that,
subject to certain limitations, if at any time or from time to time during the
term of the Registration Rights Agreement the Company registers any of its
securities, whether for its own account or for the account of a holder or
holders of the Company securities (other than a registration relating solely
to an employee benefit plan or transaction to which Rule 145 promulgated under
the Securities Act applies), the Company will include in such registration,
and in any underwriting involved therein, the Company Common Stock to be
issued to such shareholders in connection with the Merger. The Registration
Rights Agreement will terminate on the earlier of (i) two years following the
Effective Time and (ii) such time as no ELEKOM Shareholder that is a party
thereto owns any of the Company Common Stock issued to such shareholder in
connection with the Merger. The Registration Rights Agreement also contains
usual and customary terms for such agreements.
EFFECT ON EMPLOYEES, EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
ELEKOM Employees
The Agreement provides that the Company will enter into employment
agreements with the following ELEKOM employees: Norman Behar, Wayne Burns, Ona
Karasa, and Todd Ostrander. See "Interests of Certain Persons in the Merger."
Employee Benefits
ELEKOM has agreed that, before the Merger, it will convert the ELEKOM 401(k)
Plan from a "standardized" prototype plan to a "non-standardized" prototype
plan, with terms that are substantially similar to those of the "standardized"
prototype plan as adopted by ELEKOM.
With respect to each individual who is employed by ELEKOM or any of its
subsidiaries immediately before the Effective Time and who becomes employed by
the Company or any of its subsidiaries as of the Effective Time or as the
result of the Merger ("Continuing Employees"), the Company has agreed as
follows:
Welfare Benefit Plans. The Company will terminate the group medical, dental,
vision, life insurance, supplemental life insurance, short-term disability,
long-term disability, accidental death and dismemberment and Section 125
(cafeteria) plans and all other employee benefit plans, policies, programs,
arrangements or payroll practice sponsored by ELEKOM effective December 31,
1998. As of January 1, 1999, Continuing Employees and their eligible
dependents will be eligible to participate in the group medical, dental, life
insurance, supplemental life insurance, short-term disability, long-term
disability, accidental death and dismemberment and Section 125 plans and all
other employee benefit, policy, program, arrangement or payroll practices
sponsored by the Company or its subsidiaries (the "Company Group Plans"). The
Company and its subsidiaries will waive, with respect to Continuing Employees
and their eligible dependents, any pre-existing condition limitations and
eligibility waiting periods under the Company Group Plans. The Company does
not provide vision care benefits to its employees and does not intend to
provide vision care benefits to Continuing Employees.
The Company's Group Health Plan. The amount of the annual premium for which
a Continuing Employee is responsible for paying (the "Annual Employee
Premium") for coverage of the Continuing Employee and his
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or her eligible dependents under the Company's medical plan will be determined
by the Company and the insurer or insurers under the medical plan. To the
extent that the Annual Employee Premium in effect on January 1, 1999, charged
to a Continuing Employee for coverage of the Continuing Employee and
dependents under the Company's medical plan exceeds the amount of the Annual
Employee Premium in effect on December 31, 1998, charged to the Continuing
Employee for coverage of under the ELEKOM medical plan, the Company will
increase the annual salary of the Continuing Employee, effective as of January
1, 1999, in an amount equal to the difference in the Annual Employee Premium.
401(k) Plan. The Company will merge ELEKOM's 401(k) plan into the Company's
401(k) plan effective December 31, 1998. The account of each Continuing
Employee participating in ELEKOM's 401(k) plan will become fully vested at the
Effective Time. Each Continuing Employee who was a participant in ELEKOM's
401(k) plan on December 31, 1998, will be eligible to participate in the
Company's 401(k) plan on January 1, 1999. For purposes of vesting, each
Continuing Employee's service with ELEKOM and its subsidiaries and affiliates
before the Effective Time will be treated as service with the Company and its
subsidiaries.
Any new employee hired by Clarus CSA after the Effective Time but before
January 1, 1999 will be eligible to participate in the Company Group Plans and
the Company's 401(k) plan in accordance with the terms of those plans and will
not be eligible to participate in ELEKOM's group plans or 401(k) plan.
Stock Options
The Agreement provides that there will be no options to acquire ELEKOM stock
outstanding at Closing. Pursuant to the terms of ELEKOM's 1996 Stock Option
Plan, immediately prior to the Merger, 50% of all unvested shares subject to
option awards shall immediately become exercisable, and all remaining
unexercisable shares shall be canceled. Holders of options to purchase ELEKOM
Common Stock will be given an opportunity to exercise of such accelerated
shares, subject to consummation of the Merger in advance of the Closing.
ELEKOM currently has issued and outstanding shares of ELEKOM Common
Stock that were issued upon exercise of unvested option awards and are subject
to repurchase. It is anticipated that, after the acceleration of vesting in
accordance with the plan, approximately of such shares will remain
subject to repurchase (assuming that the Closing occurs on or about October
1998). The Company currently intends to repurchase all such unvested shares.
Warrants
In connection with a recent bank financing, ELEKOM issued to SVB the Warrant
to purchase up to 14,676 shares of Series B Stock in the event that ELEKOM
draws on its line of credit with SVB. Currently, ELEKOM has no outstanding
borrowings under the line of credit, so the Warrant has not been issued. If
ELEKOM issues the Warant and SVB does not exercise the Warrant prior to the
Closing Date, then, at the election of SVB, ELEKOM may be required to purchase
the unexercised portion of the Warrant for cash equal to (i) the fair market
value of any consideration that would have been received by SVB in
consideration of the shares SVB would have received if it had exercised the
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Merger, minus (ii) the
aggregate exercise price of the shares subject to the Warrant.
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COMPARATIVE MARKET PRICES AND DIVIDENDS
THE COMPANY'S MARKET PRICES
The Company Common Stock has been listed on the Nasdaq/NMS under the symbol
"SQLF" from May 26, 1998, the effective date of the Company's initial public
offering. On August 28, 1998, the Company changed its name to Clarus
Corporation and effective September 2, 1998 changed its Nasdaq/NMS symbol from
"SQLF" to "CLRS." Prior to May 26, 1998, there was no established trading
market for the Company Common Stock. The following table sets forth, for the
indicated periods, the high and low closing sales prices for the Company
Common Stock as reported by the Nasdaq/NMS for quarters since May 26, 1998.
<TABLE>
<CAPTION>
SALES PRICE
-------------
CALENDAR PERIOD HIGH LOW
--------------- ------ ------
<S> <C> <C>
1998
Second Quarter (beginning May 27, 1998).................. $10.00 $7.625
Third Quarter (through September , 1998)............... $ 9.25 $
</TABLE>
ELEKOM STOCK PRICES
ELEKOM is privately held, and there is no public market of shares of ELEKOM
Stock. As a result, ELEKOM Stock is not quoted on Nasdaq/NMS or any stock
exchange.
RECENT PRICES
The last sale price of the Company Common Stock on August 31, 1998, the last
trading day before public announcement of the proposed Merger as reported on
the Nasdaq/NMS was $5.31. On October , 1998, the last day on which the
Company Common Stock was traded prior to the mailing of this Proxy
Statement/Prospectus, the last reported sales price of the Company Common
Stock as reported on the Nasdaq/NMS was $ per share. ELEKOM
Shareholders are urged to obtain current market quotations.
DIVIDENDS
The Company has not paid any dividends to its stockholders. The Company
currently anticipates that it will retain all future earnings for use in its
business and does not anticipate that it will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board and will depend upon, among other things,
the Company's results of operations, capital requirements, general business
conditions, contractual restrictions on payment of dividends, if any, legal
and regulatory restrictions on payment of dividends, and other factors the
Company's Board deems relevant. In addition, the Company's line of credit
prohibits the payment of dividends without prior lender approval. ELEKOM has
not paid its shareholders any cash dividends and does not anticipate paying
any dividends in the foreseeable future.
STOCKHOLDERS OF RECORD
As of the Record Date, there were approximately holders of record of the
Company's Common Stock and holders of record of ELEKOM Stock.
The number of shares of Company Common Stock owned by beneficial owners of
more than 5% of the Company Common Stock, the Company's Board and all
directors and officers of the Company as a group will not change following the
Merger. Each such person's percentage beneficial ownership, however, will be
deceased. See "Company Principal Stockholders." The Company has no present
commitment to such persons with respect to the issuance of shares of Company
Common Stock other than issuances pursuant to the exercise of stock options.
55
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed combined balance sheet as of
June 30, 1998, was prepared as if the Merger occurred on such date. The
following unaudited condensed combined statements of operations give effect to
the Merger as of the beginning of the periods presented. The unaudited pro
forma condensed combined statements of operations do not purport to represent
what the Company's results of operations actually would have been if the
Merger had occurred as of such date or what such results will be for any
future periods.
The unaudited pro forma condensed combined financial statements are derived
from the historical financial statements of the Company and ELEKOM and the
assumptions and adjustments described in the accompanying notes. The Company
and ELEKOM believe that all adjustments necessary to present fairly such
unaudited financial information have been made. The unaudited pro forma
financial data should be read in conjunction with the consolidated financial
statements and the accompanying notes thereto of the Company and ELEKOM
appearing elsewhere in the Proxy Statement/Prospectus. The unaudited pro forma
condensed consolidated financial statements do not reflect any cost savings or
other economic efficiencies resulting from the Merger.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO
ASSETS COMPANY ELEKOM ADJUSTMENTS FORMA
------ ------- ------- ----------- -------
<S> <C> <C> <C> <C>
Current assets:
Cash..................................... $26,090 $ 1,467 $(8,700)(a) $18,857
Accounts receivable, net................. 5,818 114 5,932
Prepaid and other current assets......... 354 1 355
------- ------- ------- -------
Total current assets................. 32,262 1,582 (8,700) 25,144
Property and equipment, net................ 2,069 477 2,546
Other assets:
Intangible assets, net................... 5,508 -0- 1,584 (b) 7,092
Acquired in process research and
development............................. -0- -0- 14,000 (b) -0-
(14,000)(b)
Deposits and other long-term assets...... 186 40 226
------- ------- ------- -------
Total assets......................... $40,025 $ 2,099 $(7,116) $35,008
======= ======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Note payable............................. $ 969 $ -0- $ $ 969
Accounts payable and accrued liabilities. 5,062 662 5,724
Deferred revenue......................... 5,878 180 6,058
Current maturities of long-term debt..... 264 116 380
------- ------- ------- -------
Total current liabilities............ 12,173 958 13,131
Noncurrent liabilities:
Deferred revenue......................... 3,355 -0- 3,355
Long-term debt, net of current
maturities.............................. 375 24 399
Other non-current liabilities............ 65 -0- 65
------- ------- ------- -------
Total liabilities.................... 15,968 982 16,950
Stockholders' equity:
Convertible preferred stock.............. -0- 52 (52)(c) -0-
Common stock............................. 1 9 1 (d) 2
(9)(c)
Additional paid in capital............... 51,354 11,124 8,000 (d) 59,354
(11,124)(c)
Accumulated deficit...................... (28,058) (10,068) (14,000)(b) (42,058)
10,068 (c)
Warrants................................. 1,440 -0- 1,440
Less treasury stock, at cost............. (2) -0- (2)
Deferred compensation.................... (678) -0- (678)
------- ------- ------- -------
Total stockholders' equity........... 24,057 1,117 (7,116) 18,058
------- ------- ------- -------
Total liabilities and stockholders'
equity.............................. $40,025 $ 2,099 $(7,116) $35,008
======= ======= ======= =======
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
56
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
COMPANY ELEKOM ADJUSTMENTS FORMA
------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees..................... $13,506 $ -0- $ $ 13,506
Services fees.................... 7,786 17 7,803
Maintenance fees................. 4,696 -0- 4,696
------- --------- ------- --------
Total revenues................. 25,988 17 26,005
Cost of revenues:
License fees..................... 1,205 -0- 1,205
Services fees.................... 5,339 13 5,352
Maintenance fees................. 1,973 -0- 1,973
------- --------- ------- --------
Total cost of revenues......... 8,517 13 8,530
Operating expenses:
Research and development......... 6,691 1,051 7,742
Sales and marketing.............. 9,515 1,388 10,903
General and administrative....... 3,159 1,955 5,114
Depreciation..................... 844 204 1,048
Amortization..................... 562 -0- 250 (e) 812
Non-cash compensation............ 58 -0- 58
------- --------- ------- --------
Total operating expenses....... 20,829 4,598 250 25,677
------- --------- ------- --------
Operating loss..................... (3,358) (4,594) (250) (8,202)
Interest income.................... 35 16 (51)(f) -0-
Interest expense................... 309 617 630 (g) 1,556
Minority interest.................. 478 -0- 478
------- --------- ------- --------
Net loss........................... $(4,110) $ (5,195) $ (931) $(10,236)
======= ========= ======= ========
Basic and diluted net loss per
share............................. $ (2.97) $(103,892) $ (3.74)
======= ========= ======= ========
Weighted average common shares
outstanding....................... 1,386 50 1,350 (d) 2,736
======= ========= ======= ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
COMPANY ELEKOM ADJUSTMENTS FORMA
------- ------- ----------- -------
<S> <C> <C> <C> <C>
Revenues:
License fees......................... $ 8,443 $ 329 $(150)(h) $ 8,622
Services fees........................ 6,890 9 6,899
Maintenance fees..................... 3,414 38 3,452
------- ------- ----- -------
Total revenues..................... 18,747 376 (150) 18,973
Cost of revenues:
License fees......................... 565 1 566
Services fees........................ 4,507 75 4,582
Maintenance fees..................... 1,516 34 1,550
------- ------- ----- -------
Total cost of revenues............. 6,588 110 6,698
Operating expenses:
Research and development............. 2,529 912 3,441
Sales and marketing.................. 5,391 451 5,842
General and administrative........... 2,548 468 3,016
Depreciation......................... 546 92 638
Amortization......................... 383 -0- 140 (g) 523
Non-cash compensation................ 803 -0- 803
------- ------- ----- -------
Total operating expenses........... 12,200 1,923 140 14,263
------- ------- ----- -------
Operating loss......................... (41) (1,657) (290) (1,988)
Interest income........................ 159 46 150 (f) 55
Interest expense....................... 121 -0- 90 (g) 211
Minority interest...................... 36 -0- 36
------- ------- ----- -------
Net loss............................... $ (39) $(1,611) $(530) $(2,180)
======= ======= ===== =======
Basic and diluted net loss per share... $ (0.01) $ (2.55) $ (0.50)
======= ======= ===== =======
Weighted average common shares
outstanding........................... 3,026 631 1,350 (d) 4,376
======= ======= ===== =======
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The pro forma condensed combined balance sheet assumes that the Merger took
place June 30, 1998, and combines ELEKOM's unaudited June 30, 1998 condensed
balance sheet and the Company's unaudited June 30, 1998 consolidated condensed
balance sheet.
The pro forma combined statements of operations assume the Merger took place
as of the beginning of the periods presented and combine ELEKOM's unaudited
statements of operations for the year and six month period ended December 31,
1997 and June 30, 1998, respectively, and the Company's consolidated statement
of operations for the year and six month period ended December 31, 1997 and
June 30, 1998, respectively.
All material transactions between ELEKOM and the Company during the periods
presented have been eliminated as a pro forma adjustment.
There are no material differences between the accounting policies of ELEKOM
and the Company.
The pro forma combined provision for income taxes may not represent the
amounts that would have resulted had ELEKOM and the Company filed consolidated
income tax returns during the periods presented.
NOTE 2. PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on the Company's estimates of the value
of the tangible and identifiable intangible assets acquired. A valuation of
the tangible and identifiable intangible assets acquired has been conducted by
an independent third-party appraisal company.
As a part of the proposed Merger, the Company has committed to fund the
operations of ELEKOM for each two week period beginning October 1, 1998, if
the merger is not completed by that date. Should the agreement not be
completed by that date, bi-weekly funding of $250,000 will be provided until
the earlier of the completion of the Merger or November 15, 1998. The bi-
weekly funding would be considered additional purchase consideration when the
Merger is completed. Furthermore, the Company estimates that ELEKOM's working
capital may be substantially less at Closing compared to ELEKOM's historical
working capital included in the accompanying unaudited pro forma condensed
combined balance sheet as of June 30, 1998. An increase in the purchase
consideration and/or a decrease in the working capital would result in a
reallocation of the purchase price and would result in increases in values
assigned to identifiable intangible assets compared to those presented in the
accompanying pro forma condensed combined financial statements as of June 30,
1998.
Under purchase accounting, the total acquisition cost will be allocated to
ELEKOM's assets and liabilities based on their relative fair values. The final
allocations may be different from the results reflected herein. The Company's
analysis, based on an independent appraisal, resulted in an allocation of
$14.0 million to in-process acquired research and development which, under
generally accepted accounting principles, will be expensed immediately after
the Merger is completed. The accompanying pro forma condensed combined
statements of operations exclude the effects of the charge due to its
nonrecurring nature.
(a) Represents the cash consideration of $8.0 million and estimated
acquisition expenses of approximately $700,000 related to the Merger.
(b) Represents estimated valuation of tangible and intangible assets,
including purchased in-process technology, resulting from the preliminary
allocation of the purchase price. Valuation of the intangible assets
acquired was conducted by an independent third-party appraisal company and
consists of purchased in-process research and development, trademarks and
trade-names, skilled workforce and favorable lease terms. In the
accompanying unaudited pro forma condensed combined financial statements,
the purchase price exceeded amounts allocated to tangible and intangible
assets acquired less liabilities assumed by approximately $1.0 million.
59
<PAGE>
The table below is a summary of the estimated amounts allocated to the
long-lived assets acquired (dollars in thousands):
<TABLE>
<CAPTION>
VALUE ASSIGNED
TO ASSETS
BALANCE SHEET CATEGORY ACQUIRED
<S> <C>
Property and equipment $ 477
Purchased in-process research and development 14,000
Intangible assets:
Market presence and recognition 979
Skilled workforce 520
Favorable lease terms 55
Trademarks and trade-names 30
</TABLE>
The Merger will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." The
intangible assets of approximately $1.6 million noted above will be
amortized over periods ranging from 3 months to 10 years. Based on the
independent third-party appraisal, approximately $14.0 million of the
purchase price represents purchased in-process technology that has not yet
reached technological feasibility and has no alternative future use. This
amount will be expensed as a non-recurring, non-tax deductible charge upon
consummation of the acquisition. This amount has been reflected as a
reduction to stockholders' equity and has not been included in the pro
forma combined statements of operations due to its non-recurring nature.
The existence of purchased research and development was determined by a
third-party independent appraisal identifying computer software code under
development by ELEKOM since 1995. The value was determined by estimating
the remaining costs to develop the purchased in-process technology into a
commercially viable product, estimating the resulting net cash flows from
the project and discounting the net cash flows back to its present value.
The nature of the efforts to develop the purchased research and
development into a commercially viable product principally relate to the
completion of all planning, designing, programming and testing activities
that are necessary to establish that the product can be produced to meet
its design specifications including functions, features and technical
performance requirements. The efforts to develop the purchased in-process
technology also include determining the compatibility and interoperability
with other applications. The estimated remaining costs to be incurred to
develop the purchased in-process research and development into a
commercially viable product is approximately $2.0 million.
The resulting net cash flows from the project is based on management's
estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, and income taxes from the
project. These estimates are based on the following assumptions.
. The estimated revenues project a compounded annual revenue growth rate of
approximately 48% from 1999-2002. Estimated revenue for 1999 is projected
to be $5.3 million, compared to virtually no revenue in 1998. Estimated
total revenues from the purchased research and development peaks in the
year 2002 and declines rapidly in 2003-2005 as other new products are
expected to enter the market. These projections are based on management's
estimates of market size and growth, expected trends in technology and
the nature and expected timing of new product introductions by ELEKOM and
its competitors. These estimates also include growth related to the
Company utilizing certain ELEKOM technologies in conjunction with the
Company's products, marketing and distributing the resulting products
through the Company's direct sales force enhancing the market's response
to ELEKOM's products by providing incremental financial support and
stability.
. The estimated cost of sales as a percentage of revenues is expected to be
5%. This percentage is somewhat lower than the annual cost of license
fees percentage for the Company due to the lower royalty rates on certain
third party software used by ELEKOM compared to the Company's third party
software.
60
<PAGE>
. The estimated research and development expenses were based on the
estimated time associated with the remaining cost to develop the in-
process research and development. Research and development expenses
represent 33% of revenue in 1999 due to the anticipated release of the
product in 1999.
. Sales and marketing and general and administrative expenses in the early
years are expected to more closely approximate the 1998 expense structure
of the Company. Sales and marketing expenses are expected to benefit from
the savings as a result of the distribution of the ELEKOM product through
the Company's direct sales force as well as through consolidated
marketing and advertising campaigns.
. Income tax expense is estimated using a 38% tax rate, consistent with the
Company's anticipated tax rate.
Discounting the net cash flows back to their present values is based on
the present value discount rate. The present value discount rate used in
the analysis represents the weighted average cost of capital (WACC) for
ELEKOM plus 2%. The WACC calculation produces the average required rate of
return of an investment in an operating enterprise, based on various
required rates of return from investment in various areas of that
enterprise. The WACC assumed for ELEKOM, as a corporate business
enterprise, is approximately 25%. Therefore, the discount rate used in
discounting the net cash flows from purchased in-process technology is
approximately 27%. This discount rate is higher than the WACC due to the
inherent uncertainties in the estimates described above including the
uncertainty surrounding the successful development of the purchased in-
process technology, the useful life of such technology, the profitability
levels of such technology and the uncertainty of technological advances
that are unknown at this time.
If this project is not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may
become impaired. The Company expects to begin to benefit from the purchased
in-process technology in the second quarter 1999.
Intangible assets of $1.6 million are comprised of market presence and
recognition of approximately $1.0 million, skilled workforce of $520,000,
favorable lease terms of $55,000, and trademarks and trade-names of
$30,000, which have estimated useful lives of 10 years, 6 years, 2 years
and one month, respectively.
The estimated annual amortization charge to operations related to
intangible assets approximates $220,000. This charge is reflected in the
pro forma combined statement of operations.
(c) Represents adjustments to reflect the elimination of convertible
preferred stock, common stock, additional paid in capital and accumulated
deficit account balances of ELEKOM.
(d) Represents the issuance of 1,350,000 shares of the Company's common
stock valued at $5.93, the minimum Closing Price of the Company's common
stock for which 1,350,000 shares of common stock will be issued pursuant to
the Agreement, as consideration for the Merger.
(e) Adjustment to reflect the amortization expense of identifiable
intangible assets acquired as a result of the Merger. The acquired
identifiable intangible assets will be amortized over periods ranging from
3 months to 10 years.
(f) Adjustment to eliminate certain interest income as available cash
balances would have provided funding for the cash portion of the purchase
consideration.
(g) Adjustment to interest expense for incremental debt required to fund
the cash portion of the purchase consideration in excess of the average
cash balances available for the periods presented.
(h) Adjustment to eliminate revenue recognized by ELEKOM for business
transacted between the Company and ELEKOM.
61
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The selected combined financial data of the Company set forth below should
be read in conjunction with the Consolidated Financial Statements of the
Company, including the Notes thereto, and "Company Management's Discussion and
Analysis of Financial Condition and Results of Operations." The statement of
operations data for the years ended December 31, 1993, 1994, 1995, 1996 and
1997 and the balance sheet data as of December 31, 1993, 1994, 1995, 1996 and
1997 have been derived from, and are qualified by reference to, the Company's
financial statements audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data for the six months ended June
30, 1997 and 1998 and the balance sheet data as of June 30, 1998 have been
derived from the unaudited financial statements of the Company, but include
all adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the results of
operations and financial position for the periods presented. The results of
operations for the six months ended June 30, 1998, may not be indicative of
the operating results that may be expected for the Company's fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees........... $ 715 $ 2,568 $ 5,232 $ 6,425 $13,506 $ 4,728 $ 8,443
Services fees.......... 245 836 1,737 3,984 7,786 3,276 6,890
Maintenance fees....... 94 417 1,221 2,647 4,696 1,917 3,414
------- ------- ------- ------- ------- ------- -------
Total revenues....... 1,054 3,821 8,190 13,056 25,988 9,921 18,747
Cost of revenues:
License fees........... 12 98 291 416 1,205 378 565
Services fees.......... 225 860 1,421 2,904 5,338 2,322 4,507
Maintenance fees....... 189 277 655 1,350 1,973 850 1,516
------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 426 1,235 2,367 4,670 8,516 3,550 6,588
Operating expenses:
Research and
development........... 1,364 2,130 3,882 5,360 6,690 3,824 2,529
Sales and marketing.... 541 2,718 6,636 7,191 9,515 4,604 5,391
General and
administrative........ 866 2,733 2,923 2,368 3,161 1,349 2,548
Depreciation and
amortization.......... 13 162 369 1,125 1,406 698 929
Non-cash compensation.. -0- -0- -0- -0- 58 23 803
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 2,784 7,743 13,810 16,044 20,830 10,498 12,200
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,156) (5,157) (7,987) (7,658) (3,358) (4,127) (41)
Interest expense
(income), net.......... 14 (17) 2 6 274 91 (38)
Minority interest....... -0- -0- (60) (215) (478) (189) (36)
------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,170) $(5,140) $(8,049) $(7,879) $(4,110) $(4,407) $ (39)
======= ======= ======= ======= ======= ======= =======
Basic and diluted net
loss per share......... $ (2.23) $ (5.65) $ (6.19) $ (5.74) $ (2.97) $ (3.19) $ (0.01)
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding..... 975 910 1,300 1,373 1,386 1,382 3,026
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,488 $ 492 $ 3,333 $ 3,279 $ 7,213 $26,090
Working capital
(deficit).............. 1,178 (1,424) (2,555) (3,422) (453) 20,089
Total assets............ 1,981 1,506 5,865 8,525 14,681 40,025
Long-term debt, net of
current portion........ 190 143 93 1,093 497 375
Total stockholders'
(deficit) equity....... (2,961) (8,732) (15,927) (23,837) (27,910) 24,057
</TABLE>
62
<PAGE>
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in November 1991 to develop, market, license and
support financial applications. In 1997, the Company introduced a series of
additional modules and product enhancements. Specifically, in the first
quarter of 1997, the Company introduced its human resource applications, which
included the Personnel, Benefits and Payroll modules. In 1997, the Company
introduced its Financial Statement Accelerator module, a distributed
management reporting solution, and a 32-bit version of its financial
applications (the "Denver Release"), which included two new modules,
Purchasing Control and Solution/Graphical Architect. Total license revenues
from these new products in 1997 were $5.7 million. In September 1998 the
Company introduced its CLARUS Corporate Service Applications. The Company
currently markets its products in the United States and Canada through its
direct sales force and has licensed its client/server applications to more
than 225 customers in a variety of industry segments, including insurance,
financial services, communications, retail, printing and publishing,
transportation and manufacturing. The Company also offers fee-based
implementation, training and upgrade services and ongoing maintenance and
support of its products for a twelve-month renewable term.
On May 26, 1998, the Company completed an initial public offering of its
Common Stock in which it sold 2.5 million shares for approximately $22.0
million after deducting offering expenses including underwriting discounts.
Through 1997 the Company recognized revenue in compliance with Statement of
Position ("SOP") 91-1 "Software Revenue Recognition." Effective January 1,
1998, the Company adopted SOP 97-2 "Software Revenue Recognition." The
adoption of this SOP did have a significant impact on the Company's
consolidated financial statements. Revenues from software licenses have been
recognized upon delivery of the product if there are no significant
obligations on the part of the Company following delivery and collection of
the related receivable, if any, is deemed probable by management. Revenues
from service fees relate to implementation, training and upgrade services
performed by the Company and have been recognized as the services are
performed. Maintenance fees relate to customer maintenance and support and
have been recognized ratably over the term of the software support agreement,
which is typically 12 months. A majority of the Company's customers renew the
maintenance and support agreements after the initial term. Revenues that have
been prepaid or invoiced, but that do not yet qualify for recognition under
the Company's policies are reflected as deferred revenues.
Cost of license fees include royalties and software duplication and
distribution costs. These costs are recognized by the Company as the
applications are shipped. Cost of services fees include personnel and related
costs incurred to provide implementation, training and upgrade services to
customers. These services were provided by the SQL Financial Services, L.L.C.
(the "Services Subsidiary") Services Subsidiary beginning in March 1995 and
prior to that time by third-party contractors. These costs are recognized as
the services are performed. Cost of maintenance fees include personnel and
related costs incurred to provide the ongoing support and maintenance of the
Company's products. These costs are recognized as incurred.
Research and development expenses consist primarily of personnel costs and
subcontractor fees and amortization of acquired software. The Company accounts
for software development costs under Statement of Financial Accounting
Standards ("SFAS") No. 86 "Accounting For the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." Research and development expenses are
charged to expense as incurred until technological feasibility is established,
after which remaining costs are capitalized. The Company defines technological
feasibility as the point in time at which the Company has a working model of
the related product. Historically, the costs incurred during the period
between the achievement of technological feasibility and the point at which
the product is available for general release to customers have not been
material. Therefore, the Company has charged all internal software development
costs to expense as incurred.
63
<PAGE>
Sales and marketing expenses consist primarily of salaries, commissions and
benefits to sales and marketing personnel, travel, trade show participation,
public relations and other promotional expenses. General and administrative
expenses consist primarily of salaries for financial, administrative and
management personnel and related travel expenses, as well as occupancy,
equipment and other administrative costs.
The Company has net NOLs of approximately $25.6 million at June 30, 1998,
which begin expiring in 2007. The Company established a valuation allowance
equal to the NOLs and all other deferred tax assets. The benefits from these
deferred tax assets will be recorded when realized which will reduce the
Company's effective tax rate for future taxable income, if any. Due to changes
in the Company's ownership structure, the Company's use of its NOLs as of May
26, 1998, of approximately $26.0 million will be limited to approximately $3.8
million in any given year to offset future taxes. If the Company does not
realize taxable income in excess of the limitation in future years, certain
NOLs will be unrealizable.
AFFILIATE RELATIONSHIPS
In March 1995, the Company and Tech Ventures, which is controlled by Joseph
S. McCall, formed the Services Subsidiary to provide implementation, training
and upgrade services exclusively for the Company's customers. On February 5,
1998, Tech Ventures sold its 20.0% interest in the Services Subsidiary to the
Company in exchange for 225,000 shares of the Company's Common Stock, a
warrant to purchase an additional 300,000 shares of Common Stock at a price of
$3.67 per share, and a non-interest bearing promissory note in the principal
amount of $1.1 million. The purchase of the 20.0% of the Services Subsidiary
was accounted for as a purchase and will result in goodwill in the amount of
$4.2 million that is being amortized over 15 years.
In the second quarter of 1998, the Company accelerated the vesting of
certain employee stock options issued in the first quarter of 1998, for
283,000 shares of Common Stock, at an exercise price of between $3.67 per
share and $8.00 per share. As a result of this accelerated vesting, the
Company recognized in the second quarter of 1998 a noncash, nonrecurring
charge of approximately $705,000 representing the remaining unamortized
deferred compensation previously recorded on these options.
SUMMARY OF THE EFFECTS OF THE MERGER
The Company anticipates the integration and consolidation of ELEKOM will
require substantial management, financial and other resources. The acquisition
of ELEKOM will involve a number of significant risks including potential
difficulties in assimilating the technologies, services and products of ELEKOM
or in achieving the expected synergies and cost reductions, as well as other
unanticipated risks and uncertainties. As a result, there can be no assurance
as to the extent to which the anticipated benefit with respect to the Merger
will be realized, or the timing of any such realization. See "Risk Factors--
Transaction Expenses; Risk of Inability to Integrate Operations."
The Merger is expected to lower the net earnings of the Company through 1998
as a result of a substantial increase in amortization of intangible and other
long-lived assets and various other adjustments resulting from purchase
accounting. The 1997 unaudited pro forma condensed combined net loss before
nonrecurring charges would have been approximately $10.2 million, a net loss
which is approximately 149% greater than the Company's actual historical
results for 1997. See "Unaudited Pro Forma Financial Statements." The Company
believes that earnings beyond 1998 should improve as a result of the web-
based, electronic procurement market presence and recognition afforded the
Company as a result of the completion of the Merger. No assurances can be
given as to the amount or timing of such benefit that may actually be realized
or that any such growth may occur. See "Risk Factors--Ability to Successfully
Integrate ELEKOM."
The Merger will be accounted for as a purchase. Under purchase accounting,
the total purchase cost and fair value of liabilities assumed will be
allocated to the tangible and intangible assets of ELEKOM based upon their
respective fair values as of the Closing. On a pro forma basis as of June 30,
1998, intangible assets of $1.6 million are comprised of market presence and
recognition of approximately $1.0 million, skilled workforce of
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$520,000, favorable lease terms of $55,000 and trademarks and tradenames of
$30,000. On a pro forma basis as of June 30, 1998, the Company allocated $14.0
million to in-process research and development which the Company anticipates
recording as a nonrecurring charge in the fourth quarter of 1998.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ----------------- -----------------
1994 1995 1996 1997 1997 1998 1997 1998
------ ----- ----- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees........... 67.2% 63.9% 49.2% 52.0% 51.0% 46.0% 47.7% 45.0%
Services fees.......... 21.9 21.2 30.5 30.0 30.4 36.7 33.0 36.8
Maintenance fees....... 10.9 14.9 20.3 18.0 18.6 17.3 19.3 18.2
------ ----- ----- ----- ------- ------- ------- -------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ----- ----- ----- ------- ------- ------- -------
Cost of revenues:
License fees........... 2.6 3.6 3.2 4.6 3.7 2.9 3.8 3.0
Services fees.......... 22.5 17.3 22.3 20.5 21.8 22.7 23.4 24.0
Maintenance fees....... 7.2 8.0 10.3 7.6 7.7 8.0 8.6 8.1
------ ----- ----- ----- ------- ------- ------- -------
Total cost of
revenues............ 32.3 28.9 35.8 32.7 33.2 33.6 35.8 35.1
------ ----- ----- ----- ------- ------- ------- -------
Operating expenses:
Research and
development........... 55.7 47.4 41.1 25.7 36.9 13.2 38.6 13.5
Sales and marketing.... 71.1 81.0 55.1 36.6 43.1 27.7 46.4 28.7
General and
administrative........ 71.5 35.7 18.1 12.3 12.8 11.4 13.6 13.6
Depreciation and
amortization ......... 4.3 4.5 8.6 5.4 6.5 5.0 7.0 5.0
Non-cash compensation.. 0.0 0.0 0.0 0.2 0.2 7.2 0.2 4.3
------ ----- ----- ----- ------- ------- ------- -------
Total operating
expenses............ 202.6 168.6 122.9 80.2 99.5 64.5 105.8 65.1
------ ----- ----- ----- ------- ------- ------- -------
Operating income (loss). (134.9) (97.5) (58.7) (12.9) (32.7) 1.9 (41.6) (0.2)
Interest (income)
expense, net........... (0.4) 0.0 0.0 1.1 1.6 0.6 0.9 (0.2)
Minority interest....... 0.0 (0.8) (1.6) (1.8) 1.7 0.0 (1.9) ( 0.2)
------ ----- ----- ----- ------- ------- ------- -------
Net income (loss)....... (134.5)% (98.3)% (60.3)% (15.8)% (36.0)% 2.5% (44.4)% (0.2)%
====== ===== ===== ===== ======= ======= ======= =======
Gross margin on license
fees................... 96.2% 94.4% 93.5% 91.1% 92.8% 93.7% 92.0% 93.3%
Gross margin on services
fees................... (2.9) 18.2 27.1 31.4 28.2 38.1 29.1 34.6
Gross margin on
maintenance fees....... 33.6 46.4 49.0 58.0 58.6 54.0 55.7 55.6
</TABLE>
QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO QUARTER AND SIX
MONTHS ENDED JUNE 30, 1997
REVENUES
Total Revenues. For the quarter ended June 30, 1998, total revenues
increased 91.2% to $10.5 million from $5.5 million in the comparable period in
1997. For the six months ended June 30, 1998, total revenues increased 89.0%
to $18.7 million from $9.9 million in the comparable period in 1997. This
increase was attributable to substantial increases in license fees, services
fees and maintenance fees.
License Fees. License fees increased 72.5% to $4.8 million, or 46.0% of
total revenues, in the quarter ended June 30, 1998, from $2.8 million, or
51.0% of total revenues, in the comparable period in 1997. License fees
increased 78.6% to $8.4 million, or 45.0% of total revenues, in the six months
ended June 30, 1998, from $4.7 million, or 47.7% of total revenues, in the
comparable period in 1997. These increases in license fees resulted primarily
from an increase in the number of licenses sold, reflecting a continuing
increase in the demand for the Company's existing and new applications, and to
a lesser extent, to an increase in the average customer transaction size.
Services Fees. Services fees increased 130.5% to $3.8 million, or 36.7% of
total revenues, in the quarter ended June 30, 1998, from $1.7 million, or
30.4% of total revenues, in the comparable period in 1997. Services fees
increased 110.3% to $6.9 million, or 36.8% of total revenues, in the six
months ended June 30, 1998, from
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$3.3 million, or 33.0% of total revenues, in the comparable period in 1997.
The increase in services fees was primarily due to increased demand for
professional services associated with the increase in the number of licenses
sold.
Maintenance Fees. Maintenance fees increased 77.8% to $1.8 million, or 17.3%
of total revenues, in the quarter ended June 30, 1998, from $1.0 million, or
18.6% of total revenues, in the comparable period in 1997. Maintenance fees
increased 78.1% to $3.4 million, or 18.2% of total revenues in the six months
ended June 30, 1998, from $1.9 million or 19.3% of total revenues in the
comparable period in 1997. The increase in maintenance fees was primarily due
to the signing of license agreements with new customers and the renewal of
maintenance contracts with existing customers.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues increased 93.5% to $3.5 million, or
33.6% of total revenues, in the quarter ended June 30, 1998, from $1.8
million, or 33.2% of total revenues, in the comparable period in 1997. Cost of
revenues increased 85.6% to $6.6 million, or 35.1% of total revenues, in the
six months ended June 30, 1998, from $3.5 million, or 35.8% of total revenues,
in the comparable period in 1997. The increase in the cost of revenues was
primarily due to an increase in personnel and related expenses and increased
royalty expenses for the respective periods.
Cost of License Fees. Cost of license fees increased 52.5% to $305,000, or
6.3% of total license fees, in the quarter ended June 30, 1998, compared to
$200,000, or 7.2% of total license fees, in the comparable period in 1997.
Cost of license fees increased 49.5% to $565,000, or 6.7% of total license
fees, in the six months ended June 30, 1998, compared to $378,000, or 8.0% of
total license fees, in the comparable period in 1997. The increases in the
cost of license fees were primarily attributable to increases in the sale of
third-party software products distributed by the Company resulting from
increased sales volumes. The decrease as a percentage of total license fees is
primarily attributable to the expiration of certain obligations under royalty
agreements for third party software.
Cost of Services Fees. The cost of services fees increased 98.8% to $2.4
million or 61.9% of total services fees, in the quarter ended June 30, 1998,
compared to $1.2 million, or 71.8% of total services fees, in the comparable
period in 1997. Cost of services fees increased 94.1% to $4.5 million, or
65.4% of total services fees, in the six months ended June 30, 1998, compared
to $2.3 million, or 70.9% of total services fees, in the comparable period in
1997. The increase in the cost of services fees was primarily attributable to
an increase in the personnel and related costs to provide implementation,
training and upgrade services. The decreases in cost of services fees as a
percentage of revenue for the quarter and six months ended June 30, 1998, are
primarily due to increased hourly rates charges combined with increased
utilization of services personnel.
Cost of Maintenance Fees. Cost of maintenance fees increased 97.9% to
$835,000, or 46.0% of total maintenance fees, in the quarter ended June 30,
1998, compared to $422,000, or 41.4% of total maintenance fees, in the
comparable period in 1997. Cost of maintenance fees increased 78.4% to $1.5
million, or 44.4% of total maintenance fees, in the six months ended June 30,
1998, compared to $850,000, or 44.3% of total maintenance fees, in the
comparable period in 1997. The increase in the cost of maintenance fees was
primarily due to an increase in personnel and related costs required to
provide support and maintenance. Cost of maintenance fees as a percentage of
total maintenance fees decreased primarily due to more productive use of
personnel to support the maintenance customer base.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 31.5% to $1.4 million, or 13.2%
of total revenues, in the quarter ended June 30, 1998, from $2.0 million, or
36.9% of total revenues, in the comparable period in 1997. Research and
development expenses decreased 33.9% to $2.5 million, or 13.5% of total
revenues, in the six months ended June 30, 1998 from $3.8 million, or 38.6% of
total revenues, in the comparable period in 1997. Research and development
expenses decreased primarily due to decreased personnel and contractor fees
related
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<PAGE>
to the effort required in 1997 to develop the Denver Release, which was
substantially completed by September 1997. The Company has continued to reduce
third-party consultant costs and its development personnel costs have reduced
subsequent to the completion of the Denver Release. The decrease in research
and development as a percentage of revenue for the periods ended June 30,
1998, compared to the periods ended June 30, 1997, is primarily due to the
completion of the Denver Release, coupled with the economies of scale realized
through the growth in the Company's revenue. The Company intends to continue
to devote substantial resources toward research and development efforts.
SALES AND MARKETING
Sales and marketing expenses increased 22.9% to $2.9 million, or 27.7% of
total revenues, in the quarter ended June 30, 1998, from $2.4 million, or
43.1% of total revenues, in the comparable period in 1997. Sales and marketing
expenses increased 17.1% to $5.4 million, or 28.7% of total revenues, in the
six months ended June 30, 1998, from $4.6 million, or 46.4% of total revenues,
in the comparable period in 1997. The increase in expenses was primarily
attributable to the costs associated with additional sales and marketing
personnel and promotional activities. The decrease in sales and marketing as a
percentage of revenues for the respective periods reflects the higher
productivity of the Company's sales force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 70.4% to $1.2 million, or
11.4% of total revenues, in the quarter ended June 30, 1998, from $699,000 or
12.8% of total revenues, in the comparable period in 1997. General and
administrative expenses increased 88.9% to $2.5 million, or 13.6% of total
revenues, in the six months ended June 30, 1998 from $1.3 million, or 13.6% of
total revenues, in the comparable period in 1997. The increase in general and
administrative expenses was primarily attributable to increases in personnel
and related costs. The Company believes that its general and administrative
expenses will continue to increase in future periods to accommodate
anticipated growth and expenses associated with its responsibilities as a
public company.
DEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 48.7% to $525,000, or 5.0% of total revenues, in the quarter ended
June 30, 1998, from $353,000, or 6.5% of total revenues, in the comparable
period in 1997. Depreciation of tangible equipment and amortization of
intangible assets increased 33.1% to $929,000, or 5.0% of total revenues, in
the six months ended June 30, 1998, from $698,000, or 7.0% of total revenues,
in the comparable period in 1997. The increases in depreciation and
amortization expense are due to increases in capital expenditures resulting
from the significant growth of the Company combined with increased goodwill
resulting from the acquisition of the minority interest in the Services
Subsidiary.
NON-CASH COMPENSATION
Non-cash compensation expense increased to $749,000, or 7.2% of total
revenues, in the quarter ended June 30, 1998, from $13,000, or 0.2% of total
revenues in the comparable period in 1997. Non-cash compensation expense
increased to $803,000, or 4.3% of total revenues, in the six months ended June
30, 1998, from $23,000, or 0.2% of total revenues in the comparable period in
1997. In the second quarter of 1998, the Company accelerated the vesting of
certain employee stock options issued in the first quarter of 1998, for
approximately 283,000 shares of Common Stock, at an exercise price of between
$3.67 per share and $8.00 per share. As a result of this accelerated vesting,
the Company recognized a non-cash, non-recurring charge of approximately
$705,000 during the quarter ended June 30, 1998, representing the previously
remaining unamortized deferred compensation recorded on these options. The
recognition of the non-cash, non-recurring charge provided for the increases
in the non-cash compensation expense in the current year periods when compared
to the same periods of the prior year.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
the Company has not recorded any provision or benefit for income taxes in the
quarters and six month periods ended June 30, 1998 and 1997, respectively.
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<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total Revenues. Total revenues increased 99.1% to $26.0 million in 1997 from
$13.1 million in 1996. This increase was attributable to substantial increases
in license fees, services fees and maintenance fees.
License Fees. License fees increased 110.2% to $13.5 million, or 52.0% of
total revenues, in 1997 from $6.4 million, or 49.2% of total revenues, in
1996. These increases in license fees resulted primarily from an increase in
the number of licenses sold, reflecting a continuing increase in the demand
for the Company's existing and new applications, and to a lesser extent, to
the increase in the average customer transaction size.
Services Fees. Services fees increased 95.4% to $7.8 million, or 30.0% of
total revenues, in 1997 from $4.0 million, or 30.5% of total revenues, in
1996. The increase in services fees was primarily due to increased demand for
professional services associated with an increase in the number of licenses
sold.
Maintenance Fees. Maintenance fees increased 77.4% to $4.7 million, or 18.0%
of total revenues in 1997 from $2.7 million or 20.3% of total revenues in
1996. The increase in maintenance fees was primarily due to the signing of
license agreements with new customers and the renewal of maintenance with
existing customers.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues increased 82.4% to $8.5 million, or
32.7% of total revenues, in 1997 from $4.7 million, or 35.8% of total
revenues, in 1996. The increase in the cost of revenues was primarily due to
an increase in personnel and related expenses and increased royalty expenses.
The decrease as a percentage of total revenues primarily reflects increased
utilization of personnel.
Cost of License Fees. Cost of license fees increased to $1.2 million, or
8.9% of total license fees, in 1997 compared to $416,000, or 6.5% of total
license fees, in 1996. The increase as a percentage of total license fees is
primarily attributable to increases in royalty expense on new products
introduced in 1997, components of which are licensed from third parties.
Cost of Services Fees. Cost of services fees increased 83.8% to $5.3
million, or 71.8% of total services fees, in 1997 compared to $2.9 million, or
72.9% of total services fees, in 1996. The increase in the cost of services
fees was primarily attributable to an increase in the personnel and related
costs to provide implementation, training and upgrade services. Cost of
services fees as a percentage of total services fees decreased due to
increased utilization of personnel.
Cost of Maintenance Fees. Cost of maintenance fees increased 46.1% to $2.0
million, or 42.0% of total maintenance fees, in 1997 compared to $1.4 million,
or 51.0% of total maintenance fees, in 1996. The increase in the cost of
maintenance fees was primarily due to an increase in personnel and related
costs required to provide support and maintenance. Cost of maintenance fees as
a percentage of total maintenance fees decreased primarily due to more
productive use of personnel to support the maintenance customer base.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 24.8% to $6.7 million, or 25.7%
of total revenues, in 1997 from $5.4 million, or 41.1% of total revenues, in
1996. Research and development expenses increased primarily due to increased
personnel and contractor fees related to the effort required to develop the
Denver Release, which was released in September 1997. During the first half of
1997, the Company began to reduce development personnel and third-party
consultant costs as this project approached completion. The decrease in
research and development as a percentage of revenue from 1996 compared to 1997
is primarily due to the completion of the Denver Release, coupled with the
economies of scale realized through the growth in the Company's revenue. The
Company intends to continue to devote substantial resources toward research
and development efforts.
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<PAGE>
SALES AND MARKETING
Sales and marketing expenses increased 32.3% to $9.5 million in 1997 from
$7.2 million in 1996. As a percentage of total revenues, sales and marketing
expenses decreased to 36.6% in 1997 from 55.1% in 1996. The increase in
expenses was primarily attributable to the costs associated with additional
sales and marketing personnel and promotional activities. In January 1997, the
Company divided its U.S. and Canadian sales territory into east and west
regions and hired a second vice president of sales. In addition, the Company
hired two regional sales managers and several additional sales representatives
in early 1997. During 1997, the Company also incurred substantial marketing
expenditures to design and implement a promotional campaign, including
marketing collateral, trade shows and seminar presentations intended to
promote the Company's new market positioning. The decrease in sales and
marketing as a percentage of revenues from 1996 compared to 1997 reflects the
higher productivity of the Company's sales force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 33.5% to $3.2 million in 1997
from $2.4 million in 1996. As a percentage of total revenues, general and
administrative expenses decreased to 12.3% in 1997 from 18.1% in 1996. The
increase in general and administrative expenses was primarily attributable to
increases in personnel and related costs. Also, the Company incurred increased
rent and equipment expense associated with the relocation of its headquarters
in August 1997. In 1997, the Company recorded $58,000 in compensation expense
related to stock options granted. The Company believes that its general and
administrative expenses will continue to increase in future periods to
accommodate anticipated growth and expenses associated with its
responsibilities as a public company.
DEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 25.0% to $1.4 million, or 5.4% of total revenues, in the year ending
December 31, 1997, from $1.1 million or 8.6% of total revenues, in the
comparable period in 1996. This increase in depreciation and amortization
expense is due to increases in the purchases of intangible assets and
increases in capital expenditures resulting from the significant growth of the
Company.
INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
the Company has not recorded any provision or benefit for income taxes in 1997
and in 1996. See "Notes to Consolidated Financial Statements."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Total Revenues. Total revenues increased 59.4% to $13.1 million in 1996 from
$8.2 million in 1995. This increase was attributable to substantial increases
in license fees, services fees and maintenance fees.
License Fees. License fees increased 22.8% to approximately $6.4 million in
1996, from $5.2 million in 1995. The increase reflected an increase in the
number of product licenses sold during the period. As a percentage of total
revenues, license fees decreased to 49.2% in 1996 from 63.9% in 1995. This
decrease was primarily attributable to the deferral of revenues on contracts
signed in 1996 related to the Denver Release to 1997.
Services Fees. Services fees increased 129.4% to $4.0 million, or 30.5% of
total revenues, in 1996 from $1.7 million, or 21.2% of total revenues, in
1995. These increases were attributable to increasing demand for services
associated with the Company's increasing customer base coupled with the growth
of the Services Subsidiary that was created in March of 1995.
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<PAGE>
Maintenance Fees. Maintenance fees increased 116.8% to $2.7 million, or
20.3% of total revenues, in 1996 from $1.2 million, or 14.9% of total
revenues, in 1995. These increases resulted primarily from the signing of
license agreements with new customers and the renewal of maintenance with
existing customers.
COST OF REVENUES
Total Cost of Revenues. Cost of revenues increased 97.3% to $4.7 million, or
35.8% of total revenues, in 1996 from $2.4 million, or 28.9% of total
revenues, in 1995. These increases were primarily due to an increase in
personnel and related expenses.
Cost of License Fees. Cost of license fees increased 43.0% to $416,000 in
1996 from $291,000 in 1995. The increase was primarily attributable to an
increase in royalty expense. As a percentage of total license fees, cost of
license fees increased to 6.5% in 1996 from 5.6% in 1995.
Cost of Services Fees. Cost of services fees increased 104.4% to $2.9
million, or 72.9% of total services fees, in 1996 from $1.4 million, or 81.8%
of total services fees, in 1995. The increase in absolute dollars was
primarily attributable to an increase in personnel and related costs required
to provide implementation, training and upgrade services. The cost of services
fees as a percentage of total services fees decreased due to increased
utilization of personnel coupled with the Company's Services Subsidiary being
operational for all of 1996.
Cost of Maintenance Fees. Cost of maintenance fees increased 106.1% to $1.4
million, or 51.0% of total maintenance fees, in 1996 from $655,000, or 53.6%
of total maintenance fees, for 1995. The increase in absolute dollars was
primarily attributable to an increase in personnel and related costs to
provide support and maintenance services to the Company's growing customer
base. Cost of maintenance fees as a percentage of total maintenance fees
decreased primarily due to more productive use of personnel supporting the
Company's maintenance customer base.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 38.1% to $5.4 million in 1996
from $3.9 million in 1995. This increase reflects increased personnel and
related expenses and third-party contractor fees as the Company increased
product development personnel to develop new products, including the Denver
Release and the prior releases of the Company's financial applications. As a
percentage of total revenues, research and development expenses decreased to
44.1% in 1996 from 47.4% in 1995. This decrease was attributable to the
economies of scale realized through substantial increases in total revenues.
SALES AND MARKETING
Sales and marketing expenses increased by 8.4% to $7.2 million in 1996 from
$6.6 million in 1995. Sales and marketing expenses increased primarily as a
result of increased sales and marketing personnel and related costs. As a
percentage of total revenues, sales and marketing expenses decreased to 55.1%
in 1996 from 81.0% in 1995. This decrease primarily reflects the higher
productivity of the Company's sales force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 19.0% to $2.4 million, or
18.1% of total revenues, in 1996 from $2.9 million, or 35.7% of total
revenues, in 1995. The decrease reflects lower general and administrative
costs associated with the closing of the United Kingdom office and allocations
of costs to the Services Subsidiary for administrative services performed on
its behalf.
DEPRECIATION AND AMORTIZATION
Depreciation of tangible equipment and amortization of intangible assets
increased 204.9% to $1.1 million or 8.6% of total revenues, in the year ending
December 31, 1996, from $369,000 or 4.5% of total revenues, in the comparable
period in 1996. This increase in depreciation and amortization expense is
primarily due to the purchase of a majority interest in the Services
Subsidiary.
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INCOME TAXES
As a result of the operating losses incurred since the Company's inception,
the Company has not recorded any provision or benefit for income taxes in 1996
or 1995.
LIQUIDITY AND CAPITAL RESOURCES
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its Common Stock at an offering price of $10.00 per share.
The proceeds, net of expenses, from this public offering of approximately
$22.0 million were placed in investment grade cash equivalents. The Company's
working capital position (deficit) was $20.1 million and $(453,000) at June
30, 1998 and December 31, 1997, respectively. Management believes that current
cash balances and cash flows from operations will be adequate to provide for
the Company's capital expenditures and working capital requirements for the
foreseeable future. Although operating activities may provide cash in certain
periods, to the extent the Company experiences growth in the future its
operating and investing activities may use significant cash.
Cash used in operating activities was approximately $507,000 and $3.7
million during the six months ended June 30, 1998 and 1997 respectively. Cash
used by operations during the six months ended June 30, 1998, was primarily
attributable to an increase in accounts receivable and a decrease in deferred
revenue, partially offset by increases in accounts payable and accrued
liabilities. Cash used by operations during the six months ended June 30,
1997, was primarily attributable to an increase in accounts receivable,
partially offset by increases in deferred revenues and accounts payable and
accrued liabilities.
Cash used in investing activities was approximately $1.6 million and
$247,000 during the six months ended June 30, 1998 and 1997, respectively. The
cash used in investing activities during the six months ended June 30, 1998,
was primarily attributable to purchases of computer equipment and software and
the purchase of the minority interest in the Services Subsidiary. The cash
used in investing activities during the six months ended June 30, 1997, was
primarily attributable to purchases of computer equipment and software.
Cash provided by financing activities was approximately $20.9 million and
$2.6 million during the six months ended June 30, 1998 and 1997, respectively.
The cash provided by financing activities during the six months ended June 30,
1998, was primarily attributable to the Company's initial public offering
effective May 26, 1998, for net proceeds of approximately $22.0 million. The
cash provided by financing activities during the six months ended June 30,
1997, was primarily attributable to proceeds from notes payable and short term
borrowings of approximately $12.4 million, offset by payments on notes payable
and short term borrowings of approximately $9.7 million.
In March 1997, the Company entered into a loan agreement and a master
leasing agreement for an equipment line of credit in the amount of $1.0
million (the "Equipment Line") with a leasing company. The Equipment Line
bears interest at rates negotiated with each loan or lease schedule (generally
22.0% to 22.5%) and is collateralized by all of the equipment purchased with
the proceeds thereof. As of June 30, 1998, the principal balance on the
Equipment Line was $565,000.
The Company has a revolving working capital line of credit and equipment
facility with Silicon Valley Bank. Borrowings outstanding under the line are
limited to the lesser of $3.0 million or 80% of accounts receivable. Interest
on the revolving credit facility is at prime rate and on the equipment
facility at prime plus 0.5% and is collateralized by all of the assets of the
Company. The line of credit and equipment term facility with Silicon Valley
Bank will expire on April 29, 1999. As of June 30, 1998, the Company had no
outstanding balance and had $3.5 million available for future borrowings under
this agreement.
The Company had available NOLs of approximately $25.6 million as of June 30,
1998 to reduce future income tax liabilities. These NOLs expire from 2007
through 2012 and are subject to review and possible adjustment by the
appropriate taxing authorities. Pursuant to the Tax Reform Act of 1986, the
utilization of NOLs for tax purposes may be subject to an annual limitation if
a cumulative change of ownership of more than 50%
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occurs over a three-year period. As a result of this limitation, the Company
will be limited to the use of its NOLs in any given year. The Company had net
deferred tax assets of approximately $9.8 million at June 30, 1998 comprised
primarily of "NOLs." The Company has fully reserved for these deferred tax
assets.
IMPACT OF YEAR 2000
The Company has designed and tested the most current versions of its
products to be Year 2000 compliant. There can be no assurances that the
Company's current products do not contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs to
the Company. Some commentators have stated that a significant amount of
litigation will arise out of Year 2000 compliance issues, and the Company is
aware of a growing number of lawsuits against other software vendors. Because
of the unprecedented nature of such litigation, it is uncertain whether or to
what extent the Company may be affected by it.
The Company is in the process of determining the extent to which third-party
licensed software distributed by the Company is Year 2000 compliant, as well
as the impact of any non-compliance on the Company and its customers.
Additionally, in the event relational database management systems used with
the Company's software are not Year 2000 compliant, there can be no assurance
that Company's customers will be able to continue to use the Company's
products. The Company does not currently believe that the effects of any Year
2000 non-compliance in the Company's installed base of software will result in
a material adverse impact on the Company's business or financial condition.
However, the Company's investigation with respect to third-party software is
in its preliminary stages, and no assurance can be given that the Company will
not be exposed to potential claims resulting from system problems associated
with the century change or that such claims would not have a material adverse
effect on the Company's business, financial condition or results of
operations.
With respect to its internal systems, the Company is taking steps to prepare
its systems for the Year 2000 date change. The Company expects to
substantially complete inventory efforts at the end of calendar year 1998,
with remediation and testing to continue through 1999. Although the Company
does not believe that it will incur any material costs or experience material
disruptions in its business associated with preparing its internal systems for
the Year 2000, there can be no assurances that the Company will not experience
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its internal systems. The Company
is currently unable to estimate the most reasonably likely worst case effects
of the year 2000 and does not currently have a contingency plan in place for
any such unanticipated negative effects. The Company is in the process of
preparing a contingency plan which is expected to be in effect by March 31,
1999.
The Company is currently unable to estimate whether it is exposed to
significant risk of being adversely affected by Year 2000 noncompliance by
third parties. During the third quarter of 1998, the Company intends to begin
contacting third parties with which it has material relationships, including
its material customers, to attempt to determine their preparedness with
respect to Year 2000 issues and to analyze the risks to the Company in the
event any such third parties experience significant business interruptions as
a result of Year 2000 noncompliance. The Company expects to complete this
review and analysis and to determine the need for contingency planning in this
regard by March 31, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to display, with the same prominence
as other financial statements, the components of other comprehensive income.
SFAS No. 130 requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. SFAS
No. 130 is effective for the Company's fiscal year ending December 31, 1998
including interim periods. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company's
adoption of SFAS No. 130 did not require significant revisions of prior
disclosures.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. Early adoption is encouraged. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
transactions involving hedge accounting. The Company does not anticipate this
statement will have an impact on its financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for the Company's
fiscal year ending December 31, 1998. The Company will evaluate the need for
such disclosures at that time.
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2, "Software Revenue Recognition." SOP 97-2 supersedes SOP 91-1
and is effective for the Company for transactions entered into after December
31, 1997. The Company adopted SOP 97-2 in the first quarter of 1998. The
adoption of SOP 97-2 did not have a significant impact on the Company's
consolidated financial statements.
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BUSINESS OF THE COMPANY
GENERAL
The Company develops, markets and supports client/server financial and human
resource software applications that reduce the total cost of ownership by
minimizing the time, costs and risks associated with implementing, changing
and upgrading applications. Almost all of the Company's products are sold as
application suites. On occasion, the Company will sell individual applications
to its existing customers.
The Company's Clarus(TM) line of products are based on a flexible, open
architecture called Active Architecture(R) which allows for seamless, rapid
changes and upgrades without modifying the source code. The Company's software
provides organizations with the broad functionality of custom-designed
applications without the high total cost of ownership traditionally associated
with such applications. By providing broad functionality, a flexible open
architecture, and minimized implementation and modification time, the Company
addresses the needs of a wide range of organizations while giving end users
more control of their work environment.
The Company licenses its products and services primarily through a direct
sales force in North America. At July 31, 1998, the Company had more than 225
customers including leading organizations such as Amtrak, Blue Cross and Blue
Shield of Alabama, Chartwell Re Holdings Corporation, First Data Corporation,
Land's End, Inc., T. Rowe Price Associates, Inc., Shaw Industries, Inc., and
Toronto-Dominion Bank.
The Company's software license revenues accounted for 45.0%, 52.0%, 49.2%
and 63.9% of gross revenues for the six months ended June 30, 1998, and for
1997, 1996 and 1995, respectively. Services revenues accounted for 36.8%,
30.0%, 30.5% and 21.2% of gross revenues for the quarter ended June 30 1998,
and for 1997, 1996 and 1995, respectively. Maintenance revenues accounted for
18.2%, 18.0%, 20.3% and 14.9% of gross revenues for the quarter ended June 30,
1998, and for 1997, 1996 and 1995, respectively.
On May 26, 1998, the Company completed an initial public offering of its
Common Stock in which it sold 2.5 million shares and which resulted in net
proceeds to the Company of approximately $22.0 million.
INDUSTRY BACKGROUND
Increasing global competition has driven organizations of all sizes to
improve operating efficiencies, reduce costs, speed time to market and improve
customer satisfaction. To achieve these objectives, organizations have
utilized IT systems to automate repetitive processes, to facilitate
communications throughout various departments and to process increasingly
sophisticated and detailed information. Organizations therefore face the
challenge of providing this critical information to a broad group of end users
to give them better control of their work environment and to increase
productivity and performance.
Recent advances in computing and communications, including the wide-spread
adoption of distributed computing, and the proliferation of third-party
enterprise software applications, have enabled organizations to provide
relevant information directly to the desktop. Organizations have deployed
enterprise client/server applications addressing the full range of functions
across the enterprise, including "front office" related functions such as
sales force automation, call center management and customer support and help
desk activities, and "back office" operations such as distribution,
manufacturing, production and supply chain planning and execution activities.
At the core of the enterprise software system are the organization's financial
applications that serve as a critical point of integration for all enterprise
applications and enable users to improve core business processes, monitor,
analyze and report business results, and make more informed decisions faster.
According to International Data Corporation, the market for enterprise-level
accounting, human resource and payroll client/server applications exceeded
$3.0 billion in 1996, and is projected to grow at a compound annual growth
rate of 30% through the year 2001 to over $12.0 billion.
Traditionally, organizations have had two alternatives when deploying
enterprise financial and human resource applications: either a highly complex
custom-designed application to meet the organization's specific requirements,
typically developed in a "legacy" environment; or an off-the-shelf application
designed to be
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implemented more rapidly in a distributed computing environment, at a
perceived lower cost of ownership, although often lacking the depth of
functionality of the custom-designed application.
While custom-designed applications have provided the desired degree of
functionality, their size and complexity generally require very lengthy
design, development and implementation efforts. Maintaining, updating and
upgrading these applications requires substantial internal resources and
generally requires the use of outside consultants. In addition, these
applications have limited flexibility to support diverse and changing
operations or to respond effectively to evolving business demands and
technologies. The high total cost of ownership and complexity associated with
developing and maintaining custom-designed applications have limited their
utilization to organizations with significant resources.
In recent years, organizations have increasingly deployed off-the-shelf
client/server financial and human resource applications to leverage their
investment in client/server technologies and provide end users with
information that gives them greater control over their work environment.
However, traditional off-the-shelf applications often require organizations to
re-engineer established business practices to accommodate application
constraints or to customize the applications with labor-intensive
reprogramming to fit their needs. These requirements significantly challenge
resource-constrained organizations and fail to provide the desired lower total
cost of ownership.
Limitations of both custom-designed and off-the-shelf applications result in
higher total cost of ownership to the organization. The largest components of
such cost are the necessary labor and programming resources associated with
implementation and maintenance. According to the Gartner Group, labor-related
services, including implementation and post-implementation services, comprise
approximately 71% of the five-year total cost of ownership for client/server
applications, with the acquisition cost of software compromising only 17% of
the total cost of ownership and hardware and networking costs comprising the
balance.
Today, organizations acquiring or replacing their financial applications
seek broader functionality, better integration with existing systems and
applications, greater flexibility to change and upgrade, and a lower total
cost of ownership. Key to meeting these expectations are solutions that are
flexible, easy to implement, change and upgrade, provide information on demand
and, most importantly, put users in control.
THE CLARUS SOLUTION
The Company offers a highly integrated suite of applications that matches
the functionality of custom-designed applications without the high total cost
of ownership traditionally associated with such applications. By providing
broad functionality, a flexible open architecture, minimized implementation,
modification and ongoing support time, and enhanced user control, the Company
addresses the needs of a broad range of organizations. The Company's
applications offer the following key benefits:
Broad Functionality. The Company's highly integrated suite of financial
applications covers the full range of financial and accounting functions,
including general accounting, expense accounting, revenue accounting and human
resources. The Company's applications are particularly suited to address the
financial, accounting and reporting needs of non-industrial firms. Through its
Graphical Architects modules, the Company provides additional capabilities,
including enhanced interaction with external software systems, user
personalization, job scheduling, analysis capabilities and Internet
connectivity.
Flexible, Open Architecture. The Company's applications are based on a
flexible, open architecture to fit with the components of an organization's
existing IT infrastructure. These applications work with the popular
Microsoft, Oracle and Sybase databases and run on any operating system and
hardware platforms compatible with these databases, enabling customers to
easily migrate to alternative computing technologies. The flexibility of the
Company's applications, together with the ability to modify the functionality
without changing the source code, results in seamless, rapid changes or
upgrades. The openness of the architecture allows easy integration with third-
party technologies, including Microsoft BackOffice and Arbor Essbase, as well
as products from third-party financial reporting software companies.
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Minimized Implementation, Modification and Ongoing Support Time. The
implementation of the Company's software can typically be achieved in less
than six months, depending on the number of modules being implemented, and
modifications can be made directly by the end user at the time of, or
subsequent to, implementation. In addition, the time, costs and risks
associated with changing and upgrading applications are minimized because
implementation of the Company's applications is done without any modification
to the underlying source code. The Company believes that this results in
implementation and post-implementation services costs well below the industry
average.
Enhanced End User Control. The Company's applications are designed to put
users in control by: (i) providing the flexibility to quickly set up
applications and personalize user interfaces; (ii) providing end users the
ability to directly tailor and change applications during or subsequent to
implementation; (iii) allowing users to upgrade in a minimal amount of time
without software development tools or significant IT personnel involvement;
(iv) allowing integration with other native or external applications in the
users' work environment; and (v) delivering information on demand and in the
form desired.
STRATEGY
The Company's objective is to become the leading provider of financial and
human resource applications to non-industrial organizations. The key elements
of the Company's strategy are as follows:
Extend Technology Leadership. The Company believes that extending technology
leadership, rapidly creating additional features and incorporating new
technologies are important competitive advantages in its marketplace. The
Company believes its Active Architecture technology is a key differentiation
that provides a significant advantage over competing products. In addition,
the Company believes it was one of the first software developers to utilize
object wrappers in financial applications to facilitate tailoring and
integration with other applications. The Company intends to continue to
identify and develop new and emerging technologies for its applications.
Leverage Expertise in Financial Applications. The Company intends to
leverage its expertise in financial applications to design, develop and offer
other financial and financially-related applications focused on meeting the
needs of non-industrial customers. For example, the Company recently
introduced several new applications, including Purchasing Control, Personnel,
and Payroll and Benefits.
Capitalize on Middle Market Opportunities. The Company focuses its sales and
marketing efforts on value buyers in mid-sized non-industrial organizations,
including divisions of larger companies, which represent the fastest growing
segment of the financial and human resource applications market. In its
targeted industries, financial and human resource applications typically
represent the organization's most critical systems. The Company believes that
its flexible user-controlled applications are well suited for rapidly growing
mid-sized organizations and value buyers that demand highly functional and
scalable financial and human resource applications without the high total cost
of ownership traditionally associated with such applications.
Leverage Installed Customer Base. The Company believes that its installed
customer base represents a significant potential market for future sales of
its products. The Company continually uses its customer relationships: (i) to
sell new products and cross-sell products to multiple offices, divisions and
departments of a customer's organization; (ii) as a reference to gain new
customers; and (iii) to focus its efforts on selected vertical markets as a
means of expanding its market share.
Expand Sales and Marketing Channels. The Company intends to expand its
direct sales force by hiring additional experienced sales personnel. The
Company also intends to establish indirect distribution channels and
relationships with product vendors and consulting companies, as well as
increase its international market penetration by establishing relationships
with strategic partners with an international presence. The Company believes
that expanding its marketing relationships will provide increased access to
various geographic markets and potential customers.
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Continue to Provide High Quality Customer Service. By providing superior
implementation, support and training services directly to its customers,
rather than through third-party resellers and system integrators, the Company
can achieve a high level of customer satisfaction, strong customer references
and long-term relationships. Direct customer service also allows for immediate
feedback which facilitates software improvements. The Company intends to
continue to expand its customer service and maintenance staff and to make
additional investments in its support infrastructure.
TECHNOLOGY
The Company's applications are based on an extensible, object-oriented,
proprietary architecture called "Active Architecture." The Active Architecture
technology is designed to achieve the following benefits: (i) flexible, high-
end functionality; (ii) the ability to modify the functionality without
changing the source code; (iii) the ability to easily integrate applications
into a customer's IT infrastructure; (iv) the ability to rapidly implement
changes and upgrade applications; (v) reduced total cost of ownership; and
(vi) placing users in control. Active Architecture is comprised of three
elements: the Core Components, the Graphical Architects modules and the System
Manager module.
Core Components. The core functionality for the Company's applications is
defined through a set of Core Components, the building blocks of the financial
and human resource applications. The Core Components perform financial and
accounting functions in the context of legal and regulatory requirements and
generally accepted accounting principles. Examples of these Core Components
include general ledger posting, accounts payable vouching, account structure
management and payroll processing. The Company's fundamental premise is that
users should not need to reprogram the Core Components. Contained within the
overall architectural framework is the ability to modify and seamlessly
upgrade the Company's applications while continuing to maintain the process
and data security, integrity and reliability of the Core Components. End users
can accommodate their business-specific requirements and technology changes,
such as integrating external software systems, user personalization, job
scheduling, analysis capabilities, Internet connectivity and application
management through the Graphical Architect modules which require no source
code programming.
Graphical Architects. The Company has developed Graphical Architects modules
that allow organizations to quickly and easily adapt to business-specific
requirements and changes in technology. The Company provides the Business
Controls/Graphical Architect as a standard component with all of its
applications and licenses other Graphical Architects modules with additional
functionality. Through Business Controls an organization can centrally
administer its business rules and policies and apply them across all financial
applications. This central control allows for consistency of management
policies and reduced set-up time in each of the application areas. Business
Controls also allows organizations to define and manage their chart of
accounts, analysis codes, default account segments and overrides, accounting
periods, inter-company transactions, tax management, accounting calendar,
cross-validation rules and multiple currencies.
System Manager. System Manager supports the Active Architecture technology
by integrating, synchronizing and managing all components of the application.
System Manager offers a visual point-and-click interface and is designed to
reduce systems and database administration efforts and the time required to
update external applications, as well as upgrades to the Company's application
itself. Through System Manager, the user orchestrates software installation,
database initialization, and software and database upgrades. These tasks are
simplified by System Manager's automated process which does not require
scripts or other programming. In addition, System Manager provides a single
point of control for security across all of the Company's applications.
Security information is automatically maintained and updated during the
upgrades.
The Company's applications incorporate a multi-tiered, client/server
architecture that supports Microsoft Windows 95 and/or NT clients, including
Netscape and Microsoft Internet Explorer, and most popular UNIX (AIX, HP-UX,
Solaris, VMS, etc.) and Windows NT servers running Microsoft SQL Server,
Oracle, and Sybase database management systems over a variety of network
topologies. For the year ended December 31, 1997, the Company derived 79.2%
and 20.8%, respectively, of its license fees from sales of its products to
customers who
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use Windows NT based-servers and UNIX servers. Integration of the Company's
applications with these databases is achieved with a single version of the
source code, allowing users to replace or upgrade their hardware and database
systems with minimal impact to the customer's application. The Company
currently offers both 16-bit and 32-bit versions of its financial applications
and 16-bit versions of its human resource applications for the Windows 3.1,
Windows 95, and Windows NT platforms. The various technologies upon which the
Active Architecture has been built include Microsoft Visual C++ and the
Microsoft Foundation Classes, ActiveX, OLE/COM and Centura.
Clarus Corporate Service Applications. The Company recently introduced its
Clarus Corporate Service Applications , including Clarus HRPoint, Clarus
Budget, Clarus OLAP and Clarus E Procurement.
PRODUCTS
The Company's product family includes a full suite of financial, human
resource and growing suite of corporate service applications designed to meet
the needs of a broad range of organizations.
APPLICATIONS
General Ledger, the Company's flagship application, delivers a comprehensive
solution including ledger accounting, consolidation and allocations, multi-
level segment accounts, automatic entry balancing, multiple financial
calendars within a single organization, recurring entries, average daily
balances and budgeting and profit sharing.
Accounts Payable controls vendor information, invoicing procedures and
payment activities, while providing for an unlimited number of bank accounts,
processing foreign currency gains and losses, and automatically reconciling
and balancing inter-company accounts and multiple payment methods.
Purchasing Control streamlines purchasing processes with end user
requisitioning, quick access to contracts and price lists, automation of
receiving and matching processes and vendor management.
Accounts Receivable streamlines payment applications, provides management
and reporting of receivables activities, manages customer information and
inter-relationships, tracks the collection process, processes foreign currency
gains and losses and provides historical information.
Revenue Accounting combines invoice entry and billing applications, provides
user-defined rules for revenue recognition, automatically creates multi-line
tax distributions for multiple taxing authorities, calculates shipping charges
for specific lines of an invoice, supports a multi-catalog pricing structure
as well as user-defined pricing contracts and tracks customer deposits and
down payments.
Fixed Assets tracks and maintains asset investments and facilitates
compliance with tax and accounting regulations through user-defined
depreciation scheduling, which can be segmented by organization, asset or
book.
Personnel manages employment, compensation, career/succession planning,
position control, health and safety, applicant management, recruiting,
training, government compliance and business event notification.
Benefits manages benefit and accrual planning and enables control of auto
enrollment, flexible benefits, flexible spending accounts, cafeteria, defined
contributions, beneficiaries, eligibility, COBRA administration and leave
accrual processing.
Payroll manages control of payment and tax processing functions, streamlines
payroll processing, manages on-demand checks, direct deposit and earnings and
deductions.
GRAPHICAL ARCHITECTS
The Company licenses a series of modules, its Graphical Architects, that are
designed to extend, enhance, integrate and change the look-and-feel of the
Company's core applications. Through a visual point-and-click
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interface, the Graphical Architects modules allow users to personalize and
configure the Company's applications without any source code programming. In
addition to Business Controls, which is a standard component of all
applications, Graphical Architects modules include the following:
Data Exchange/Graphical Architect defines sources of data for import and
export purposes through a metadata interface for logical mapping of data
between the Company's applications and the customer's other internal systems
which simplifies implementation and streamlines changes to external data
sources.
Workload/Graphical Architect enables users to manage and schedule tasks
effectively with job scheduling, resource allocation, process and report
distribution, and e-mail notification. Users can schedule tasks to run on
separate application servers at the most efficient processing time.
Solution/Graphical Architect allows users to personalize the look-and-feel
and the functions of their applications and facilitates the integration of the
Company's applications with other applications without changing the source
code.
Analysis/Graphical Architect provides a suite of applications that address
an organization's need for information on demand. Analysis/Graphical Architect
provides users with the following functions and benefits:
<TABLE>
<CAPTION>
FUNCTION BENEFIT
------------------- ----------------------------------------------------
<S> <C>
Quick Find Online access with extensive selection criteria to
quickly locate information.
Quick Reports Report printing of online query results.
Quick Graphs Graphical representations of online query results.
Standard Reports Templates to simplify users' report definitions
based upon the organization's requirements.
Financial Statement Flexible financial reporting system enabling
Generator sophisticated financial statements without any
programming.
Drill Down Analysis Intra-application, inter-application, and open drill
down into all supporting detail and information
sources, including information originated in third-
party applications.
Financial Statement Integration of Financial Statement Generator with
Accelerator Arbor Software's Essbase for high performance
reporting.
FRx for Windows Flexible distributed management reporting solution,
utilizing FRx from FRx Software Corporation, which
delivers full drill down analysis without being
connected to the network.
Clarus Library Centralized report repository to store reports and
make them available to other users in the
organization eliminating redundancy and improving
resource efficiency.
</TABLE>
Workflow/Graphical Architect allows users to define procedures and policies
(events) that trigger responses from the system. Workflow/Graphical Architect
allows users to extend the applications to conform to an organization's
business processes and policies, such as an accounting application
automatically generating approval requests for purchases over a certain dollar
amount.
Internet/Graphical Architect allows organizations to quickly deploy their
entire suite of financial and human resource applications to the World Wide
Web and tailor it specifically to the unique needs of each Web user.
Internet/Graphical Architect provides native Internet implementation of
information access-oriented applications such as invoice or payment status,
drill down inquiries, report viewing, and account balances.
SALES AND MARKETING
The Company sells its software and services primarily through its direct
sales force. As of July 31, 1998, the Company's direct sales force consisted
of 37 sales professionals and 12 marketing personnel, located in 11 domestic
offices and one office located in Canada. The Company expects to increasingly
develop indirect
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channels in order to enhance its market penetration and implementation
capabilities. International revenues were approximately 3.0% of total revenues
for the year ended December 31, 1997, and the Company expects that revenues
from international customers will account for a growing portion of the
Company's total revenues. The sales cycle for the Company's software averages
between four to seven months.
The Company's marketing strategy is to position the Company as the leading
provider of applications to non-industrial organizations by providing
applications with a high level of functionality and flexibility with minimal
implementation time. In support of this strategy, the Company engages in a
full range of marketing programs focused on creating awareness and generating
qualified leads. These programs include developing and maintaining business
partners and participating in joint marketing programs, such as participating
in the Microsoft Solution Provider Program, as well as public relations,
telemarketing, developing databases of targeted customers, and conducting
advertising and direct mail campaigns. In addition, the Company participates
in trade shows and seminars and maintains a World Wide Web home page which is
integrated with the Company's sales, marketing, recruiting and fulfillment
operations.
IMPLEMENTATION SERVICES
The Company provides dedicated implementation services for the Company's
customers. The Company believes that the provision of superior implementation
services in conjunction with ease of implementation is integral to its success
in achieving a high level of customer satisfaction. By providing these
implementation services, the Company is able to minimize implementation time
by helping customers to implement an application module in an average of four
months, generally at a cost equal to or below the cost of the licensed
software. As of July 31, 1998, the Company employed 89 personnel providing
implementation services, which are typically offered to the Company's
customers on a time and materials basis.
The Company is also developing marketing relationships with companies
sharing a commitment to client/server implementations that deliver high
functionality and flexibility, while minimizing the time required to
implement, change and upgrade them.
CUSTOMER SERVICE AND MAINTENANCE
The Company believes that superior customer service and support, including
product support and maintenance, training and consulting services, are
critical to achieve and maintain customer satisfaction. The Company's customer
service and support functions include the Company's call center, distribution
services, production support and account management, all of which are
integrated in a single group. The Company's customer service organization
provides a single point of contact for customers from execution of the license
agreements through post-implementation. Each of the Company's customers has
entered into an annual maintenance contract for the first year of use,
renewable on an annual basis. As of July 31, 1998, the Company employed 53
technical post-sales support personnel providing software maintenance and
support, and hotline access. In addition to telephone support, the Company
also offers support by electronic mail, electronic bulletin board facsimile
and over the Internet. The Company intends to continue to expand its customer
service and maintenance staff and to make additional investments in its
support infrastructure.
RESEARCH AND DEVELOPMENT
The Company's success is in part dependent on its ability to continue to
meet customer and market requirements with respect to functionality,
performance, technology and reliability. The Company invests, and intends to
continue to invest, substantially in its research and development efforts. As
of July 31, 1998, the Company's research and development operation included 56
employees, located in Atlanta. In addition, the Company has from time-to-time
supplemented, and plans to continue to supplement, its core resource pool
through outside contractors and consultants when necessary.
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The Company's research effort is currently focused on identifying new and
emerging technologies and engineering processes, as well as possible
technology alliances. The primary area of focus within the research effort
involves distributed component computing and associated technologies and
architectures, especially with respect to both Internet and intranet
transaction processing.
The Company's development effort is focused primarily on the product
delivery cycle and its associated technologies and software life-cycle
processes. The development operation consists of various functional and
technological teams who are responsible for bringing the various products that
the Company delivers to market. These teams consist of software engineering,
documentation, and quality assurance personnel. The specific responsibilities
of the development operation include: (i) enhancing the functionality and
performance within the currently available product line; (ii) developing new
products and/or integrating with strategic third-party products to strengthen
the product line; (iii) porting the product line to remain current and
compatible with new operating systems, databases, and tools; (iv) enhancing
the adaptability and extensibility of the product line through the release of
new and enhanced Graphical Architects; and (v) managing and continuously
improving the overall software development process. The Company continually
utilizes customer feedback in the product design process in order to meet
changing business requirements and is committed to developing technologies
which provide highly functional, integrated solutions in a rapid and efficient
manner.
Research and development expenditures were approximately $3.9 million, $5.4
million, $6.7 million and $2.5 million for 1995, 1996, 1997 and the six months
ended June 30, 1998, respectively. See "Company Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
COMPETITION
The market for the Company's products is highly competitive and subject to
rapid technological change. Although the Company has experienced limited
competition to date from products with comparable capabilities, the Company
expects competition to increase in the future. The Company currently competes
principally based on ease of use and reduced time of implementation, which are
a result of: (i) the breadth of its products' features; (ii) the automated,
scalable and cost-effective nature of its products; and (iii) the Company's
knowledge, expertise and service ability gained from close interaction with
customers. While the Company believes that it currently competes favorably
overall with respect to these factors, there can be no assurance that the
Company will be able to continue to do so.
The Company competes directly or indirectly with a number of competitors
that have significantly greater financial, selling, marketing, technical and
other resources than the Company, including the following companies:
PeopleSoft, Lawson and Oracle. In 1997, J.D. Edwards & Company introduced
financial applications for use on Windows NT or Unix servers, and additional
competitors may enter this market, thereby further intensifying competition.
These competitors may be able to devote greater resources to the development,
promotion, sale and support of their products than the Company. Moreover,
these companies may introduce additional products that are competitive with or
better than those of the Company or may enter into strategic relationships to
offer better products than those currently offered by the Company. There can
be no assurance that the Company's products would effectively compete with
such new products.
To remain competitive, the Company must continue to invest in research and
development, selling and marketing, and customer service and support. In
addition, as the Company enters new markets and utilizes different
distribution channels, the technical requirements and levels and bases of
competition may be different than those experienced in the Company's current
market. There can be no assurance that the Company will be able to
successfully compete against either current or potential competitors in the
future. See "Risk Factors--Competition."
81
<PAGE>
PROPRIETARY RIGHTS AND LICENSING
The Company's success depends significantly on its internally developed
intellectual property and intellectual property licensed from others. The
Company relies primarily on a combination of copyright, trademark and trade
secret laws, as well as confidentiality procedures and license arrangements to
establish and protect its proprietary rights in its software products.
The Company has no patents, and existing trade secret and copyright laws
afford only limited protection of the Company's proprietary rights. The
Company has registered or applied for registration for certain copyrights and
trademarks, and will continue to evaluate the registration of additional
copyrights and trademarks as appropriate. The Company believes that, because
of the rapid pace of technological change in the software industry, the
intellectual property protection of its products is a less significant factor
in the Company's success than the knowledge, abilities and experience of the
Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of
its support services. See "Risk Factors--Proprietary Rights and Licensing."
The Company enters into license agreements with each of its customers. The
Company's license agreements provide for the customer's non-exclusive right to
use the object code version of the Company's products. The Company's license
agreements prohibit the customer from disclosing to third parties or reverse
engineering the Company's products and disclosing the Company's other
confidential information. In certain rare circumstances, typically for the
earliest releases of the Company's products, the Company has granted its
customers a source code license, solely for the customer's internal use.
The Company has in the past licensed and may in the future license on a non-
exclusive basis third-party software from third parties for use and
distribution with the Company's financial and human resource applications.
Additionally, the Company's human resource applications are based on software
acquired under a non-exclusive object code and source code license from a
third party. The Company has entered into agreements with its third party
licensors with customary warranty, software maintenance and infringement
indemnification terms.
OEM AGREEMENT WITH ELEKOM
The Company has entered into an OEM Software License Agreement (the "OEM
Agreement") with ELEKOM that grants the Company a license to reproduce, use,
market, distribute and sublicense the object code version of ELEKOM
Procurement under the Company's own product names and trademarks, either as a
stand-alone product or as integrated with the Company's products. The license
is exclusive with respect to the Company's existing customers and certain
named competitors of the Company, subject to the payment of minimum royalty
amounts. The OEM Agreement provides for the payment by the Company to ELEKOM
of license fees equal to a specified percentage of ELEKOM's standard list
price for ELEKOM Procurement, and is subject to quarterly minimums ranging
from $250,000 for second quarter 1998 to $650,000 for fourth quarter 1999.
EMPLOYEES
As of July 31, 1998, the Company had a total of 275 employees, all except
seven of whom were based in the United States. Of the total, 89 were employed
in implementation services, 56 were in research and development, 37 were in
sales, 53 were in customer support, 28 were in finance, administration and
operations, and 12 were in marketing. The Company believes its future
performance depends in significant part upon the continued service of its key
engineering, technical support and sales personnel and on its ability to
attract or retain qualified employees. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel in the future. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company has not experienced any work stoppages and
considers its relations with its employees to be good. See "Risk Factors--
Management of Growth;" "--Dependence Upon Key Personnel; Ability to Hire and
Retain Personnel."
82
<PAGE>
FACILITIES
The Company's corporate office and principal facility is located in Suwanee,
Georgia, where the Company leases approximately 41,000 square feet of space.
The lease commenced on June 15, 1997 and expires on July 15, 2004. The lease
requires annual payments of $386,000 for the first 12-month period with an
increase of 3% in each 12-month period after the first year. This facility
accommodates research and development, sales, finance, administration and
operations, customer support and marketing. The Company also leases 11
facilities, primarily for regional sales offices, elsewhere in the United
States and Canada, providing for aggregate annual lease payments of
approximately $218,000. Expiration dates on sales office leases range from May
1998 to March 1999.
The Company has entered into a lease agreement for new office space adjacent
to its current corporate office and principal facility. At the time the
Company accepts the new office space, begins paying rent and vacates the
existing office space, the lessor of the new office space will assume the
existing lease agreement. The new office in Suwanee, Georgia will consist of
approximately 87,000 square feet of space. The new lease requires annual
payments of $913,185 for the first 12-month period with an increase of 3% in
each 12-month period after the first year. The lease will commence on January
1, 1999 and expires on March 31, 2006. The Company plans to move to its new
office space in January of 1999 to meet its needs as a result of significant
growth in personnel.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
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<PAGE>
MANAGEMENT OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------------------
<S> <C> <C>
Stephen P. Jeffery...... 42 Chairman, Chief Executive Officer, President and
Director
William M. Curran, Jr... 36 Vice President, Sales
William A. Fielder, 39
III.................... Chief Financial Officer and Treasurer
Sally M. Foster......... 44 Vice President, Customer Support
Robert C. Holler........ 34 Vice President, Research and Development
Steven M. Hornyak....... 32 Vice President, Marketing
David A. Spicer......... 51 Vice President, Development
Arthur G. Walsh, Jr..... 51 Vice President, Human Resources and Secretary
Joseph S. McCall........ 48 Director
Tench Coxe(1)(2)........ 40 Director
William S. Kaiser(1)(2). 42 Director
Donald L. House......... 57 Director
Said Mohammadioun....... 51 Director
Mark A. Johnson......... 45 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
STEPHEN P. JEFFERY joined the Company in November 1994 as Vice President of
Marketing and was elected Vice President of Sales and Marketing in June 1995.
He was elected President of the Company in October 1995, a member of the Board
of Directors in October 1997, Chairman of the Board in December 1997 and Chief
Executive Officer of the Company in February 1998. Prior to joining the
Company, Mr. Jeffery was employed by Hewlett-Packard Company, where he served
as the manager of Hewlett-Packard's client/server solutions and partner
programs as well as in a variety of sales and marketing management positions
in the U.S. and Europe for 15 years. Mr. Jeffery also served in sales with IBM
prior to joining Hewlett-Packard.
WILLIAM M. CURRAN, JR. joined the Company in February 1996 as Regional Sales
Manager for the Southern Region. In August 1997, Mr. Curran was elected Vice
President of Sales for the Eastern region and in July 1998 he was elected Vice
President of Sales. Prior to joining the Company, Mr. Curran was employed by
Geac Computer Corp. Ltd (formerly Dun & Bradstreet Software) ("Geac") from
November 1989 until February 1996 as a Senior Account Executive where he was
the top sales performer for a six-year period. From June 1984 until November
1989, Mr. Curran served in a variety of sales positions with Unisys
Corporation.
WILLIAM A. FIELDER, III joined the Company in March 1998 as Chief Financial
Officer and Treasurer. Prior to joining the Company, Mr. Fielder served as
Vice President and Chief Financial Officer of Gray Communications Systems,
Inc. from July 1993 to March 1998. From April 1991 to July 1993, Mr. Fielder
served as Controller of Gray Communications Systems, Inc. which was the chief
financial officer position of that company. From November 1984 to March 1991,
Mr. Fielder was employed with Ernst & Young LLP where he served a variety of
roles in the Columbus, Georgia, office, most recently as audit manager and
computer auditor for a variety of clients in the Atlanta and West Georgia
area.
SALLY M. FOSTER joined the Company in March 1997 as Vice President of
Customer Service. Prior to joining the Company, Ms. Foster served in several
positions at Geac from August 1988 until March 1997, most recently as Vice
President/Director of Global Business Operations. From August 1985 until
August 1988, Ms. Foster served as the Division Operations Manager for the
General Motors Corporation, Electronic Data Systems Ltd. based in London,
England.
84
<PAGE>
ROBERT C. HOLLER joined the Company in June 1993 as the group leader for all
technology development. In January 1995, Mr. Holler was elected Vice President
of Development and in May 1996, he was elected Vice President of Research. In
April 1998, Mr. Holler was elected Vice President of Research and Development.
Currently, Mr. Holler serves as Vice President of Research. Before joining the
Company, he served from 1989 to 1993 as a consultant with McCall Consulting
Group, where he managed the initial implementations of the Company's products.
Prior to that time,, he was employed with Andersen Consulting as a consultant.
STEVEN M. HORNYAK joined the Company in December 1994 as an Account
Executive and was promoted to Regional Sales Manager for the Northeast region.
In August 1997, Mr. Hornyak was elected Vice President of Marketing. Prior to
joining the Company, Mr. Hornyak served in a variety of sales and consulting
roles for Oracle Corporation from June 1992 until December 1994. Prior to
that, he was employed by Price Waterhouse in its management consulting
services group.
DAVID A. SPICER joined the Company in August 1998, as Vice President of
Development. Prior to joining the Company, Mr. Spicer served as Vice President
of Development for Arbor Software from February 1998 to July 1998. From April
1992 to February 1998, Mr. Spicer served as Vice President of Financial
Application Development at Oracle Corporation.
ARTHUR G. WALSH, JR. joined the Company in November 1992 as Chief Operating
Officer and Secretary. In October 1995, Mr. Walsh was elected Vice President
of Customer Service and Treasurer. Currently, Mr. Walsh serves as Vice
President of Human Resources and Secretary. From September 1989 until November
1992, he was Chief Operating Officer for Wilson & McIlvaine, a general
business Chicago law firm, where he was responsible for overall management of
the firm's business operations. Before that, Mr. Walsh was employed with
Andersen Consulting, from July 1974 until September 1989, where he served in a
variety of roles in Atlanta and Chicago, lastly as Director of Finance and
Administration for the Technical Services Organization in Chicago world
headquarters.
JOSEPH S. MCCALL co-founded the Company in November 1991 and has previously
served as its Chairman, President, and Chief Executive Officer and has been a
member of the Board of Directors since 1991. Mr. McCall currently serves as a
Director and consultant to the Company. Prior to founding the Company, Mr.
McCall founded McCall Consulting Group, Inc. in 1986, and he currently serves
as its President. Mr. McCall also formed Technology Ventures, LLC in 1994 and
currently serves as its sole manager. From 1975 to 1986, Mr. McCall managed
major systems integration and development projects and application software
evaluations and implementation engagements for Andersen Consulting.
TENCH COXE has served as a member of the Board of Directors of the Company
since September 1993. Mr. Coxe has served as a general partner of Sutter Hill
Ventures, a venture capital company located in Palo Alto, California, since
1989. From 1984 to 1987, Mr. Coxe served as Director of Marketing and in other
management positions with Digital Communications Associates. Mr. Coxe is
currently on the Board of Directors of Avant! Corporation and Edify
Corporation.
WILLIAM S. KAISER has served on the Board of Directors of the Company since
November 1992. Mr. Kaiser joined Greylock Management Corporation, a venture
capital company located in Boston, in 1986 and became a general partner in
1988. From 1983 to 1986, Mr. Kaiser served in a variety of marketing
management positions with Apollo Computer, primarily working with Apollo's
third-party suppliers. Mr. Kaiser is also on the Board of Directors of Avid
Technology, Inc. and Open Market, Inc.
DONALD L. HOUSE served as Chairman of the Board of Directors of the Company
from January 1994 through December 1997, and as President and a Director from
January 1993 through December 1993. From September 1991 until December 1992,
Mr. House served as President of Prentice Hall Professional Software, Inc., a
subsidiary of Simon and Schuster, Inc. From 1968 through 1987, Mr. House
served in a number of senior executive positions with Management Science
America, Inc. Mr. House is a director of Melita International
85
<PAGE>
Corporation, where he serves as Chairman of the Audit Committee and a member
of the Compensation Committee and is a director of Carreker-Antinori, Inc.,
where he is a member of its Audit Committee. Mr. House also serves as a member
of the Board of Directors of BT Squared Technologies, Inc., Intellimedia
Commerce, Inc. and Telinet Technologies, LLC which are privately held
companies.
MARK A. JOHNSON has served as a member of the Board of Directors since July
1998. Mr. Johnson has served as the Vice Chairman of CheckFree Corporation, a
supplier of financial electronic commerce services, software and related
products since 1997. He also serves on the Board of Directors of CheckFree
Corporation. From 1982 to 1997 Mr. Johnson has served in various capacities
with CheckFree including as President in 1996 and as Executive Vice President
of Corporate Development of CheckFree Corporation from 1990 to 1996.
SAID MOHAMMADIOUN has served as a member of the Board of Directors of the
Company since March 1998. Mr. Mohammadioun has served as Chairman and Chief
Executive Officer of Synchrologic, Inc. since October 1996. From March 1995 to
September 1996, he was a private investor in small technology companies. Mr.
Mohammadioun was Vice President of Lotus Development Corp. from December 1990
to February 1995. Mr. Mohammadioun also serves on the Board of Directors of IQ
Software Corporation and FirstWave Technologies, Inc.
Executive officers of the Company are elected by the Board of Directors and
serve until their successors are duly elected and qualified. There are no
family relationships among any of the executive officers or directors of the
Company.
The Company's Board of Directors is divided into three classes, with the
members of each class of directors serving for staggered three-year terms.
Messrs. McCall, Kaiser and Johnson serve in the class the term of which
expires in 1999; Messrs. Coxe and House serve in the class the term of which
expires in 2000; and Messrs. Jeffery and Mohammadioun serve in the class the
term of which expires in 2001. Upon the expiration of the term of each class
of directors, directors comprising such class of directors will be elected for
a three-year term at the next succeeding annual meeting of stockholders. The
Company's classified Board of Directors could have the effect of increasing
the length of time necessary to change the composition of a majority of the
Board of Directors. In general, at least two annual meetings of stockholders
will be necessary for stockholders to effect a change in a majority of the
members of the Board of Directors. See "Description of Capital Stock--Delaware
Law and Certain Provisions of the Company's Restated Certificate and By-laws."
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Coxe and Kaiser. The Audit Committee
reviews, with the Company's independent auditors, the scope and timing of
their audit services and any other services they are asked to perform, the
auditor's report on the Company's financial statements following completion of
their audit and the Company's policies and procedures with respect to internal
accounting and financial controls. In addition, the Audit Committee makes
annual recommendations to the Board of Directors for the appointment of
independent auditors for the ensuing year. The Compensation Committee consists
of Messrs. Coxe and Kaiser. The Compensation Committee reviews and evaluates
the compensation and benefits of all officers of the Company, reviews general
policy matters relating to compensation and benefits of employees of the
Company and makes recommendations concerning these matters to the Board of
Directors. The Compensation Committee also administers the Company's stock
option plans.
DIRECTOR COMPENSATION
Directors who are not employees of the Company (also referred to as "Outside
Directors") currently include Messrs. McCall, Coxe, House, Kaiser,
Mohammadioun and Johnson. Outside Directors do not receive an annual retainer
or any fees for attending regular meetings of the Board of Directors.
Directors are not reimbursed for out-of-pocket expenses incurred in attending
such meetings. Outside Directors may participate in the Company's 1998 Stock
Incentive Plan. Effective March 9, 1998, the Company granted to Mr.
Mohammadioun an option to acquire 11,250 shares of Common Stock at an exercise
price of $8.00 per share.
86
<PAGE>
On June 2, 1998, each of the Outside Directors at that time were granted
options to purchase 7,500 shares of Company Common Stock at an exercise price
of $7.63 per share. On July 1, 1998, the Company granted Mark A. Johnson
options to purchase 18,750 shares of Common Stock at an exercise price of
$9.13 per share.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by Joseph S. McCall, the Company's Chief Executive Officer at December
31, 1997, and the Company's four other most highly compensated executive
officers who were serving as executive officers at the end of 1997
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
-------------------- -------------------
NUMBER OF
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY BONUS COMPENSATION OPTIONS(2) COMPENSATION
------------------ -------- -------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
Joseph S. McCall........ $151,350 $150,000 -- -- --
Chief Executive Offi-
cer(3)
William M. Curran, Jr... $111,748 $197,910 -- 45,000 --
Vice President, Sales
Steven M. Hornyak....... $111,760 $130,822 -- 51,000 $53,394(4)
Vice President, Market-
ing
Stephen P. Jeffery...... $175,000(6) $ 92,621 -- 75,000 --
President(5)
Alain Livernoche........ $136,752 $ 91,599 -- 60,000 --
Vice President,
Sales(7)
</TABLE>
- --------
(1) In accordance with the rules of the SEC, the compensation set forth in the
table does not include medical, group life insurance or other benefits
which are available to all salaried employees of the Company, and certain
perquisites and other benefits, securities or property that do not exceed
the lesser of $50,000 or 10% of the person's salary and bonus shown in the
table.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1997 to its executive officers. Options granted to the Named Executive
Officers were granted at fair market value on the date of grant as
determined by the Board of Directors.
(3) Mr. McCall resigned as the Company's Chief Executive Officer on February
5, 1998.
(4) One time payment for relocation expenses.
(5) Mr. Jeffery was elected as the Company's Chief Executive Officer effective
as of February 5, 1998.
(6) Includes $14,583 in deferred compensation earned in 1997.
(7) Mr. Livernoche resigned as the Company's Vice President of Sales and as an
employee of the Company on June 30, 1998.
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<PAGE>
The following table sets forth all individual grants of stock options during
fiscal year 1997 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTIONS GRANTED PRICE
UNDERLYING TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION APPRECIATION FOR
NAME OPTIONS GRANTED(1) FISCAL YEAR PRICE PER SHARE DATE OPTION TERM(2)
- ---- ------------------ ---------------- ---------------- ---------- -----------------
5% 10%
-------- --------
<S> <C> <C> <C> <C> <C> <C>
Joseph S. McCall........ -- -- -- -- -- --
Stephen P. Jeffery...... 75,000 9.3% $3.67 11/10/04 $112,054 $261,134
William M. Curran, Jr... 15,000 1.9 2.00 07/24/04 12,213 28,462
30,000 3.7 3.67 11/10/04 44,822 104,454
Alain Livernoche........ 15,000 1.9 1.00 04/13/04 6,107 14,231
15,000 1.9 2.00 07/24/04 12,213 28,462
30,000 3.7 3.67 11/10/04 44,822 104,454
Steven M. Hornyak....... 6,000 0.7 1.00 01/01/04 2,443 5,692
15,000 1.9 1.00 05/23/04 6,107 14,231
30,000 3.7 3.67 11/10/04 44,822 104,454
</TABLE>
- --------
(1) All options were incentive stock options and were granted pursuant to the
Company's 1992 Stock Option Plan at an exercise price not less than fair
market value on the date of grant as determined by the Board of Directors
of the Company. Options vest in installments over a period of four years
with 20% of the options vested 12 months from the date of grant, 40%
vested 24 months after the date of grant, 70% vested 36 months after the
date of grant and 100% vested 48 months after the date of grant. The
options expire seven years after the date of grant.
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming that the stock price on the date of grant
appreciates at the specified annual rates of appreciation, compounded
annually over the term of the option. These numbers are calculated based
on rules promulgated by the SEC.
The following table provides information regarding exercisable and
unexercisable stock options held as of December 31, 1997 by each of the Named
Executive Officers. There were no options exercised by the Named Executive
Officers in 1997.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph S. McCall............ 61,762 -- $267,429 $ --
Stephen P. Jeffery.......... 37,500 225,000 159,900 714,600
William M. Curran, Jr....... 3,000 57,000 12,396 134,484
Alain Livernoche............ -- 60,000 -- 144,900
Steven M. Hornyak........... 2,340 57,660 9,914 151,867
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated by determining the
difference between the estimated fair market value of the Company's Common
Stock underlying the option as of December 31, 1997 ($5.00 per share) and
the exercise price per share payable upon exercise of such options. In
determining the fair market value of the Company's Common Stock, the Board
of Directors considered various factors, including the Company's financial
condition and business prospects, its operating results, the absence of a
market for its Common Stock and the risks normally associated with
technology companies.
88
<PAGE>
EMPLOYEE BENEFIT PLANS
1992 Stock Option Plan. The Company adopted its 1992 Stock Option Plan (the
"1992 Stock Option Plan") on November 22, 1992. The aggregate number of shares
reserved for issuance under the 1992 Stock Option Plan is 1,633,938 shares. As
of July 31, 1998, options to purchase 1,513,426 shares of Common Stock were
outstanding under the 1992 Stock Option Plan at exercise prices ranging from
$0.67 to $10.00 per share and a weighted average exercise price of $2.68 per
share. Options granted under the 1992 Stock Option Plan generally vest in
installments over a period of four years with 20% of the options vested 12
months from the date of grant, 40% vested 24 months from the date of grant,
70% vested 36 months from the date of grant and 100% vested 48 months after
the date of grant. The Company has accelerated the vesting of options granted
from January through March 1998 under the 1992 Stock Option Plan. As of July
31, 1998, 55,973 shares of Common Stock have been issued pursuant to the
exercise of options granted under the 1992 Stock Option Plan. The purpose of
the 1992 Stock Option Plan is to provide incentives for key employees,
officers, consultants and directors to promote the success of the Company, and
to enhance the Company's ability to attract and retain the services of such
persons. The majority of all options granted under the 1992 Stock Option Plan
are intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1985 as amended (the "Code").
The 1992 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors. The Compensation Committee has the authority to
determine exercise prices applicable to the options, the eligible officers,
directors, consultants or employees to whom options may be granted, the number
of shares of the Company's Common Stock subject to each option and the extent
to which options may be exercisable.
1998 Stock Incentive Plan. In February 1998, the Board of Directors adopted
and the stockholders approved the SQL 1998 Stock Incentive Plan (the "1998
Stock Plan"). Under the 1998 Stock Plan, the Board of Directors, or the
Compensation Committee of the Board of Directors, has the flexibility to
determine the type and amount of awards to be granted to eligible
participants. The 1998 Stock Plan is intended to secure for the Company and
its stockholders the benefits arising from ownership of the Company's Common
Stock by individuals employed or retained by the Company who will be
responsible for the future growth of the enterprise. The 1998 Stock Plan is
designed to help attract and retain superior personnel for positions of
substantial responsibility with the Company (including advisory relationships
where appropriate), and to provide individuals with an additional incentive to
contribute to the Company's success.
The Board or the Compensation Committee may make the following types of
grants under the 1998 Stock Plan, each of which will be an "Award": (i)
incentive stock options ("ISOs"); (ii) nonqualified stock options ("NSOs");
(iii) restricted stock awards ("Restricted Stock Awards"); (iv) stock
appreciation rights ("SARs"); and (v) restricted units ("Restricted Units").
Officers, key employees, employee directors, consultants and other independent
contractors or agents of the Company or its subsidiaries who are responsible
for or contribute to the management growth or profitability of the Company's
business will be eligible for selection by the Board of Directors or the
Compensation Committee to participate in the 1998 Stock Plan, provided,
however, that ISOs may be granted only to a person who is an employee of the
Company or its subsidiaries.
The Company has authorized and reserved for issuance an aggregate of
1,000,000 shares of its Common Stock under the 1998 Stock Plan. As of July 31,
1998, options to purchase 529,600 of Common Stock were outstanding under the
1998 Stock Plan with exercise prices ranging from $7.63 to $10.00 per share
and a weighted average exercise price of $8.89 per share. The Company has
accelerated the vesting of certain options granted during January through
March 1998 under the 1998 Stock Plan. The aggregate number of shares of Common
Stock that may be granted through Awards under the 1998 Stock Plan to any
employee in any calendar year may not exceed 200,000 shares. The shares of
Common Stock issuable under the 1998 Stock Plan are authorized but unissued
shares. If any of the Awards granted under the 1998 Stock Plan expire,
terminate or are forfeited for any reason before they have been exercised,
vested or issued in full, the unused shares subject to those expired,
terminated or forfeited Awards will again be available for purposes of the
1998 Stock Plan. The 1998 Stock Plan will continue in effect until February
2008 unless sooner terminated under the general provisions of the 1998 Stock
Plan.
89
<PAGE>
The 1998 Stock Plan is administered by the Board of Directors or upon its
delegation to the Compensation Committee of the Board of Directors, by the
Compensation Committee, consisting of not less than two directors of the
Company who are "non-employee directors" (within the meaning of SEC Rule 16b-3
promulgated pursuant to the Securities Exchange Act of 1934, as amended), so
long as non-employee director administration is required under Rule 16b-3, and
who are "outside directors" (as defined in Section 162(m) of the Code), so
long as outside directors are required by the Code. Subject to the foregoing
limitations, as applicable, the Board of Directors may from time to time
remove members from the Compensation Committee, fill all vacancies on the
Compensation Committee, however caused, and may select one of the members of
the Compensation Committee as its chairman. The Compensation Committee may
hold meetings at such times and places as they may determine, will keep
minutes of their meetings, and may adopt, amend and revoke rules and
procedures in accordance with the terms of the 1998 Stock Plan.
401(k) Retirement Savings Plan. The Company maintains a Section 401(k)
Retirement Savings Plan (the "401(k) Plan"). The 401(k) Plan is intended to be
a tax-qualified defined contribution plan under Section 401(k) of the Code. In
general, Company employees who have completed six consecutive months of
service with the Company and are over 21 years of age may elect to participate
in the 401(k) Plan. Under the 401(k) Plan, participants may elect to defer a
portion of their compensation, subject to certain Code limitations. In
addition, at the discretion of the Board of Directors and subject to certain
Code limitations, the Company may make profit sharing contributions into the
401(k) Plan. The Company currently does not match contributions. A separate
account is maintained for each participant in the 401(k) Plan, which account
is 100% vested. Distributions from the 401(k) Plan may be in the form of a
lump-sum payment in cash or property or in the form of an annuity.
AGREEMENTS WITH EMPLOYEES
In February 1998, the Company entered into an agreement with Joseph S.
McCall whereby Mr. McCall resigned as the Company's Chief Executive Officer
and as Chairman, Chief Executive Officer and Manager of the Services
Subsidiary. Mr. McCall agreed to remain an employee of the Company at his
current salary, including incentive compensation, until the completion of the
Company's initial public offering, at which time he became a consultant to the
Company for a period of one year pursuant to the terms of an Independent
Contractor Agreement. For his consulting services, the Company will pay Mr.
McCall the sum of $125,000 over the one year period, with the ability to earn
an additional $100,000 in incentive compensation if certain revenue targets
are met by the Company. Mr. McCall has agreed to continue to serve on the
Company's Board of Directors for at least six months following the termination
of his employment. In recognition of his past services, Mr. McCall's agreement
to allow the termination of the common stock voting trust agreement, and his
resignation as CEO, the Company paid Mr. McCall a lump sum of $225,000 and
will pay Mr. McCall as severance an additional $75,000 payable in semi-monthly
installments over a one year period beginning on the Effective Time of the
termination of his employment with the Company.
The Company generally enters into confidentiality and nondisclosure
agreements with its employees. Pursuant to the terms of these agreements,
employees agree to confidentiality restrictions, employee and customer
nonsolicitation covenants and assignment of inventions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee reviews and approves compensation and
benefits for the Company's key executive officers, administers the Company's
stock option plans and makes recommendations to the Board regarding such
matters. No member of the Compensation Committee serves as a member of the
board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board or
Compensation Committee.
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LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The By-Laws of the Company and the Amended and Restated Certificate of
Incorporation of the Company (the "Restated Certificate") provide that the
directors and officers of the Company shall be indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. Insofar as
indemnification for liabilities arising under the Securities Act, may be
permitted to directors, officers and controlling persons of the Company
pursuant to the Restated By-Laws, 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. The Company
has obtained insurance which insures the directors and officers of the Company
against certain losses and which insures the Company against certain of its
obligations to indemnify such directors and officers. In addition, the
Restated Certificate provides that the directors of the Company will not be
personally liable for monetary damages to the Company for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to the
Company or its stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors. Such limitations of
personal liability under the Delaware Business Corporation Law do not apply to
liabilities arising out of certain violations of the federal securities laws.
While non-monetary relief such as injunctive relief, specific performance and
other equitable remedies may be available to the Company, such relief may be
difficult to obtain or, if obtained, may not adequately compensate the Company
for its damages.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification by the Company
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
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COMPANY PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 31, 1998, by: (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Company's Common Stock; (ii) each of the Company's directors; (iii) each Named
Executive Officer who is a beneficial owner of the Company's Common Stock (see
"Management--Executive Compensation"); and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF PERCENTAGE
BENEFICIALLY COMMON STOCK AFTER THE
NAME OF BENEFICIARY OWNER OWNED(1) OUTSTANDING(2) MERGER
------------------------- ------------ -------------- ----------
<S> <C> <C> <C>
Technology Crossover Management,
L.L.C.(3)........................ 1,690,930 16.9% 14.9%
Joseph S. McCall(4)............... 1,256,587 12.6 11.1
William S. Kaiser(5).............. 1,004,997 10.0 8.9
Greylock Limited
Partnership(5)(6)................ 1,003,122 10.0 8.9
Technology Ventures L.L.C.(7)..... 928,950 9.3 8.2
HarbourVest Partners IV--Direct
Fund L.P.(8)..................... 870,155 8.7 7.7
Tench Coxe(9)..................... 743,680 7.4 6.6
Sutter Hill Ventures, a California
Limited Partnership(9)........... 741,805 7.4 6.6
Highland Capital Partners II
Limited Partnership(10).......... 594,684 5.9 5.2
Stephen P. Jeffery(11)............ 174,299 1.7 1.5
Donald L. House(12) .............. 78,124 * *
Said Mohammadioun(13)............. 21,125 * *
Steven M. Hornyak(14)............. 7,950 * *
William M. Curran, Jr.(15)........ 7,200 * *
Mark Johnson(16).................. 1,875 * *
All executive officers and
directors as a group (14
persons)......................... 3,391,946 33.9% 29.9%
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of Common Stock issuable
by the Company pursuant to options held by the respective person or group
which may be exercised within 60 days after July 31, 1998 ("Presently
Exercisable Options"). Except as otherwise indicated, each stockholder
named in the table has sole voting and investment power with respect to
the shares set forth opposite such stockholder's name.
(2) For purposes of calculating the percentage beneficially owned, the number
of shares deemed outstanding before the Merger are the shares outstanding
as of August 31, 1998. The number of shares deemed outstanding after the
Merger includes Common Stock being offered hereby. Presently Exercisable
Options are deemed to be outstanding and to be beneficially owned by the
person or group holding such options for the purpose of computing the
percentage ownership of such person or group but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person or group.
(3) Includes (i) 70,082 shares of Common Stock owned by Technology Crossover
Ventures II, L.P.; (ii) 647,674 shares of Common Stock owned by Technology
Crossover Ventures I, L.P. ("TCVLP"); (iii) 51,291 shares of Common Stock
owned by Technology Crossover Ventures I, C.V. ("TCVCV"); (iv) 53,880
shares of Common Stock owned by Technology Crossover Ventures (Q), L.P.;
(v) 9,562 shares of Common Stock owned by Technology Crossover Ventures II
Strategic Partners, L.P.; (v) 10,700 shares of Common Stock owned by
Technology Crossover Ventures II, C.V.; (vi) 2,276 shares of Common Stock
owned by Technology Crossover Ventures II, V.O.F.; (vii) 146,500 shares of
Common Stock owned by Technology Crossover Management II, L.L.C. and
(viii) 698,965 shares of Common Stock owned by Technology Crossover
Management I, L.L.C. Technology Crossover Management, L.L.C. is the sole
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general partner of TCVLP and the sole investment general partner of TCVCV.
The managing members of Technology Crossover Management, L.L.C. are Jay C.
Hoag and Richard H. Kimball. Technology Crossover Ventures' address is 575
High Street, Suite 400, Palo Alto, California 94301. Information with
respect to Technology Crossover Management, L.L.C. ("TCM") is provided in
reliance upon information included in a Schedule 13G filed by TCM dated
June 17, 1998.
(4) Includes 325,762 shares of Common Stock owned by Mr. McCall individually,
928,950 owned by Technology Ventures L.L.C., a Georgia limited liability
company controlled by Mr. McCall and 1,875 shares issuable to Mr. McCall
upon the exercise of Presently Exercisable Options.
(5) Mr. Kaiser, a director of the Company, has voting control over the
securities of the Company held by Greylock Limited Partnership. Includes
1,875 shares of Common Stock issuable upon the exercise of Presently
Exercisable Options.
(6) The general partners of Greylock Limited Partnership are Howard E. Cox,
Roger Evans, William Helman, Robert Henderson, William Kaiser, Henry
McCance and Dave Strohm. Greylock Limited Partnership's address is One
Federal Street, Boston, Massachusetts 02110.
(7) Consists of 928,950 shares owned by Technology Ventures L.L.C. Technology
Ventures L.L.C.'s address is Two Ravinia Drive, 10th Floor, Suite 1090,
Atlanta, Georgia.
(8) Includes 43,507 shares of Common Stock owned by Falcon Ventures II, L.P.
("Falcon"). Falcon is an affiliate of HarbourVest Partners IV--Direct Fund
L.P. ("HarbourVest"). Both Falcon and HarbourVest are beneficially owned
by Edward W. Kane, D. Brooks Zug, George R. Anson, Kevin Delbridge,
William A. Johnston, Frederick C. Maynard, Ofer Nemirovsky and Robert M.
Wadsworth. HarbourVest's address is One Financial Center, Boston,
Massachusetts 02111.
(9) Includes (i) 491,693 shares of Common Stock owned by Sutter Hill Ventures,
a California Limited Partnership ("Sutter Hill"); (ii) 20,128 shares of
Common Stock owned by Mr. Coxe, individually; (iii) 1,875 shares of Common
Stock issuable upon the exercise of Presently Exercisable Options; (iv)
225,822 shares of Common Stock held of record for 14 other individuals or
entities associated with Sutter Hill (the "Sutter Hill Affiliates"); and
(v) 4,162 shares of Common Stock owned by the Sutter Hill Affiliates. Mr.
Coxe, a director of the Company, is a Managing Director of the General
Partner of Sutter Hill and shares voting and investment power with respect
to the shares of Common Stock held by Sutter Hill. Mr. Coxe disclaims
beneficial ownership of the shares held by Sutter Hill and Sutter Hill
Affiliates, except as to the shares held of record in his name and as to
his partnership interest in Sutter Hill. Sutter Hill's address is 755 Page
Mill Road, Suite A-200, Palo Alto, California 94304-1005.
(10) Includes 594,684 shares of Common Stock owned by Highland Capital
Partners II Limited Partnership ("Highland Capital"). The general partner
of Highland Capital is Highland Management Partners II. The general
partners of Highland Management Partners II are Robert F. Higgins, Paul
A. Maeder, Daniel J. Nova and Wycliff K. Grousbeck. Highland Capital's
address is One International Place, Boston, Massachusetts 02110.
(11) Includes 128,249 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
(12) Includes 1,875 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
(13) Includes 13,125 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
(14) Includes 7,950 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
(15) Includes 7,200 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
(16) Consists of 1,875 shares of Common Stock issuable upon the exercise of
Presently Exercisable Options.
CERTAIN TRANSACTIONS OF THE COMPANY
In March 1995, the Company issued 450,000 shares of Common Stock to Tech
Ventures, an entity controlled by Joseph S. McCall, the Company's Chief
Executive Officer at that time and a member of the Company's Board of
Directors, in exchange for certain intellectual property rights, intangible
assets and $10,000 cash. Following the acquisition, the Company and Tech
Ventures formed the Services Subsidiary. The Company contributed the acquired
intellectual property rights, intangible assets and $10,000 cash to the
Services Subsidiary
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in exchange for an 80% interest in the Services Subsidiary. Tech Ventures
acquired the remaining 20% interest in the Services Subsidiary in exchange for
a $75,000 promissory note bearing interest at 7.74%, payable annually, with
the principal due in a lump sum payment in March 2000 (the "Tech Ventures
Note").
During 1996 and 1997, McCall Consulting Group, Inc. ("MCG"), an entity owned
by Tech Ventures, provided to the Company: (i) temporary services by
administrative employees; (ii) third-party consulting services in connection
with several product development projects; (iii) the lease of office equipment
and office space in the Company's prior headquarters facility; and (iv)
services in connection with the Company's sales process. The Company paid MCG
approximately $1.6 million and $1.4 million, respectively, during 1997 and
1996 for these services. In February 1998, the Company entered into an
Independent Contractor Agreement with MCG providing for the performance of
services by MCG for the Company and the assignment to the Company of the
intellectual property rights associated with the performance of such services.
In addition, in February 1998, the Company granted to Tech Ventures and MCG a
royalty-free license to use its current products as well as certain of the
Company's future products to be designated by the Company, and agreed to
provide to MCG without charge ongoing support services as long as Tech
Ventures owns at least 100,000 shares of the Common Stock of the Company and
has not modified the software. This license agreement may be terminated by the
Company if a competitor of the Company acquires any interest in either MCG or
Tech Ventures.
On February 5, 1998, Tech Ventures sold its 20% interest in the Services
Subsidiary to the Company in exchange for 225,000 shares of the Company's
Common Stock, a warrant to purchase an additional 300,000 shares of Common
Stock at an exercise price of $3.67 per share and a non-interest bearing two-
year promissory note in the principal amount of $1.1 million, giving the
Company 100% ownership of the Services Subsidiary. The Company granted Tech
Ventures certain registration rights and agreed to register in the Company's
initial public offering 497,700 shares of Common Stock owned by Tech Ventures
(comprised of 272,700 of the 450,000 shares originally issued to Tech Ventures
in March 1995 and 225,000 shares issued on February 5, 1998) and to maintain
the effectiveness of such registration for a period of two years. Tech
Ventures has agreed not to sell any of its shares for a period of 180 days
after the Effective Time of the Company's initial public offering on November
22, 1998. In addition, immediately prior to the purchase and sale, the
Services Subsidiary distributed approximately $241,000 to Tech Ventures as the
accumulated unpaid profits earned by the Services Subsidiary prior to February
5, 1998. All of the material terms of the purchase were agreed upon by Tech
Ventures and the Company in January 1998, including the number of shares to be
issued to Tech Ventures. The transaction was approved by the Company's Board
of Directors and consummated on February 5, 1998. In February 1998, the
Services Subsidiary also paid Tech Ventures approximately $33,000 as
consideration for the termination of the Management Services Agreement entered
into between the parties in March 1995, and Tech Ventures paid in full to the
Services Subsidiary the remaining principal balance and accrued interest of
approximately $33,000 due under the Tech Ventures Note.
In February 1998, the Company entered into certain severance and related
agreements with Joseph S. McCall in connection with his resignation as the
Company's Chief Executive Officer. In connection therewith, the Company paid
Mr. McCall $225,000, severance in the amount of $75,000 payable over a one
year period beginning on May 26, 1998, and entered into an Independent
Contractor Agreement whereby Mr. McCall will serve as a consultant to the
Company for one year for $125,000 in compensation, with the ability to earn an
additional $100,000 in incentive compensation. See "Management--Agreements
with Employees." Tech Ventures provided recruiting services to the Company
from January 1996 through January 1997 in the amount of $339,302. In addition,
pursuant to a Management Services Agreement, Tech Ventures received $25,000
for certain administrative services rendered to the Services Subsidiary during
each of 1997 and 1996.
On October 26, 1995, Tech Ventures received a warrant to purchase 87,500
shares of the Company's Series C Preferred Stock resulting from the conversion
and simultaneous cancellation of 87,500 shares of Series C Preferred Stock
held by Tech Ventures and the simultaneous amendment of a promissory note
payable by Tech Ventures to the Company which had been made by Tech Ventures
as payment for its original shares of Series C Preferred Stock. Tech Ventures
exercised this warrant following the closing of the Company's initial public
offering.
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The Company believes that all transactions set forth above were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties.
COMPANY CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, $.0001 par value per share, and 5,000,000 shares of preferred
stock, $.0001 par value per share (the "Preferred Stock").
COMMON STOCK
As of August 31, 1998, there were 9,188,442 shares of Common Stock issued
and outstanding and held of record by 104 stockholders. Holders of Common
Stock are entitled to one vote for each share held on all matters submitted to
a vote of stockholders 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 dividends, if
any, as may be declared by the Board of Directors out of funds legally
available therefor, subject to any preferential dividend 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 the prior rights of any outstanding Preferred
Stock. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. 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.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no present plans to issue
any shares of Preferred Stock.
The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having
such authorized shares available for issuance will allow the Company to issue
shares of Preferred Stock without the expense and delay of holding a special
stockholders' meeting. The authorized shares of Preferred Stock, as well as
shares of Common Stock, will be available for issuance without further action
by stockholders of the Company, unless such action is required by applicable
law or the rules of any stock exchange or quotation system on which the
Company's securities may be listed or quoted.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE AND
BY-LAWS
The Company is subject to Section 203 ("Section 203") of the Delaware
General Corporation Law (the "Delaware Code"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder's becoming an interested stockholder; (ii) upon consummation
of the transaction which resulted in the stockholder's becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (x) by persons who are directors and also
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officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines business combinations to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as an entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides for the classification of the Company's Board of
Directors. These and other provisions could have the effect of making it more
difficult to acquire the Company by means of a tender offer, proxy contest or
otherwise or to remove the incumbent officers and directors of the Company.
These provisions may discourage certain types of coercive takeover practices
and encourage persons seeking to acquire control of the Company to first
negotiate with the Company.
The Company's Certificate does not provide preemptive rights to (the
"Delaware Code") the Company's Stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Union National Bank of North Carolina, N.A.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND ELEKOM
As a result of the Merger, holders of ELEKOM capital stock will be
exchanging their shares of a Washington corporation governed by the WBCA and
ELEKOM's Restated Articles of Incorporation ("Articles") and Bylaws, for
shares of the Company, a Delaware corporation governed by the Delaware Code
and the Company's Certificate and Bylaws. Certain significant differences
exist between the rights of ELEKOM Shareholders and those of Company
stockholders. The differences deemed material by ELEKOM and the Company are
summarized below. The following discussion is necessarily general; it is not
intended to be a complete statement of all differences affecting the rights of
stockholders, and it is qualified in its entirety by reference to the
Washington Code and the Delaware Code as well as to the Company's Certificate
and Bylaws and ELEKOM's Articles and Bylaws.
AUTHORIZED CAPITAL STOCK
The Company. The Company is currently authorized to issue 25,000,000 shares
of Company Common Stock, $.0001 par value per share, of which 9,188,442 shares
were issued and outstanding as of August 31, 1998, and 5,000,000 shares of
Preferred Stock, none of which are currently issued and outstanding. The Board
of Directors of the Company may authorize the issuance of additional shares of
Company Common Stock or Preferred Stock without further action by the
Company's stockholders, up to the maximum amount permitted by the Certificate,
unless such action is required in a particular case by applicable laws or
regulations or by any stock exchange upon which the Company's capital stock
may be listed. The Company's Certificate does not provide preemptive rights to
the Company's stockholders.
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The Company's Certificate provides that the authorized preferred stock of
the Company may be issued from time to time in one or more series pursuant to
a resolution or resolutions providing for such issue duly adopted by the Board
of Directors of the Company, and such resolution or resolutions shall also set
forth the voting powers, full or limited or none, of each such series of
preferred stock and shall fix the designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of each such series of preferred stock.
The authority to issue additional shares of the Company's capital stock
provides the Company with the flexibility necessary to meet its future needs
without the delay resulting from seeking stockholder approval. The authorized
but unissued shares of Company Common Stock will be issuable from time to time
for any corporate purpose, including, without limitation, stock splits, stock
dividends, employee benefit and compensation plans, acquisitions, and public
or private sales for cash as a means of raising capital. Such shares could be
used to dilute the stock ownership of persons seeking to obtain control of the
Company. In addition, the sale of a substantial number of shares of Company
Common Stock to persons who have an understanding with the Company concerning
the voting of such shares, or the distribution or declaration of a dividend of
shares of Company Common Stock (or the right to receive Company Common Stock)
to Company stockholders, may have the effect of discouraging or increasing the
cost of unsolicited attempts to acquire control of the Company.
ELEKOM. ELEKOM is authorized to issue 9,712,826 shares of ELEKOM Common
Stock, $0.01 par value per share, of which 930,923 shares of ELEKOM Common
Stock were issued and outstanding as of August 31, 1998. ELEKOM is also
authorized to issue 5,327,174 shares of ELEKOM Preferred Stock $0.01 par value
per share, of which 5,307,174 shares were issued and outstanding on August 31,
1998. Except for contractual agreements which may be entered into by ELEKOM
with its shareholders from time to time, no preemptive rights shall exist with
respect to shares of stock or securities convertible into shares of stock of
ELEKOM.
The ELEKOM Preferred Stock may be issued from time to time in one or more
series. Currently two series of ELEKOM Preferred Stock have been issued,
designated as "Series A Preferred Stock," which consists of 917,229 shares,
and "Series B Preferred Stock," which consists of 4,389,945 shares.
Each share of ELEKOM Series A Preferred Stock and ELEKOM Series B Preferred
Stock is convertible, at the option of the holder thereof, at any time after
the date of issuance of such share, into such number of fully-paid and
nonassessable shares of ELEKOM Common Stock as is determined by dividing the
Original ELEKOM Series A Issue Price or the Original ELEKOM Series B Issue
Price, as the case may be, by the conversion price applicable to such share in
effect on the date the certificate is surrendered for conversion. The initial
conversion price per share for shares of Series A Preferred Stock and Series B
Preferred Stock shall be the Original Series A Issue Price or Original Series
B Issue Price, as the case may be, provided, however, that the conversion
price for the Series A Preferred Stock and Series B Preferred Stock shall be
subject to adjustment as set forth in the Articles. Each share of Series A
Preferred Stock and Series B Preferred Stock shall automatically be converted
into shares of ELEKOM Common Stock at the conversion price at the time in
effect for such Series A Preferred Stock or Series B Preferred Stock,
immediately upon the earlier of (i) ELEKOM's sale of the ELEKOM Common Stock
in a firm commitment underwritten public offering pursuant to a registration
statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as
amended, the public offering price of which is not less than $3.40 per share
(as adjusted for any stock splits, stock dividends, recapitalizations or the
like) and $10,000,000 in the aggregate or (ii) the date specified by written
consent or agreement of the holders of two-thirds of the then outstanding
shares of Series B Preferred Stock. ELEKOM, in its Articles, has committed
that it will not, by amendment of its Articles or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed by ELEKOM relating to the above-described conversion rights, but
will at all times in good faith assist in the carrying out of all the
provisions relating to conversion rights and in the taking of all such action
as may be necessary or appropriate in order to protect the conversion rights
of the holders of the Series A Preferred Stock and Series B Preferred Stock
against impairment.
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In the event of any liquidation, dissolution or winding up of ELEKOM, the
holders of Series B Preferred Stock will be entitled to receive, prior and in
preference to any distribution of any of the assets of ELEKOM to the holders
of ELEKOM Common Stock, an amount per share equal to $0.6814 for each
outstanding share of Series B Preferred Stock (the "Original Series B Issue
Price") plus declared but unpaid dividends on such share. Upon the completion
of the distribution to the holders of Series B Preferred Stock described
above, if assets of ELEKOM remain, the holders of the Series A Preferred Stock
shall be entitled to receive 17.28% of the assets distributed, and the holders
of the Series B Preferred Stock and ELEKOM Common Stock together shall be
entitled to receive 82.72% of the assets distributed, (with such 82.72%
distributed between the holders of the Series B Preferred Stock and ELEKOM
Common Stock pro rata based on the number of shares of ELEKOM Common Stock
held by each (assuming full conversion of all such Series B Preferred Stock),
until each holder of Series A Preferred Stock has received an amount per share
equal to $7.2092 for each outstanding share of Series A Preferred Stock (the
"Original Series A Issue Price") held by such holder, plus declared but unpaid
dividends on such share. Upon completion of the distributions described above,
all of the remaining assets of ELEKOM available for distribution to
shareholders shall be distributed among the holders of Series A Preferred
Stock, Series B Preferred Stock and ELEKOM Common Stock pro rata based on the
number of shares of ELEKOM Common Stock held by each (assuming full conversion
of all such Series A Preferred Stock and Series B Preferred Stock). For
purposes of these liquidation preference provisions, a liquidation,
dissolution or winding up of ELEKOM shall be deemed to be occasioned by, or to
include (unless the holders of at least two-thirds of the Preferred Stock then
outstanding shall determine otherwise), (i) the acquisition of ELEKOM by
another entity by means of any transaction or series of related transactions
that results in the transfer of fifty percent (50%) or more of the outstanding
voting power of ELEKOM; or (ii) a sale of all or substantially all of the
assets of ELEKOM. The Articles also provide that any non-cash consideration to
be received in such a transaction shall be valued as set forth in the
Articles; specifically, securities traded on a securities exchange or through
the Nasdaq/NMS shall be valued at the average of the closing prices of the
securities on such exchange or system over the thirty (30) day period ending
three days prior to the closing.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
The Company. Any amendment to the Company's Certificate must comply with the
applicable provisions of the Delaware Code. The Delaware Code generally
provides that the approval of a corporation's board of directors and the
affirmative vote of a majority of (i) all shares entitled to vote thereon and
(ii) the shares of each class of stock entitled to vote thereon as a class is
required to amend a corporation's certificate of incorporation, unless the
certificate specifies a greater voting requirement. The Company's Certificate
provides that the affirmative vote of the holders of at least two-thirds (
2/3) of the outstanding shares of the Company Common Stock shall be required
to amend, alter, repeal or adopt any provision inconsistent with the existing
provisions of the Certificate relating to the issuance by the Board of
Directors of preferred stock; the classification of the Board of Directors;
the liability of directors; the indemnification of directors; and the
amendments to the Certificate. The Bylaws of the Company provide that the
Bylaws may be amended or repealed and new Bylaws may be adopted by the
affirmative vote of the holders of a majority of the capital stock issued and
outstanding and entitled to vote at any meeting of stockholders or by
resolution adopted by the affirmative vote of not less than a majority of the
number of directors of the Company. However, the provisions of the Bylaws
relating to shareholder nominations and proposals; number, term and
qualification of the Board of Directors; indemnification of directors and
officers; and Amendments to Bylaws may only be altered, amended or repealed by
the affirmative vote of the holders of at least two-thirds ( 2/3) of the
outstanding shares of the Company Common Stock.
ELEKOM. Any amendment to ELEKOM's Articles must comply with the applicable
provisions of the Washington Code. The Washington Code authorizes a
corporation's Board of Directors to make various changes of an administrative
nature to the corporation's articles of incorporation, including changes of
corporate name, changes to the number of outstanding shares in order to
effectuate a stock split or stock dividend in the corporation's own shares,
and changes to or elimination of provisions with respect to the par value of
the corporation's stock. Other amendments to a corporation's articles of
incorporation must be recommended to the
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shareholders by the Board of Directors, unless the Board determines that
because of a conflict of interest or other special circumstances, it should
make no recommendation, and must be approved by a majority (if the corporation
is a public company) of all votes entitled to be cast by each voting group
that has a right to vote on the amendment. The articles of incorporation of a
corporation may provide for a higher percentage of shareholder approval, but
the ELEKOM Articles do not. ELEKOM's Bylaws provide that they may be altered,
amended or repealed and new Bylaws may be adopted by the Board of Directors,
except that the Board of Directors may not repeal or amend any Bylaw that the
shareholders have expressly provided, in amending or repealing such Bylaw, may
not be amended or repealed by the Board of Directors. The shareholders may
also alter, amend and repeal the ELEKOM Bylaws or adopt new Bylaws. All Bylaws
made by the Board of Directors of ELEKOM may be amended, repealed, altered or
modified by the shareholders.
NUMBER OF DIRECTORS, ELECTION OF DIRECTORS AND CLASSIFIED BOARD OF DIRECTORS
The Company. The Bylaws of the Company provide that the Board of Directors
of the Company shall consist of at least three but not more than seven
members, which number shall be determined, from time to time, by resolution
adopted by the Board of Directors. The Company's Board of Directors presently
consists of seven members. The Certificate of the Company provides that the
directors of the Company shall be divided into three classes as nearly equal
in size as is practicable. The directors in each class serve three-year terms
of office. If the number of directors is changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable,
provided that no decrease in the number of directors shall shorten the term of
any incumbent director. One class of directors is to be elected annually at a
meeting of the stockholders by a plurality of the votes of the shares present
in person or by proxy and entitled to vote on the election of directors. Each
director shall hold office until the next annual meeting of stockholders at
which his term expires and until his successor is elected and qualified, or
until his earlier death, resignation or removal.
The effect of the Company having a classified Board of Directors is that
only approximately one-third of the members of the Board of Directors are
elected each year; consequently, two annual meetings are effectively required
for the Company's stockholders to change a majority of the members of the
Board of Directors.
ELEKOM. The WBCA provides that the board of directors of a Washington
corporation shall consist of one or more directors as fixed by its articles of
incorporation or bylaws. The Bylaws of ELEKOM provide that the Board of
Directors of ELEKOM shall be composed of not less than one nor more than eight
directors, the specific number to be set by resolution of the Board of
Directors or the shareholders. ELEKOM's Board of Directors presently consists
of five members. The Articles and Bylaws of ELEKOM do not provide for a
classified Board of Directors. Rather, the Bylaws of ELEKOM provide that
unless a director dies, resigns, or is removed, his or her term of office
shall expire at the next annual meeting of shareholders; provided, however,
that a director shall continue to serve until his or her successor is elected
or until there is a decrease in the authorized number of directors. Each
shareholder entitled to vote at an election of directors may vote, in person
or by proxy, the number of shares owned by such shareholder for one candidate
for each board seat to be filled. Unless otherwise provided in the Articles,
the candidates elected shall be those receiving the largest number of votes
cast, up to the number of directors to be elected. The Articles provide that,
as long as at least a majority of the shares of Series A Preferred Stock
originally issued remain outstanding, the holders of such shares of Series A
Preferred Stock shall be entitled to elect one director of ELEKOM at each
annual election of directors. The holders of Series A Preferred Stock, Series
B Preferred Stock and ELEKOM Common Stock (voting together as a single class
and not as separate series, and on an as-converted basis) shall be entitled to
elect any remaining directors of ELEKOM. ELEKOM's Articles do not provide for
cumulative voting.
REMOVAL OF DIRECTORS
The Company. The Company's Bylaws provide that the directors of the Company
may be removed from office only with cause by a vote of the holders of a
majority of the shares of capital stock of the Company then entitled to vote
at an election of directors, except as otherwise provided by applicable law.
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ELEKOM. ELEKOM's Bylaws provide that, at a meeting of shareholders called
expressly for such purpose, one or more members of ELEKOM's Board of
Directors, including the entire Board of Directors, may be removed with or
without cause by the holders of the shares entitled to elect the director or
directors whose removal is sought if the number of votes cast to remove the
director exceeds the number of votes cast not to remove the director. If
ELEKOM's Articles permit cumulative voting in the election of directors, then
a director may not be removed if the number of votes sufficient to elect such
director if then cumulatively voted at an election of the entire board or, if
there are classes of directors, at an election of the class of director of
which such director is a part, is voted against the director's removal.
ELEKOM's Articles currently do not provide for cumulative voting.
LIMITATION ON DIRECTOR LIABILITY
The Company. The Company's Certificate provides that, to the fullest extent
permitted by the Delaware Code, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director.
ELEKOM. ELEKOM's Articles provide that, to the full extent that the WBCA
permits the limitation or elimination of the liability of directors, a
director of ELEKOM shall not be liable to ELEKOM or its shareholders for
monetary damages for conduct as a director. Any amendments to or repeal of
this provision of ELEKOM's Articles will not adversely affect any right or
protection of a director of ELEKOM for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal. The
WBCA permits a corporation to provide for the elimination or limitation of the
liability of directors to the corporation or its shareholders for monetary
damages for their conduct as directors, except that a corporation may not
limit a director's liability for acts or omissions involving intentional
misconduct or knowing violation of law, for unlawful distributions, or for any
transaction in which the director derived an improper personal financial
benefit.
INDEMNIFICATION
The Company. The Company's Certificate provides that the Company shall
indemnify to the full extent permitted by law any person made or threatened to
be made a party to an action or proceeding, whether criminal, civil,
administrative, or investigative, by reason of the fact that he, his testator
or intestate is or was a director, officer or employee of the Company or any
predecessor of the Company or serves or served any other enterprise as a
director, officer or employee at the request of the Company or any predecessor
of the Company. Under Section 145 of the Delaware Code, as currently in
effect, other than in actions brought by or in the right of the Company, such
indemnification would apply if it were determined in the specific case that
the proposed indemnitee acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal proceeding, if such person had no
reasonable cause to believe that the conduct was unlawful. In actions brought
by or in the right of the Company, such indemnification probably would be
limited to reasonable expenses (including attorneys' fees) and would apply if
it were determined in a specific case that the proposed indemnitee acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification
may be made with respect to any matter as to which such person is adjudged
liable to the Company, unless, and only to the extent that, the court
determines upon application that, in view of all the circumstances of the
case, the proposed indemnitee is fairly and reasonably entitled to
indemnification for such expenses as the court deems proper. To the extent
that any director, officer, employee, or agent of the Company has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding, as discussed herein, whether civil, criminal, administrative, or
investigative, such person must be indemnified against reasonable expenses
incurred by such person in connection therewith.
ELEKOM. The Bylaws of ELEKOM provide that each person who was, is or is
threatened to be made a named party to or is otherwise involved (including,
without limitation, as a witness) in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, and whether formal or informal (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or
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officer of ELEKOM or, that being or having been such a director or officer or
an employee of ELEKOM, he or she is or was serving at the request of ELEKOM as
a director, officer, partner, trustee, employee, or agent of another
corporation or of a partnership, joint venture, trust, employee benefit plan
or other enterprise (hereinafter an "indemnitee"), whether the basis of a
proceeding is alleged action in an official capacity as such a director,
officer, partner, trustee, employee or agent or in any other capacity while
serving as such a director, officer, partner, trustee, employee or agent,
shall be indemnified and held harmless by ELEKOM against all expense,
liability and loss (including counsel fees, judgments, fines, ERISA excise
taxes or penalties and amounts to be paid in settlement) actually and
reasonably incurred or suffered by such indemnitee in connection therewith,
and such indemnification shall continue as to an indemnitee who has ceased to
be a director, officer, partner, trustee, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators. This
right to indemnification conferred by the Articles is a contract right. No
indemnification shall be provided, however, to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the WBCA regarding unlawful
distributions, for any transaction with respect to which it was finally
adjudged that such indemnitee personally received a benefit in money, property
or services to which the indemnitee was not legally entitled, or if ELEKOM is
otherwise prohibited by applicable law from paying such indemnification,
except that if Section 23B.08.560 relating to shareholder authorized
indemnification and advancement of expenses or any successor provision of the
WBCA is hereafter amended, the restrictions on indemnification set forth in
the Bylaws shall be as set forth in such amended statutory provisions. Unless
limited by the corporation's articles of incorporation, the WBCA requires
indemnification if the director or officer was wholly successful on the merits
of the action or otherwise. Any indemnification of a director in a derivative
action must be reported to the shareholders in writing. WBCA also permits a
corporation to indemnify its directors and officers for amounts paid in
settlement of derivative actions, provided that the director's or officer's
conduct does not fall within one of the categories set forth above. The ELEKOM
Bylaws provide for indemnification of directors and officers of ELEKOM to the
fullest extent permitted by Washington law.
VOTE REQUIRED FOR SHAREHOLDER APPROVAL
The Company. The Company's Bylaws provide that the holders of a majority of
the issued and outstanding share of capital stock of the Company entitled to
vote at a meeting of stockholders, present in person or represented by proxy,
shall constitute a quorum for the transaction of business at such meeting.
Each outstanding share of voting capital stock of the Company shall be
entitled to one vote on each matter submitted to a vote at a meeting of the
stockholders. Except as otherwise provided by law, the Certificate or the
Company's Bylaws, if a quorum is present (i) directors shall be elected by a
plurality of the votes of the shares of capital stock of the Company present
in person or represented by proxy at the meeting and entitled to vote on the
election of directors, and (ii) the affirmative vote of the holders of a
majority of shares of capital stock of the Company present in person or by
proxy at the meeting and entitled to vote on the subject matter shall be the
act of the stockholders of the Company in all matters other than the election
of directors.
ELEKOM. ELEKOM's Bylaws provide that a majority of the votes entitled to be
cast on a matter by the holders of shares that, pursuant to the Articles or
the Washington Code, are entitled to vote and be counted collectively upon
such matter, represented in person or by proxy, shall constitute a quorum of
such shares at a meeting of shareholders. Except as provided in the Articles
or in the election of directors, each outstanding share entitled to vote with
respect to a matter submitted to a meeting of shareholders shall be entitled
to one vote upon such matter. If a quorum is present, action on a matter other
than the election of directors shall be approved if the votes cast in favor of
the action by the shares entitled to vote and be counted collectively upon
such matter exceed the votes cast against such action by the shares entitled
to vote and be counted collectively thereon, unless the Articles or the
Washington Code require a greater number of affirmative votes. The Articles
provide that the holder of each share of Series A Preferred Stock and Series B
Preferred Stock shall have the right to one vote for each share of ELEKOM
Common Stock into which such Series A Preferred Stock and Series B Preferred
Stock could then be converted, and with respect to such vote, such holder
shall have full voting rights and powers equal to the voting rights and powers
of the holders of the ELEKOM Common Stock, and shall be entitled to
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notice of any shareholders' meeting in accordance with the Bylaws of ELEKOM,
and shall be entitled to vote, together with the holders of the ELEKOM Common
Stock, with respect to any question upon which the holders of the ELEKOM
Common Stock have the right to vote.
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS
The Company. The Delaware Code generally requires the approval of a majority
of the outstanding voting stock of the Company to effect (i) any merger or
consolidation with or into any other corporation, (ii) any sale, lease, or
exchange of all or substantially all of the Company's property or assets, or
(iii) the dissolution of the Company. However, pursuant to the Delaware Code,
the Company may enter into a merger transaction without stockholder approval
if: (i) the Company is the surviving corporation, (ii) the agreement of merger
does not amend in any respect the Company's Certificate, (iii) each share of
Company stock outstanding immediately prior to the Effective Time of the
merger is to be an identical outstanding or treasury share of the Company
after the Effective Time of the merger, and (iv) either no shares of Company
Common Stock and no shares, securities, or obligations convertible into such
stock are to be issued or delivered under the plan of merger, or the
authorized unissued shares or the treasury shares of Company Common Stock to
be issued or delivered under the plan of merger plus those initially issuable
upon conversion of any other shares, securities, or obligations to be issued
or delivered under such plan do not exceed 20% of the shares of Company Common
Stock outstanding immediately prior to the Effective Time of the merger.
ELEKOM. WBCA provides generally that the Board of Directors must recommend a
merger or share exchange to the shareholders, unless the Board of Directors
determines that because of conflict of interest or other special circumstances
it should make no recommendation and communicates the basis for its
determination to the shareholders. Unless the Washington Code or the Articles
require a greater vote or a vote by voting groups, the merger or share
exchange to be authorized must be approved by each voting group entitled to
vote separately on the merger or share exchange by two-thirds of all the votes
entitled to be cast on the merger or share exchange by that voting group.
However, the Washington Code provides that action by the shareholders of a
surviving corporation is not required if: (i) the articles of incorporation of
the surviving corporation will not differ, with certain minor exceptions, from
its articles of incorporation before the merger; (ii) each shareholder of the
surviving corporation whose shares were outstanding immediately before the
Effective Time of the merger will hold the same number of shares, with
identical designations, preferences, limitations, and relative rights,
immediately after the merger; (iii) the number of voting shares outstanding
immediately after the merger plus the number of voting shares issuable as a
result of the merger, either by the conversion of securities issued pursuant
to the merger or the exercise of rights and warrants issued pursuant to the
merger, will not exceed the total number of voting shares of the surviving
corporation authorized by its articles of incorporation immediately before the
merger; (iv) the number of participating shares outstanding immediately after
the merger, plus the number of participating shares issuable as a result of
the merger, either by the conversion of securities issued pursuant to the
merger or the exercise of rights and warrants issued pursuant to the merger,
will not exceed the total number of participating shares authorized by its
articles of incorporation immediately before the merger. The Articles of
ELEKOM do not provide for a greater vote than two-thirds of the votes entitled
to be cast on a merger or share exchange by any voting group.
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING
The Company. The Bylaws of the Company provide that any action which the
stockholders of the Company could take at a meeting may be taken without a
meeting if one or more written consents, setting forth the action taken, shall
be signed, before or after such action, by all the stockholders who would be
entitled to vote upon the action at the meeting.
ELEKOM. The Articles of ELEKOM provide that any action required or permitted
to be taken at a shareholders' meeting may be taken without a meeting or a
vote if either: (i) the action is taken by all shareholders entitled to vote
on the action; or (ii) so long as ELEKOM is not a public company, the action
is taken by shareholders holding of record, or otherwise entitled to vote, in
the aggregate not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which shares
entitled to vote on the action were present and voted.
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SPECIAL MEETING OF STOCKHOLDERS
The Company. The Company's Bylaws provide that a special meeting of the
stockholders of the Company may be called at any time for any purpose or
purposes by the Chairman of the Board or the Chief Executive Officer, and
shall be called by the Secretary at the written request of, or by resolution
adopted by (i) a majority of the Board of Directors or (ii) the holders of a
majority of all of the outstanding shares of capital stock of the Company
entitled to vote at such meeting, in which case, such request shall state the
purpose of the proposed meeting.
ELEKOM. The Bylaws of ELEKOM provide that the Chairman of the Board, the
President or the Board of Directors may call special meetings of the
shareholders for any purpose. Further, a special meeting of the shareholders
shall be held if the holders of not less than 10% of all the votes entitled to
be cast on any issue proposed to be considered at such special meeting have
dated, signed and delivered to the Secretary of ELEKOM one or more written
demands for such meeting, describing the purpose or purposes for which it is
to be held.
DIVIDENDS
The Company. The Bylaws of the Company provide that the Board of Directors
of the Company may from time to time declare, and the Company may pay,
dividends out of its earned surplus on its outstanding shares in the manner
and upon the terms and conditions provided by law. The Delaware Code provides
that, subject to any restrictions in a corporation's certificate of
incorporation, dividends may be declared from the corporation's surplus, or,
if there is no surplus, from its net profits for the fiscal year in which the
dividend is declared and the preceding fiscal year. Dividends may not be
declared, however, if the corporation's capital has been diminished to an
amount less than the aggregate amount of all capital represented by the issued
and outstanding shares of all classes having a preference upon the
distribution of assets.
ELEKOM. Under the Washington Code, a corporation may declare and pay
dividends unless (i) the corporation would, as a result, become unable to pay
its debts as they become due in the usual course of business, or (ii) the
corporation's total assets would be less than the sum of its total liabilities
plus any preferential rights of shares senior to those receiving
distributions. The ELEKOM Articles provide that, so long as any shares of
Series B Preferred Stock are outstanding, ELEKOM shall not declare or pay
dividends on the ELEKOM Common Stock without first obtaining the approval of
at least a majority of the then outstanding shares of Series B Preferred
Stock. In addition, the Articles provide that the holders of record of the
outstanding shares of ELEKOM Series A Preferred Stock and ELEKOM Series B
Preferred Stock shall be entitled to receive dividends out of any assets of
ELEKOM legally available therefor, prior and in preference to any declaration
or payment of any dividend on the ELEKOM Common Stock, at the rate of $0.055
per share per annum for the Series A Preferred Stock and Series B Preferred
Stock, payable when, as, and if declared by the Board of Directors of ELEKOM.
Such dividends shall not be cumulative. After payment of any such dividends,
any additional dividends or distributions shall be distributed among all
holders of ELEKOM Common Stock and all holders of Series A Preferred Stock and
Series B Preferred Stock in proportion to the number of shares of ELEKOM
Common Stock which would be held by each such holder if all shares of Series A
Preferred Stock and Series B Preferred Stock were converted to ELEKOM Common
Stock at the then effective conversion rate. The Articles also provide that,
subject to the prior rights of holders of all classes of stock at the time
outstanding having prior rights as to dividends, the holders of the ELEKOM
Common Stock shall be entitled to receive, when and as declared by the Board
of Directors, out of any assets of ELEKOM legally available therefor, such
dividends as may be declared from time to time by the Board of Directors.
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SELECTED HISTORICAL FINANCIAL DATA OF ELEKOM
The selected balance sheet data as of December 31, 1996 and 1997, and for
the years then ended are derived from the financial statements of ELEKOM that
have been audited by PricewaterhouseCoopers LLP, independent accountants,
which are included elsewhere in this Proxy Statement/Prospectus. The statement
of operations data for the six months ended June 30, 1998 and 1997, and the
balance sheet data as of June 30, 1998, are derived from unaudited financial
statements of the Company which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, that are
necessary for a fair presentation of the financial position and results of
operations for these periods. For the periods prior to November 10, 1997 the
selected financial data relate to the operations of ELEKOM as a wholly-owned
subsidiary of Egghead. The following selected financial data should be read in
conjunction with, and are qualified in their entirety by reference to the
financial statements of ELEKOM and ELEKOM Management's Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this
Proxy Statement/Prospectus. The historical results should not be construed to
be indicative of future results of operations.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
------------------- -------------------
1996 1997 1997 1998
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................ $ 5 $ 17 $ -0- $ 376
Cost of sales........................ -0- 13 -0- 110
Operating expenses:
Research and development........... 409 1,172 629 967
Sales and marketing................ 727 1,425 880 468
General and administrative......... 1,247 2,001 1,037 488
-------- --------- -------- ---------
Total operating expenses......... 2,383 4,598 2,546 1,923
Operating loss....................... (2,378) (4,594) (2,546) (1,657)
Other expense (income), net.......... 154 601 268 (46)
Minority interest.................... -0- -0- -0- -0-
Net loss............................. $ (2,532) $ (5,195) $ (2,814) $ (1,611)
Basic and diluted net loss per share. $(50,646) $(103,892) $(56,280) $ (2.55)
Weighted average number of common
shares outstanding.................. 50 50 50 631,088
Pro forma basic and diluted net loss
per share(1)........................ (0.84) (0.26)
Pro forma weighted average number of
common shares outstanding(1)........ 6,183,097 6,183,097
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1996 1997 1998
------- ------ ----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 1,683 $2,777 $1,467
Working capital (deficit)........................... (3,443) 2,328 624
Total assets........................................ 2,118 3,214 2,099
Long-term debt, net of current portion.............. 157 118 24
Total stockholders' equity (deficit)................ (3,262) 2,575 1,117
</TABLE>
- --------
(1) Given the changes in ELEKOM's capital structure as a result of the 1997
recapitalization and the changes to be effected as a result of the Merger,
pro forma earnings per share is presented. Pro forma earnings per share is
calculated based on the number of shares of ELEKOM Common Stock and ELEKOM
Preferred Stock outstanding at June 30, 1998, and has been adjusted to
give effect to the conversion of all shares of preferred stock into common
stock that will occur in connection with the Merger. Stock options
outstanding at each period end have not been included in the loss per
share calculations as their effect is antidilutive.
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ELEKOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ELEKOM is a development stage enterprise, founded in 1995 as a subsidiary of
Egghead. ELEKOM was founded to focus on the development of advanced supplier-
independent electronic procurement systems for large enterprises. In 1996,
ELEKOM introduced, but never sold, a Lotus Notes-based product, ELETRADE, that
was the precurser to the existing ELEKOM Procurement intranet business
software. In November 1997, ELEKOM was recapitalized, and a majority of the
ownership was sold to outside investors. In connection with the
recapitalization, ELEKOM reacquired debt of approximately $6.6 million, and
Egghead assumed responsibility for all accounts payable, totaling
approximately $174,000 incurred before or on November 4, 1997, in exchange for
preferred stock. In connection with the recapitalization, ELEKOM sold
preferred stock to outside investors who purchased a majority of the
outstanding stock.
The financial statements for all periods prior to November 10, 1997, reflect
the results of operations, financial position, and cash flows of ELEKOM as a
wholly-owned subsidiary of Egghead and may not be indicative of actual results
of operations and financial position of ELEKOM under other ownership. In
particular, the statement of operations reflects certain expense items
incurred by Egghead which were allocated to ELEKOM on a basis which management
believes represents a reasonable allocation of such costs to present ELEKOM as
a stand-alone company. These allocations consist primarily of corporate
expenses such as executive and other compensation, depreciation of corporate
assets, rent expense and legal fees and interest expense on inter-company
borrowings. The corporate expenses have been allocated based on an estimate of
Egghead personnel time dedicated to the operations and management of ELEKOM.
Interest expense has been allocated based on ELEKOM's estimated borrowing rate
and actual intercompany borrowings. A summary of these allocations is as
follows (in thousands):
<TABLE>
<CAPTION>
CORPORATE INTEREST
EXPENSE EXPENSE
--------- --------
<S> <C> <C>
Year ended December 31, 1996........................... $186 $193
Year ended December 31, 1997........................... $365 $601
</TABLE>
Through 1997 ELEKOM recognized revenue from services in compliance with
Statement of Position ("SOP") 91-1 "Software Revenue Recognition." Effective
January 1, 1998, ELEKOM adopted SOP 97-2 "Software Revenue Recognition." The
adoption of this SOP did not have a significant impact on ELEKOM's financial
statements due to its limited revenue. Sales include revenues from product
licenses, service fees and maintenance fees. Sales that are prepaid or
invoiced, but that do not yet qualify for recognition under SOP 97-2, are
reflected as deferred revenues.
Cost of sales includes the costs of license fees, services and maintenance.
Cost of license fees includes royalties and software duplication and
distribution costs. Cost of services include personnel and related costs.
These costs are recognized as services are performed. Cost of maintenance fees
include personnel and related costs incurred to provide the ongoing support
and maintenance of products. These costs are recognized when incurred.
Research and development expenses consist primarily of personnel costs and
subcontractor fees. ELEKOM accounts for software development costs under
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting For
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Research and development expenses are charged to expense as incurred until
technological feasibility is established, after which remaining costs are
capitalized. ELEKOM defines technological feasibility as the point in time at
which there is a working model of the related product. ELEKOM charges all
internal software development costs to expense as incurred.
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Sales and marketing expenses consist primarily of salaries, commissions and
benefits to sales and marketing personnel, travel, trade show participation,
public relations and other promotional expenses.
General and administrative expenses consist primarily of salaries for
financial, administrative and management personnel and related travel
expenses, as well as occupancy, equipment and other administrative costs,
including the expenses allocated from Egghead for the periods through November
1997.
ELEKOM has NOLs of approximately $7.5 million at June 30, 1998, of which
approximately $2.9 million were generated in periods in which ELEKOM was a
subsidiary of Egghead. The net operating losses will expire beginning in 2012
if not previously utilized. ELEKOM established a valuation allowance equal to
the total deferred tax assets. The benefits from these deferred tax assets may
be recorded in the future if it is determined that the NOLs can be utilized,
which will reduce ELEKOM's effective tax rate for future taxable income. Based
upon the ownership changes in November 1997, utilization of $5.2 million of
the NOLs is limited to approximately $220,000 per year. If ELEKOM does not
realize taxable income in excess of the limitation in future years, certain
NOLs will expire. Upon completion of the Merger, the NOL may be further
limited.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
SALES
Sales were approximately $376,000 for the six months ended June 30, 1998.
ELEKOM had no sales for the six months ended June 30, 1997. During the period
ended June 30, 1997, ELEKOM was still in the process of developing the first
release of the current product and had ceased marketing the ELETRADE product.
Sales for the six months ended June 30, 1998, included (i) product license
fees of $329,000, of which $150,000 was attributable to the OEM Agreement with
the Company, and (ii) service and maintenance fees of $47,000 related to
installation and maintenance of product licensed during the six month period.
COST OF SALES
Cost of sales were approximately $110,000, or 29.3% of sales, for the six
months ended June 30, 1998. Elekom had no cost of sales for the six months
ended June 30, 1997. Substantially all of the cost of sales relates to costs
associated with service and maintenance revenues. Cost of sales as a
percentage of revenues are high due to the low volume of sales relative to the
fixed costs required to maintain a technical support organization.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 53.7% to approximately $967,000
for the six months ended June 30, 1998, compared to approximately $629,000 for
the six months ended June 30, 1997, primarily as a result of an increase in
the number of developers, including outside developers, in conjunction with
the continued development of ELEKOM's software.
SALES AND MARKETING
Sales and marketing expenses decreased 46.8% to approximately $468,000 for
the six months ended June 30, 1998, compared to approximately $880,000 for the
six months ended June 30, 1997. The decrease is a result of the decrease in
marketing expenses. In the quarter ended June 30, 1997, ELEKOM incurred
significant marketing expenses in connection with the promotion of ELEKOM
Procurement 1.0.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 52.9% to approximately
$488,000 for the six months ended June 30, 1998, compared to approximately
$1.0 million for the six months ended June 30, 1997. This decrease was
primarily due to (i) a smaller executive staff in 1998 and (ii) the
elimination of administrative services which were previously provided by
Egghead.
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OTHER INCOME (EXPENSE)
Interest income, net, was approximately $46,000 for the six months ended
June 30, 1998. Interest expense, net, was approximately $268,000 for the six
months ended June 30, 1997. Interest income for the six months ended June 30,
1998, was generated by the funds available to invest from the November 1997
venture financing. Interest expense for the six months ended June 30, 1997,
was incurred on funds advanced by Egghead.
INCOME TAXES
As a result of the operating losses incurred since ELEKOM's inception,
ELEKOM has not recorded any provision or benefit for income taxes in the six
month periods ended June 30, 1998 and 1997. During the six month period ended
June 30, 1997, ELEKOM filed its income tax return as part of the Egghead
consolidated group, which also had a loss for the period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES AND COST OF SALES
Both sales and cost of sales were immaterial for the years ended December
31, 1997 and 1996.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 186.5% to approximately $1.2
million in 1997, compared to approximately $409,000 in 1996. The increase was
primarily due to increased staffing for research and development.
SALES AND MARKETING
Sales and marketing expenses increased 96.1% to approximately $1.4 million
in 1997, compared to approximately $727,000 in 1996 as a result of the costs
associated with increased marketing efforts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 60.4% to approximately $2.0
million in 1997 from approximately $1.2 million in 1996. The increase was
primarily due to an increase in the amount of allocated expenses from Egghead
due to an increase in the number of ELEKOM staff.
INCOME TAXES
As a result of the operating losses incurred since ELEKOM's inception and
the fact that Egghead has accumulated net operating losses during the time
that ELEKOM filed its income tax return as part of the Egghead consolidated
group, ELEKOM has not recorded any provision or benefit for income taxes in
1997 or 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in August 1995, ELEKOM has been a development stage
enterprise and has not generated significant revenues. Funding of operations
and investment activities was provided exclusively by Egghead through November
1997, at which time ELEKOM raised $2.5 million from a venture capital equity
financing. ELEKOM raised an additional $400,000 of venture capital financing
in December 1997. Cash used in operating activities was approximately $1.2
million and $2.7 million during the six months ended June 30, 1998 and 1997,
respectively, primarily attributable to the net losses incurred during those
periods.
Cash used in investing activities was approximately $186,000 and $44,000
during the six months ended June 30, 1998 and 1997, respectively. The cash
used in investing activities during the six months ended June 30, 1998 and
June 30, 1997, was primarily attributable to purchases of equipment.
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In June 1998, ELEKOM entered into a revolving loan agreement and an
equipment line of credit facility with Silicon Valley Bank in the amount of
$1.0 million under which ELEKOM can draw on either facility in any proportion
up to the aggregate total of $1.0 million. The agreement with Silicon Valley
Bank requires ELEKOM to complete additional equity financing of at least $2.0
million prior to December 31, 1998, and to maintain a tangible net worth of at
least $500,000 thereafter. Interest on the revolving credit facility and on
the equipment facility is at prime plus 0.5% and is collateralized by all of
the assets of ELEKOM. The equipment term facility with Silicon Valley Bank
will expire on December 31, 1998, and the revolving portion of the facility
will expire on September 30, 1999. As of June 30, 1998, the Company had no
outstanding balance and had $1.0 million available for future borrowings under
this agreement.
ELEKOM had available NOLs of approximately $7.5 million as of June 30, 1998,
to reduce future income tax liabilities. These NOLs begin expiring in 2012 and
are subject to review and possible adjustment by the appropriate taxing
authorities. Pursuant to the Tax Reform Act of 1986, the utilization of NOLs
for tax purposes may be subject to an annual limitation if a cumulative change
of ownership of more than 50% occurs over a three-year period. As a result of
this limitation, ELEKOM will be limited in the use of its NOLs in any given
year. ELEKOM had gross deferred tax assets of approximately $2.5 million at
June 30, 1998, comprised primarily of NOLs. ELEKOM has fully reserved for
these deferred tax assets. Upon completion of the Merger, the NOL may be
further limited.
IMPACT OF YEAR 2000
ELEKOM has designed and tested the most current versions of its products to
be Year 2000 compliant. There can be no assurances that ELEKOM's current
products do not contain undetected errors or defects associated with Year 2000
date functions that may result in material costs to ELEKOM. Some commentators
have stated that a significant amount of litigation will arise out of Year
2000 compliance issues, and ELEKOM is aware of a growing number of lawsuits
against other software vendors. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent ELEKOM may be affected
by it.
ELEKOM is in the process of determining the extent to which third-party
licensed software distributed by ELEKOM is Year 2000 compliant, as well as the
impact of any non-compliance on ELEKOM and its customers. Additionally, in the
event relational database management systems used with ELEKOM's software are
not Year 2000 compliant, there can be no assurance that ELEKOM's customers
will be able to continue to use ELEKOM's products. ELEKOM does not currently
believe that the effects of any Year 2000 non-compliance in ELEKOM's installed
base of software will result in a material adverse impact on ELEKOM's business
or financial condition. However, ELEKOM's investigation with respect to third-
party software is in its preliminary stages, and no assurance can be given
that ELEKOM will not be exposed to potential claims resulting from system
problems associated with the century change or that such claims would not have
a material adverse effect on ELEKOM's business, financial condition or results
of operations.
With respect to its internal systems, ELEKOM is taking steps to prepare its
systems for the Year 2000 date change. ELEKOM expects to substantially
complete inventory efforts at the end of calendar year 1998, with remediation
and testing to continue through 1999. Although ELEKOM does not believe that it
will incur any material costs or experience material disruptions in its
business associated with preparing its internal systems for the Year 2000,
there can be no assurance that ELEKOM will not experience unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems. ELEKOM is currently
unable to estimate the most reasonably likely worst case effects of the year
2000 and does not currently have a contingency plan in place for any such
unanticipated negative effects.
ELEKOM is currently unable to estimate whether it bears a significant risk
of being adversely affected by Year 2000 noncompliance by third parties.
During the fourth quarter of 1998, ELEKOM intends to begin contacting third
parties with which it has material relationships, including its material
customers, to attempt to determine their preparedness with respect to Year
2000 issues and to analyze the risks to ELEKOM in the event
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any such third parties experience significant business interruptions as a
result of Year 2000 noncompliance. ELEKOM expects to complete this review and
analysis and to determine the need for contingency planning in this regard by
March 31, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants has issued Statement
of Position 97-2, "Software Revenue Recognition." SOP 97-2 supersedes SOP 91-1
and is effective for ELEKOM for transactions entered into after December 31,
1997. ELEKOM adopted SOP 97-2 in the first quarter of 1998. The adoption of
SOP 97-2 did not have a significant impact on ELEKOM's consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to display, with the same prominence
as other financial statements, the components of other comprehensive income.
SFAS No. 130 requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. SFAS
No. 130 is effective for ELEKOM's fiscal year ending December 31, 1998
including interim periods. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. ELEKOM's
adoption of SFAS No. 130 did not require significant revisions of prior
disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. Early adoption is encouraged. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
transactions involving hedge accounting. ELEKOM does not anticipate this
statement will have an impact on its financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for financial statements for ELEKOM's
fiscal year ending December 31, 1998. ELEKOM will evaluate the need for such
disclosures at that time.
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BUSINESS OF ELEKOM
GENERAL
ELEKOM is a development stage enterprise engaged in the development of
ELEKOM Procurement, an intranet-based application that is designed to
streamline the corporate procurement process. ELEKOM believes that its
business-to-business commerce solution will provide its customers an
application that simplifies corporate procurement procedures, decreases
purchasing overhead costs and streamlines purchasing from multiple suppliers.
ELEKOM Procurement is designed to automate the creation, routing, approval
and transaction functions for purchase requests and orders of non-production
goods and services by creating a localized database of available products and
services and providing ELEKOM's customers with Internet links to suppliers to
review more detailed supplier and product information. Once deployed at a
customer site, ELEKOM Procurement will automate the procurement process for
non-production goods and services from requisition creation and approval
routing to electronic placement of orders with suppliers. The system is
designed to allow transaction communication through standard communications
methods including facsimile, E-mail and EDI. In addition to the web-based end
user application, ELEKOM believes that ELEKOM Procurement will reduce the IT
burden associated with installation, implementation, deployment and
maintenance of the application through a suite of administrative tools.
Using intranet and Internet based technology, ELEKOM Procurement is designed
to provide users with increased control over their purchasing processes.
Traditionally, purchasing of non-production goods and services, including
computer hardware and software and office supplies, has been an inefficient,
paper intensive process. ELEKOM believes that ELEKOM Procurement will
streamline and automate a company's procurement operations, reduce processing
costs, improve procurement effectiveness and discourage users from purchasing
outside of a customer's approved procedures.
INDUSTRY BACKGROUND
The electronic procurement industry is a relatively new and rapidly changing
industry that has developed as a result of the acceptance of new technologies
in recent years. Traditionally, the procurement process is handled through
client server and mainframe applications that support corporate buyers and
manual requisition routing and approval processes to support front line
employees. The current procurement process in many organizations consists of
the completion of a paper-based requisition form, routing of the request to a
supervisor for his or her approval and further routing of the paper through
other points of authorization within the organization, depending on the goods
and/or services requested. Once fully approved, a purchase order is created to
purchase the goods and/or services previously requisitioned.
In addition to the inefficiency and expense associated with manual
processes, the traditional systems largely fail to connect requisitioners with
supplier information. With the growing popularity of business intranets and
the increased use of the Internet as a business tool, these limitations can be
addressed through new web-based applications. Electronic procurement systems
offer the potential for a rapid return on investment due to reduced process
costs and increased ordering through approved suppliers at a reduced price.
ELEKOM believes that the availability of such returns creates a significant
business opportunity to provide customers with electronic procurement
solutions.
THE ELEKOM SOLUTION
ELEKOM is one of the first companies in the market to develop an intranet-
based electronic procurement software specifically focused on non-production
goods and services. ELEKOM Procurement is designed for ease of use and allows
users to generate requests based on selection via electronic catalogs. The
software is designed to allow the system administrator to create business
rules to support approval routing as required by the customer organization.
Requisitions created by the system can be transmitted to suppliers via E-mail,
fax or by EDI.
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STRATEGY
ELEKOM's near-term objective is to continue to develop and enhance the
functionality of ELEKOM Procurement. In the future, ELEKOM expects to address
other business procedures that require request routing and approval. The key
elements of the strategy are (i) to capitalize on the rapid growth of
Microsoft Windows NT and Microsoft SQL Server in the market, and (ii) to
provide software that is easy to implement, administer and use in an effort to
reduce the total cost of ownership.
As part of its strategy, ELEKOM intends to develop a standard set of
application programming interfaces to integrate with its customers' existing
systems. Additionally, ELEKOM continues to cultivate relationships with
suppliers and business partners.
TECHNOLOGY
ELEKOM Procurement is designed with a three-tier architecture. A three-tier
architecture separates business rules and logic from the user interface and
the database back-end, allowing the distribution of processing loads across
numerous servers and workstations.
ELEKOM's software is comprised of the ELEKOM Procurement Client, ELEKOM
Application server, and the database server running on Microsoft SQL Server
6.5 on Microsoft NT 4.0. In addition, it consists of two administration
applications: ELEKOM Enterprise Manager and ELEKOM Catalog Manager. The
intended functionality of each of these elements is described below:
. ELEKOM PROCUREMENT CLIENT: Users access ELEKOM Procurement through a web
browser. Upon logging into ELEKOM Procurement, the ActiveX components are
downloaded onto the client workstation as needed, and client web pages
are rendered by the browser.
. ELEKOM APPLICATION SERVER: The Application server contains ELEKOM
Procurement's business rules and logic, communicates with the client
browser, and manages approval notification, report generation, and order
placement. It includes ELEKOM Procurement web pages and the ELEKOM
Procurement Server program and it utilizes the capabilities and services
of Microsoft Internet Information Server(TM) ("IIS").
. DATABASE SERVER: Users access the database server through the ELEKOM
Procurement Client to create and manage requisition and purchase order
data. The database server runs Microsoft SQL Server 6.5.
. ADMINISTRATION APPLICATIONS: The enterprise, user, supplier and catalog
portions of the database are configured and maintained with ELEKOM
Enterprise Manager and ELEKOM Catalog Manager running on an administrator
client workstation or on the application server with access to the
database server.
PRODUCTS
ELEKOM Procurement is designed to automate the creation, routing, approval
and transaction functions for purchase requests and orders of non-production
goods and services by (i) creating a localized database of available products
and services (the ELEKOM Procurement catalog) for intranet browsing and (ii)
providing Internet links to suppliers to review more detailed supplier and
product information. Once deployed at a customer site, ELEKOM Procurement will
automate the procurement process for non-production goods and services, from
requisition creation and automatic approval routing to electronically placing
orders with suppliers. The system is designed to allow transaction
communication through standard methods such as E-mails and EDI, and
administrator utilities are designed to provide easy maintenance of the
database and system processes.
ELEKOM Procurement contains the following components:
. ELEKOM PROCUREMENT consists of Active Server Pages (ASP) with ActiveX
controls, reporting software, and ELEKOM Procurement Help for the client.
A browser provides the interface to web pages for browsing the ELEKOM
Procurement catalog, creating paperless requisitions, approving purchase
requests, receiving and accepting shipments, and generating reports.
Users can track the status of orders throughout the process.
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. ELEKOM PROCUREMENT DATABASE contains all enterprise, user, supplier,
catalog, and order data.
. ELEKOM PROCUREMENT SERVER generates approval routing paths for
requisitions, sends e-mail notifications, and transmits orders to
suppliers.
. ELEKOM ENTERPRISE MANAGER lets administrators configure and maintain
user, supplier, organization, group, and business rules data stored in
the ELEKOM Procurement database.
. ELEKOM CATALOG MANAGER lets administrators set up and maintain the ELEKOM
Procurement catalog, which contains the catalog items from all suppliers
and is stored in the ELEKOM Procurement database.
CUSTOMERS
ELEKOM's principal customers include MasterCard International, the Company
and the Chamberlain Group. ELEKOM believes that the loss of any one of these
customers could have a material adverse effect on its business, financial
condition and results of operations.
SALES AND MARKETING
ELEKOM's sales strategy is based on building its geographically distributed
sales force and developing relationships with indirect channel partners.
ELEKOM's sales force is a geographically-distributed direct sales force with
indirect channel partners. ELEKOM's direct sales force focuses on leads
generated through ELEKOM's marketing efforts and will contact customers to
generate new business activity. ELEKOM intends to solicit indirect channel
partners who have existing relationships with customers who may view ELEKOM's
software as a significant value-added application. Given the early stage of
the electronic procurement market, ELEKOM's marketing efforts have focused on
market awareness and lead generation through its participation in industry
trade shows, customer seminar series and direct contact with key industry
analysts. ELEKOM also intends to enhance its sales collateral materials to
better support its growing direct sales force.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
ELEKOM's professional services include project planning, software
installation, configuration and supplier set-up. ELEKOM will also seek to
develop relationships with key consulting organizations who can assist ELEKOM
in identifying new business opportunities and provide product related services
to ELEKOM customers. ELEKOM intends to increase the level of post-sales
customer support based on the future growth in its customer base.
RESEARCH AND DEVELOPMENT
As a development stage company, ELEKOM spends a significant portion of its
annual budget on product development. ELEKOM employs developers, test
engineers and product managers in its product development area. In addition,
ELEKOM commits resources to the review of third-party technologies that may
enhance the ELEKOM product.
COMPETITION
ELEKOM's primary competitors include other electronic procurement providers
such as ARIBA, CommerceOne, Trade'ex, Intelisys and Trilogy. ELEKOM also faces
competition from larger corporations, such as Netscape and Harbinger, which
have entered the electronic procurement market. In addition, ELEKOM believes
it will experience increased competition from travel and expense software
companies, such as Extensity, Captura and Concur (formerly Portable Software),
which recently acquired 7Software, a direct competitor. In addition, ELEKOM
anticipates that some of the large enterprise resource planning software
vendors, such as SAP, which recently announced SAP Business-to-Business
Procurement solution with expected availability in the fourth quarter of 1998.
Other potential competitors in this category include Oracle, PeopleSoft, and
Baan. Other companies who have a stated interest in electronic procurement
include Microsoft Corporation, IBM, Aspect Development and Requisite
Technologies.
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PROPRIETARY RIGHTS AND LICENSING
ELEKOM's success depends significantly on its internally developed
intellectual property and intellectual property licensed from others. ELEKOM
relies primarily on a combination of copyright, trademark and trade secret
laws, as well as confidentiality procedures and license arrangements to
establish and protect its proprietary rights in its software.
ELEKOM has no patents, and existing trade secret and copyright laws afford
only limited protection of ELEKOM's proprietary rights. ELEKOM has registered
or applied for registration for certain trademarks, and will continue to
evaluate the registration of additional copyrights and trademarks as
appropriate. ELEKOM believes that, because of the rapid pace of technological
change in the software industry, the intellectual property protection of its
products is a less significant factor in its success than the knowledge,
abilities and experience of its employees, the frequency of its product
enhancements, the effectiveness of its marketing activities and the timeliness
and quality of its support services.
ELEKOM has in the past licensed and may in the future license on a non-
exclusive basis third-party software from third parties for use and
distribution with ELEKOM's applications. ELEKOM has entered into agreements
with third party licensors with customary warranty, software maintenance and
infringement indemnification terms. There can be no assurance, however, that
these measures will adequately protect its proprietary rights.
EMPLOYEES
As of June 30, 1998, ELEKOM had a total of 36 full-time employees, all of
whom were based in the United States. Of the total, eight were employed in
sales, two in implementation services, 17 in research and development, one in
customer support, six in finance, administration and operations, and two in
marketing.
FACILITIES
ELEKOM's corporate office and principal facility is located in Bellevue,
Washington, where ELEKOM leases approximately 13,000 square feet of office
space. The lease commenced in July 1998 and expires in October 2000. The lease
requires monthly payments of approximately $23,000. This facility accommodates
all functions of ELEKOM except its regional sales. ELEKOM's regional sales
representatives work from home offices.
LEGAL PROCEEDINGS
ELEKOM and Egghead have initiated a lawsuit against Casahl Technology, Inc.
("Casahl") pending under Case No. 987331 in the Superior Court of California
for the County of San Francisco ("Casahl Litigation") involving an agreement
between Casahl and ELEKOM. Casahl has counterclaimed against the plaintiffs.
At the time that Egghead reduced its equity share in ELEKOM in November 1997,
Egghead undertook certain of ELEKOM's obligations with respect to the Casahl
Litigation. Since November 1997, Egghead has paid all attorneys' fees and
costs of ELEKOM in the Casahl Litigation. To the extent ELEKOM incurs after
the Closing any liability or attorneys' fees or costs that Egghead does not
pay, then the Company and Clarus CSA may assert claims against the Escrowed
Funds and may assert claims against the holders of ELEKOM Preferred Stock
based on their indemnification obligations under the Escrow and Indemnity
Agreement. Although ELEKOM does not anticipate that it will incur any
liability or suffer any losses relating to the Casahl Litigation that Egghead
would not pay, there can be no assurance that this litigation will not have a
material adverse effect on ELEKOM's business, results of operations and
financial condition.
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ELEKOM PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of ELEKOM's capital stock as of July 31, 1998, by: (i) each
beneficial owner of more than 5% of the capital stock of ELEKOM; (ii) each of
ELEKOM's directors; (iii) each executive officer who is a beneficial owner of
ELEKOM capital stock; and (iv) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
SHARES OF ELEKOM SHARES OF ELEKOM
COMMON STOCK PREFERRED STOCK SHARES OF COMPANY
BENEFICIALLY OWNED BENEFICIALLY COMMON STOCK
PRIOR TO OWNED PRIOR TO BENEFICIALLY OWNED
MERGER(1)(2) MERGER(1)(2) FOLLOWING MERGER(3)
------------------ ----------------- ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(2) NUMBER PERCENT NUMBER PERCENT
------------------------ ------- ---------- --------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Hummer Winblad Venture
Partners III, L.P.(4).. -- -- 1,742,736 32.8%
Hummer Winblad
Technology Fund III,
L.P.(4)................ -- -- 91,723 1.7% *
Olympic Venture Partner
IV, L.P.(5)............ -- -- 1,161,824 21.9%
OVP IV Entrepreneurs
Fund, L.P.(5).......... -- -- 61,149 21.9%
Egghead, Inc.(6)........ 50 * 1,528,715 28.8%
Norman N. Behar(7)...... 536,151 57.6% 587,027 11.1% *
John Hummer(4).......... -- -- 1,834,459 34.6%
Gerard Langeler(5)...... -- -- 1,222,973 23.0%
Jonathan Lazarus(8)..... 50,265 5.4% 134,000 2.5% *
George Orban(6)......... 1,285 * 1,528,715 28.8%
Officers and Directors
as a Group (6 persons). 672,651 72.3% 5,307,174 100%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of Common Stock issuable
by the Company pursuant to options held by the respective person or group
which may be exercised within 60 days after July 31, 1998 ("Presently
Exercisable Options"). Except as otherwise indicated, each shareholder
named in the table has sole voting and investment power with respect to
the shares set forth opposite such shareholder's name.
(2) For purposes of calculating the percentage beneficially owned, the number
of shares deemed outstanding before the Merger are the shares outstanding
as of July 31, 1998. The number of shares deemed outstanding after the
Merger includes Company Common Stock being offered hereby. Presently
Exercisable Options are deemed to be outstanding and to be beneficially
owned by the person or group holding such options for the purpose of
computing the percentage ownership of such person or group but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person or group.
(3) The shares of the Company Common Stock beneficially owned following the
Merger are calculated assuming there will be approximately [ ] shares
of the Company Common Stock outstanding immediately after the Merger and
by applying the liquidation preferences for the ELEKOM Common Stock and
the ELEKOM Preferred Stock, as applicable, as set forth in ELEKOM's
Articles of Incorporation. The table above assumes that each of the ELEKOM
Shareholders has made a Pro Rata Election with respect to the Merger
Consideration and that the Closing Price for a share of the Company Common
Stock is $[ ]. See "The Merger--Basic Terms of the Merger."
(4) Includes 91,723 shares of Series B Stock owned by Hummer Winblad
Technology Fund III, L.P. and 1,742,736 shares of Series B Stock owned by
Hummer Winblad Venture Partners III, L.P. John Hummer is a limited partner
of both funds and disclaims any beneficial ownership of such shares.
Hummer Winblad Venture Partners III, L.P. address is 2 South Park, 2nd
Floor, San Francisco, CA, 94107.
114
<PAGE>
(5) Includes 1,161,824 shares of Series B Stock owned by Olympic Venture
Partners IV, L.P. and 61,149 shares of Series B Stock owned by OVP IV
Entrepreneur Fund, L.P. Mr. Langeler is the Managing Member of the General
Partner, OVMC IV, LLC, of both limited partnerships. Mr. Langeler
disclaims beneficial ownership of all such shares. Olympic Ventre Partner
IV, L.P. and Olympic Entrepreneur Fund, L.P. address is 2420 Carillon
Point, Kirkland, WA 98033.
(6) Includes presently exerciseable Options to purchase 1,235 shares of ELEKOM
Common Stock which are exercisable by Mr. Orban within sixty days
following September 4, 1998. Also includes 50 shares of ELEKOM Common
Stock and 1,528,715 shares of Series B Stock owned by Egghead over which
Mr. Orban has voting control. Mr. Orban disclaims beneficial ownership of
the shares owned by Egghead. Egghead's address is 22705 E. Mission,
Liberty Lake, WA 99019.
(7) Includes 469,133 shares of ELEKOM Common Stock that are subject to
repurchase by ELEKOM.
(8) Includes 134,000 Series B Preferred Stock owned by the Lazarus Family
Investments, LLC.
EXPERTS
The audited consolidated financial statements and schedule of the Company as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 included in this Proxy Statement/Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report thereto and are included herein in reliance upon the authority
of said firm as experts in giving said reports.
The financial statements of ELEKOM Corporation as of December 31, 1997 and
1996 and for the years ended December 31, 1997 and 1996 and for the period
from August 7, 1995 (inception) through December 31, 1997 included in this
Proxy Statement/Prospectus have been so included in reliance on the report
(which includes an explanatory paragraph relating to the ability of ELEKOM
Corporation to continue as a going concern as described in Note 1 to the
financial statements) of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
OPINIONS
The legality of the shares of the Company's Common Stock to be issued in the
Merger will be passed on by Womble Carlyle Sandridge & Rice, PLLC, Atlanta,
Georgia. Certain tax consequences to ELEKOM Shareholders will be passed upon
by Perkins Coie LLP.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SQL FINANCIALS INTERNATIONAL, INC. FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997...................................................... F-6
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1995, 1996 and 1997......................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997...................................................... F-8
Notes to Consolidated Financial Statements for the Years Ended December
31, 1995, 1996 and 1997.................................................. F-9
Unaudited Consolidated Balance Sheet as of June 30, 1998.................. F-27
Unaudited Consolidated Statements of Operations for the Six Months Ended
June 30, 1997 and 1998................................................... F-29
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1998................................................... F-30
Notes to Unaudited Interim Consolidated Financial Statements.............. F-31
ELEKOM CORPORATION FINANCIAL STATEMENTS:
Report of Independent Accountants......................................... F-32
Balance Sheet as of December 31, 1997 and 1996............................ F-33
Statements of Operations for the Years Ended December 31, 1997 and 1996... F-34
Statements of Changes in Shareholders' Equity for the Years Ended December
31, 1997 and 1996........................................................ F-35
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996... F-36
Notes to Financial Statements............................................. F-37
Unaudited Balance Sheet as of June 30, 1998............................... F-44
Unaudited Statements of Operations for the Six Months Ended June 30, 1997
and 1998................................................................. F-45
Unaudited Statements of Cash Flows for the Six Months Ended June 30, 1997
and 1998................................................................. F-46
Notes to Unaudited Interim Financial Statements........................... F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SQL Financials International, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of SQL
FINANCIALS INTERNATIONAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SQL Financials
International, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 19, 1998 (except with respect to the matter discussed in Note 12 to
which the date is March 31, 1998)
F-2
<PAGE>
[This Page Intentionally Left Blank]
F-3
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash....................................................... $ 3,279 $ 7,213
Accounts receivable, less allowance for doubtful accounts
and returns of $634 and $338 in 1996 and 1997,
respectively.............................................. 1,971 4,050
Accounts receivable--related party......................... 19 2
Prepaids and other current assets.......................... 90 492
------- -------
Total current assets..................................... 5,359 11,757
------- -------
PROPERTY AND EQUIPMENT:
Furniture and equipment.................................... 2,176 3,094
Leasehold improvements..................................... 215 280
------- -------
Total property and equipment............................. 2,391 3,374
Less accumulated depreciation.............................. (1,181) (1,867)
------- -------
Property and equipment, net.............................. 1,210 1,507
------- -------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $561
and $1,127 in 1996 and 1997, respectively................. 1,783 1,267
Deposits and other long-term assets........................ 173 150
------- -------
Total other assets....................................... 1,956 1,417
------- -------
Total assets............................................. $ 8,525 $14,681
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................. $ 2,003 $ 4,598
Accounts payable--related party.......................... 279 54
Short-term debt.......................................... 958 0
Deferred revenue......................................... 4,686 5,717
Current maturities of long-term debt..................... 855 1,841
-------- --------
Total current liabilities.............................. 8,781 12,210
NONCURRENT LIABILITIES:
Deferred revenue......................................... 3,333 4,480
Long-term debt, net of current maturities,............... 1,093 497
Other noncurrent liabilities............................. 63 49
-------- --------
Total liabilities...................................... 13,270 17,236
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY............... 17 243
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A, 262,500 shares issued and outstanding in 1996
and 1997,............................................... 1,050 1,050
Series B, 454,888 shares issued and outstanding in 1996
and 1997,............................................... 3,025 3,025
Series C, 428,572 shares issued and outstanding in 1996
and 1997,............................................... 3,000 3,000
Series D, 701,755 shares issued and outstanding in 1996
and 1997,............................................... 6,000 6,000
Series E, 697,675 shares issued and outstanding in 1996
and 1997,............................................... 6,000 6,000
Series F, 0 and 628,809 shares issued and outstanding in
1996 and 1997,.......................................... 0 6,037
-------- --------
Total redeemable convertible preferred stock........... 19,075 25,112
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1 par value; 3,000,000 and 3,500,000
shares authorized in 1996 and 1997, respectively;
2,545,390 and 3,174,199 shares of redeemable convertible
preferred stock issued and outstanding in 1996 and 1997,
respectively............................................ 0 0
Common stock, $.0001 par value; 6,750,000 and 9,000,000
shares authorized in 1996 and 1997, respectively;
2,185,348 and 1,467,160 shares issued in 1996 and 1997,
respectively ........................................... 0 0
Additional paid in capital............................... 472 489
Accumulated deficit...................................... (23,859) (28,019)
Warrants................................................. 612 652
Less treasury stock, at cost............................. (302) (2)
Note from stockholder.................................... (612) (612)
Deferred compensation.................................... (148) (418)
-------- --------
Total stockholders' deficit............................ (23,837) (27,910)
-------- --------
Total liabilities and stockholders' deficit............ $ 8,525 $ 14,681
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
License fees...................................... $ 5,232 $ 6,425 $13,506
Services fees..................................... 1,737 3,984 7,786
Maintenance fees.................................. 1,221 2,647 4,696
------- ------- -------
Total revenues.................................. 8,190 13,056 25,988
------- ------- -------
COST OF REVENUES:
License fees...................................... 291 416 1,205
Services fees..................................... 1,421 2,904 5,402
Maintenance fees.................................. 655 1,350 1,973
------- ------- -------
Total cost of revenues.......................... 2,367 4,670 8,580
------- ------- -------
OPERATING EXPENSES:
Research and development.......................... 3,882 5,777 7,190
Sales and marketing............................... 6,636 7,191 9,515
General and administrative........................ 3,292 3,076 4,061
------- ------- -------
Total operating expenses........................ 13,810 16,044 20,766
------- ------- -------
OPERATING LOSS...................................... (7,987) (7,658) (3,358)
INTEREST EXPENSE, net............................... 2 6 274
MINORITY INTEREST................................... (60) (215) (478)
------- ------- -------
NET LOSS............................................ $(8,049) $(7,879) $(4,110)
======= ======= =======
BASIC AND DILUTED NET LOSS PER SHARE................ $ (6.19) $ (5.74) $ (2.97)
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......... 1,300 1,373 1,386
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED TREASURY NOTE FROM DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT WARRANTS STOCK AMOUNT STOCKHOLDER COMPENSATION DEFICIT
------ ------ ---------- ----------- -------- -------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1994......... 1,710 $ 0 $ 7 $ (7,825) $ 0 (810) $(302) $(612) $ 0 $ (8,732)
Issuance costs,
redeemable
convertible
preferred stock,
Series D........ 0 0 0 (72) 0 0 0 0 0 (72)
Issuance of
common stock.... 465 0 310 0 0 0 0 0 0 310
Exercise of stock
options......... 6 0 4 0 0 0 0 0 0 4
Conversion of
redeemable
convertible
preferred stock
into warrants... 0 0 0 0 612 0 0 0 0 612
Net loss......... 0 0 0 (8,049) 0 0 0 0 0 (8,049)
----- --- ---- -------- ---- ---- ----- ----- ----- --------
BALANCE, December
31, 1995......... 2,181 0 321 (15,946) 612 (810) (302) (612) 0 (15,927)
Issuance costs,
redeemable
convertible
preferred stock,
Series E........ 0 0 0 (34) 0 0 0 0 0 (34)
Issuance of stock
options......... 0 0 148 0 0 0 0 0 (148) 0
Exercise of stock
options......... 4 0 3 0 0 0 0 0 0 3
Net loss......... 0 0 0 (7,879) 0 0 0 0 0 (7,879)
----- --- ---- -------- ---- ---- ----- ----- ----- --------
BALANCE, December
31, 1996......... 2,185 0 472 (23,859) 612 (810) (302) (612) (148) (23,837)
Issuance costs,
redeemable
convertible
preferred stock,
Series F........ 0 0 0 (50) 0 0 0 0 0 (50)
Issuance of
warrants........ 0 0 0 0 40 0 0 0 0 40
Unamortized debt
discount........ 0 0 (22) 0 0 0 0 0 0 (22)
Issuance of stock
options......... 0 0 328 0 0 0 0 0 (328) 0
Amortization of
deferred
compensation.... 0 0 0 0 0 0 0 0 58 58
Retirement of
treasury stock.. (735) 0 (300) 0 0 735 300 0 0 0
Exercise of stock
options......... 17 0 11 0 0 0 0 0 0 11
Net loss......... 0 0 0 (4,110) 0 0 0 0 0 (4,110)
----- --- ---- -------- ---- ---- ----- ----- ----- --------
BALANCE, December
31, 1997......... 1,467 $ 0 $489 $(28,019) $652 (75) $ (2) $(612) $(418) $(27,910)
===== === ==== ======== ==== ==== ===== ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(8,049) $(7,879) $(4,110)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 428 1,125 1,406
Minority interest............................... 60 216 478
Amortization of debt discount................... 0 0 18
Deferred compensation........................... 0 0 58
Loss on sale of property and equipment.......... 0 0 46
Changes in operating assets and liabilities:
Accounts receivable........................... (1,510) (352) (2,062)
Prepaids and other current assets............. 107 (31) (402)
Deposits and other long-term assets........... (106) (22) 23
Accounts payable and accrued liabilities...... 1,676 3 2,370
Deferred revenue.............................. 2,644 4,180 2,178
Other noncurrent liabilities.................. 8 (53) (14)
------- ------- -------
Total adjustments........................... 3,307 5,066 4,099
------- ------- -------
Net cash used in operating activities....... (4,742) (2,813) (11)
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment............... (598) (958) (1,193)
Proceeds from sale of property and equipment...... 0 0 10
Purchases of intangible assets.................... (316) (2,000) (50)
------- ------- -------
Net cash used in investing activities....... (914) (2,958) (1,233)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible
preferred stock.................................. 5,927 5,966 5,987
Proceeds from issuance of common stock............ 314 3 11
Proceeds from notes payable and short-term
borrowings, net.................................. 556 2,472 859
Repayments of notes payable and short-term
borrowings....................................... (275) (490) (1,427)
Proceeds from preferred stock bridge financing.... 2,750 0 2,000
Repayment of preferred stock bridge financing..... (750) (2,000) (2,000)
Repayment of note receivable from holder of
minority interest................................ 0 0 38
Dividends paid to holder of minority interest..... (25) (234) (290)
------- ------- -------
Net cash provided by financing activities... 8,497 5,717 5,178
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 2,841 (54) 3,934
CASH AND CASH EQUIVALENTS, beginning of year........ 492 3,333 3,279
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year.............. $ 3,333 $ 3,279 $ 7,213
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest............................ $ 126 $ 153 $ 330
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SQL Financials International, Inc. (the "Company") was incorporated in the
state of Delaware on November 20, 1991. The Company develops, markets, and
supports client/server financial software applications and markets its
products under the trade name SQL Financials throughout the United States and
Canada. The Company provides installation and implementation services through
its majority-owned subsidiary, SQL Financial Services, LLC (the "Services
Subsidiary") and is the sole owner of SQL Financials Europe, Inc.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company and its
majority-owned subsidiaries. All intercompany transactions and balances have
been eliminated.
Minority Interest
Minority interest represents the 20% ownership interest in the Services
Subsidiary (Note 3).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
History of Operating Losses
The Company has incurred significant net losses in each year since its
formation. As of December 31, 1997, the Company had an accumulated deficit of
approximately $28.0 million. These losses have occurred, in part, because of
the substantial costs incurred by the Company to develop its products, expand
its product research, and hire and train its direct sales force. Although the
Company has achieved recent revenue growth and profitability for the quarters
ended September 30, 1997 and December 31, 1997, there can be no assurance that
the Company will be able to generate the substantial additional growth in
revenues that will be necessary to sustain profitability. The Company plans to
continue to increase its operating expenses in order to fund higher levels of
research and development, increase its sales and marketing efforts, broaden
its customer support capabilities and expand its administrative resources in
anticipation of future growth. To the extent that increases in such expenses
precede or are not offset by increased revenues, the Company's business,
results of operations and financial condition would be materially adversely
affected. The Company's financial prospects must be considered in light of the
risks, costs and difficulties frequently encountered by emerging companies,
particularly companies in the competitive financial software industry.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-9
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The book values of cash, trade accounts receivable, trade accounts payable,
and other financial instruments approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of
the Company's long-term debt is estimated based on current rates offered to
the Company for debt with similar terms and maturities. Under this method, the
Company's fair value of financial instruments was not materially different
from the stated value at December 31, 1996 and 1997.
Credit and Concentrations of Product Risk
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The credit risk is mitigated by
the large number of customers comprising the customer base.
Substantially all of the Company's product revenues are derived from sales
of its financial applications. Increased market acceptance of the Company's
product family is critical to the Company's ability to increase sales and
thereby sustain profitability. Any factor adversely affecting sales or pricing
levels of these applications will have a material adverse effect on the
Company's business, results of operations, and financial condition.
Revenue Recognition
Revenues from license fees are recognized upon delivery of the product if
there are no significant post-delivery obligations. Revenues from services
fees are recognized as the services are performed. Maintenance fees relate to
customer maintenance and support and are recognized ratably over the term of
the software support services agreement, which is typically 12 months.
Revenues that have been prepaid or invoiced but that do not yet qualify for
recognition under the Company's policies are reflected as deferred revenues.
Deferred Revenues
Deferred revenues at December 31, 1996 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Deferred revenues:
Deferred license fees...................................... $1,662 $ 1,027
Deferred services fees..................................... 336 127
Deferred maintenance fees.................................. 6,021 9,043
------ -------
Total deferred revenues.................................. 8,019 10,197
Less current portion......................................... 4,686 5,717
------ -------
Noncurrent deferred revenues................................. $3,333 $ 4,480
====== =======
</TABLE>
The Company has in the past, and is expected in the future, to introduce
additional modules and product enhancements. As a result, deferred revenues
resulting from contracts executed in a prior period are recognized in the
quarter in which delivery of the new product occurs. This practice has, and
will in the future continue to cause fluctuations in revenues and operating
results from period to period.
F-10
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment consist of furniture, computers, other office
equipment, purchased software, and leasehold improvements. These assets are
depreciated on a straight-line basis over a two-, three-, or five-year life.
Improvements are amortized over the term of the lease. Depreciation expense
for the years ended December 31, 1995, 1996, and 1997 was $370,000, $640,000,
and $840,000, respectively.
Product Returns and Warranties
The Company provides warranties for its products after the software is
purchased for the period in which the customer maintains the Company's support
of the product. The Company generally supports only current releases and the
immediately prior releases of its products. The Company's license agreements
generally do not permit product returns by its customers. The Company provides
for the costs of product returns and warranties at the time of sale. The
Company recorded a provision for the cost of product returns in the allowance
for doubtful accounts in the accompanying balance sheets at December 31, 1997
and 1996. The Company has not experienced significant warranty claims to date,
and has therefore provided no reserve for warranty costs at December 31, 1997
and 1996.
Intangible Assets
Intangible assets include goodwill, and purchased software licensing rights.
Goodwill in the amount of approximately $290,000, resulting from the excess of
the purchase price over the value of the assets acquired and liabilities
assumed in the purchase of the 80% interest in the Services Subsidiary (Note
3) in 1995, is being amortized on a straight-line basis over a period of 60
months.
In 1996, the Company entered into a license and private label agreement to
purchase a nonexclusive and perpetual license for human resource, payroll, and
benefits software. The agreement allows the Company to modify and enhance the
software and to license these software products to its customers. The purchase
price of $2,000,000 is included in intangible assets and is being amortized on
a straight-line basis over the estimated useful life of 48 months.
Amortization expense related to the agreement for the years ended December 31,
1995, 1996, and 1997 was approximately $0, $417,000, and $500,000,
respectively. The amortization expense related to the agreement is included in
research and development expense in the accompanying consolidated statements
of operations.
Total amortization expense relating to all intangibles was $58,000,
$485,000, and $566,000 for the years ended December 31, 1995, 1996, and 1997,
respectively.
Capitalized Software Development Costs
Internal research and development expenses are charged to expense as
incurred. Computer software development costs are charged to research and
development expense until technological feasibility is established; after
which, remaining software production costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The
Company has defined technological feasibility as the point in time at which
the Company has a working model of the related product. Historically, the
internal development costs incurred during the period between the achievement
of technological feasibility and the point at which the product is available
for general release to customers have not been material. Accordingly, the
Company has concluded that the amount of internal development costs
capitalizable under the provisions of SFAS No. 86 was not material to the
financial statements for the years ended December 31, 1995, 1996, and 1997.
Therefore, the Company has charged all internal software development costs to
expense as incurred for the years ended December 31, 1995, 1996, and 1997.
The Company has in the past and may in the future purchase or license
software that may be modified and integrated with its products. If at the time
of purchase or license technological feasibility is met, the cost of the
software is capitalized and amortized over a period not to exceed its useful
life.
F-11
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived and Intangible Assets
The Company periodically reviews the values assigned to long-lived assets,
including property and other assets, to determine whether any impairments are
other than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
The Company periodically reviews the value assigned to goodwill and
intangible assets to determine whether events and circumstances have occurred
which indicate that the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. The Company uses an estimate of undiscounted cash flows over the
remaining life of the goodwill and other intangible assets in measuring
whether the goodwill and other intangible assets are recoverable.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities include the following as of
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Accounts payable.............................................. $ 261 $ 973
Accrued taxes, other than income taxes........................ 204 396
Accrued compensation, benefits, and commissions............... 865 1,636
Accrued other................................................. 673 1,593
------ ------
$2,003 $4,598
====== ======
</TABLE>
Historical Net Loss Per Share
Historical basic and diluted net loss per share was computed in accordance
with SFAS No. 128, "Earnings per Share," using the weighted average number of
common shares outstanding. Historical basic and diluted net loss per share
does not include the impact of common stock equivalents, including redeemable
convertible preferred stock, as their effect would be antidilutive.
Net loss for basic and diluted earnings per share are the same for basic and
diluted earnings per share; therefore, no reconciliation of the numerator is
presented.
Stock Based Compensation Plan
The Company accounts for its stock-based compensation plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Effective in fiscal year 1996, the Company adopted the disclosure
option of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 requires that companies which do not choose to account for stock-based
compensation as prescribed by the statement shall disclose the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been
adopted.
New Accounting Pronouncements
The American Institute of Certified Public Accountants has issued a
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
supersedes SOP 91-1 "Software Revenue Recognition," and is effective for the
Company for transactions entered into after December 31, 1997. The Company
will adopt SOP 97-2 in the first quarter of 1998. The adoption of the
standards in the statement is not expected to have a significant impact on the
Company's consolidated financial statements.
F-12
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is designed to improve the
reporting of changes in equity from period to period. SFAS No. 130 is
effective for the Company's fiscal year ending December 31, 1998. The Company
will adopt SFAS No. 130 for fiscal 1998. Management does not expect SFAS No.
130 to have a significant impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 requires that an enterprise disclose certain information about
operating segments. SFAS No. 131 is effective for financial statements for the
Company's fiscal year ending December 31, 1998. The Company does not expect
that SFAS No. 131 will require revision of prior disclosures.
2. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995, 1996, and 1997, the Company
engaged in a number of transactions with McCall Consulting Group, Inc.
("McCall Consulting Group") and Technology Ventures LLC ("Technology
Ventures"), entities controlled by Joseph S. McCall, an officer and director
of the Company (the "Officer"). In the opinion of management, the rates, terms
and considerations of the transactions with related parties approximate those
with nonrelated entities.
During the years ended December 31, 1995, 1996 and 1997, McCall Consulting
Group provided the following for the Company: temporary help by administrative
employees and third-party contract labor services, the lease of office
equipment and office space and services in connection with the Company's sales
process.
During the years ended December 31, 1996 and 1997, Technology Ventures
provided recruiting and administrative services to the Company.
Expenses relating to services provided by McCall Consulting Group were as
follows for the years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Contract labor expense:
Implementation expense................................ $ 150 $ 0 $ 0
Research and development.............................. 386 1,250 1,450
Commissions expense..................................... 495 0 0
Administrative services................................. 25 22 38
Office rental expense................................... 0 96 71
Training................................................ 70 37 19
Software and equipment purchases and rental expense..... 0 24 33
------ ------ ------
Total............................................... $1,126 $1,429 $1,611
====== ====== ======
</TABLE>
Amounts owed related to services provided by McCall Consulting Group were as
follows as of December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accounts payable and accrued liabilities........................... $234 $52
==== ===
Accounts receivable................................................ $ 19 $ 2
==== ===
</TABLE>
F-13
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expenses relating to services provided by Technology Ventures were as
follows for the years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Recruiting services........................................... $ 0 $339 $ 0
Administrative services....................................... 19 23 23
--- ---- ---
Total....................................................... $19 $362 $23
=== ==== ===
</TABLE>
Amounts owed related to services provided by Technology Ventures were as
follows as of December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accounts payable and accrued liabilities........................... $45 $ 2
=== ===
</TABLE>
3. SQL FINANCIAL SERVICES, LLC
On March 9, 1995, the Company issued 450,000 shares of common stock to
acquire certain intellectual property rights and tangible assets valued at
$300,000 from Technology Ventures, a related party controlled by the Officer.
Subsequent to the acquisition, the Company and Technology Ventures formed a
subsidiary, the Services Subsidiary, which is 80%-owned by the Company. The
Company contributed the acquired intellectual property rights and tangible
assets to the Services Subsidiary. Technology Ventures acquired the remaining
20% interest in the Services Subsidiary in exchange for a $75,000 note bearing
interest at 7.74%, payable annually, with the principal due in a lump sum
payment in March 2000. As of December 31, 1996 and 1997, the note was
reflected as a reduction of minority interest in consolidated subsidiary. The
Services Subsidiary provides implementation services for the Company's
software applications. The Services Subsidiary had income of approximately
$299,000, $1,080,000 and $2,390,000 for the years ended December 31, 1995,
1996 and 1997, respectively. The Services Subsidiary distributed dividends of
approximately $125,000, $1,169,000 and $1,448,000 during the years ended
December 31, 1995, 1996 and 1997, respectively, to the Company and the
related-party minority interest holder. Subsequent to December 31, 1997, the
minority interest in the Services Subsidiary was purchased by the Company. See
Note 11.
F-14
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
The Company files a consolidated tax return with its majority owned
subsidiaries. The components of the income tax provision (benefit) for the
years ended December 31, 1995, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ 0 $ 0 $ 0
State........................................... 0 0 0
------- ------- -------
0 0 0
------- ------- -------
Deferred:
Federal......................................... (2,542) (2,494) (1,287)
State........................................... (477) (468) (241)
------- ------- -------
(3,019) (2,962) (1,528)
------- ------- -------
Valuation allowance............................... 3,019 2,962 1,528
------- ------- -------
Total......................................... $ 0 $ 0 $ 0
======= ======= =======
</TABLE>
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the years ended December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Tax benefit at statutory
rate..................... (34.0)% (34.0)% (34.0)%
Effect of:
State income tax, net... (4.0) (4.0) (4.0)
Other................... 0.5 0.4 1.1
Valuation allowance..... 37.5 37.6 36.9
----- ----- -----
Provision (benefit) for
income taxes............. 0.0 % 0.0 % 0.0 %
===== ===== =====
</TABLE>
F-15
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities are determined based on the difference
between the financial accounting and tax bases of assets and liabilities.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 8,306 $ 10,047
Allowance for doubtful accounts......................... 241 128
Deferred revenue........................................ 151 0
Depreciation and amortization........................... 167 326
Accrued liabilities..................................... 38 110
Other................................................... 5 3
------- --------
8,908 10,614
------- --------
Deferred tax liabilities:
Services Subsidiary..................................... (3) (181)
Amortization of purchased software...................... (5) (5)
------- --------
(8) (186)
------- --------
Net deferred tax assets before valuation allowance........ 8,900 10,428
Valuation allowance....................................... (8,900) (10,428)
------- --------
Net deferred tax assets................................... $ 0 $ 0
======= ========
</TABLE>
A valuation allowance is provided when it is determined that some portion or
all of the deferred tax assets may not be realized. Accordingly, since it
currently is more likely than not that the net deferred tax assets resulting
from the net operating loss carryforwards ("NOLs") and other deferred tax
items will not be realized, a valuation allowance has been provided in the
accompanying consolidated financial statements as of December 31, 1996 and
1997. The Company established the valuation allowance for the entire amount of
the deferred tax assets attributable to the NOL carryforwards, as well as for
the net deferred tax assets created as a result of temporary differences
between book and tax. The Company will recognize such income tax benefits when
realized. The NOLs at December 31, 1997 were approximately $26,439,000 and
expire at various dates through 2012.
The Company's ability to benefit from certain NOL carryforwards is limited
under Section 382 of the Internal Revenue Code when ownership of the Company
changed by more than 50%, as defined. The Company is limited to using the NOL
carryforwards of $15,800,000 generated prior to February 16, 1996. The
limitation does not permit the Company to use in excess of $1,600,000 of
certain NOL carryforwards per year. If the Company does not realize taxable
income in excess of the limitation in future years, certain NOLs will be
unrealizable. NOLs generated from February 16, 1996 through December 31, 1996
of $6,500,000 and NOLs generated from January 1, 1997 through December 31,
1997 of $4,139,000 may also be further limited as a result of the proposed
initial public offering.
F-16
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
The Company's short- and long-term debt consists of the following as of
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Notes payable to a bank, due in installments through December
31, 1997, secured by certain equipment, bearing interest at a
rate of prime plus 1.75% to 2%................................ $ 323 $ 0
Working capital line of credit with a bank expiring April 7,
1997, payable on demand, repaid with proceeds from the new
line-of-credit agreement, secured by all company assets,
bearing interest at a rate of prime plus 1%................... 635 0
Payable for purchased software licensing rights, payable in
installments over a two-year period through March 1998 at the
rate at which the Company licenses human resource, payroll and
benefits software to its customers............................ 1,855 1,632
Equipment notes payable to a leasing company, payable in
monthly installments of $27,000, with final principal
installments of $169,000 due March 2000 and August 2000,
secured by certain company assets, bearing interest at a
weighted average rate of 22.1%................................ 0 655
Note payable to a financing company, payable in monthly
installments of $1,500 through November 2000, secured by
certain company assets, bearing interest at 8%................ 0 51
Note payable to a former shareholder, secured by treasury
shares of common stock, bearing interest at 8%................ 93 0
------ -----
2,906 2,338
Less short-term debt........................................... 958 0
Less current portion of long-term debt......................... 855 1,841
------ -----
$1,093 $ 497
====== =====
</TABLE>
During 1997, the Company entered into a new line-of-credit agreement with a
bank bearing interest at prime (8.5% at December 31, 1997) plus 2.75% or 3%,
depending on certain terms, as defined. The new line-of-credit agreement with
the bank provides for maximum borrowings not to exceed the lesser of
$3,000,000 or 80% of eligible license and implementation services revenue
accounts receivable plus 65% of eligible maintenance revenue accounts
receivable and is collateralized by substantially all the Company's assets.
The Company had $0 outstanding under the line of credit and availability of
approximately $1,950,000 under the line of credit at December 31, 1997.
Under the provisions of the line-of-credit agreement, the Company must
comply with certain restrictive covenants. These covenants, among other
things, require the Company to maintain specified levels of profitability.
During 1997, the Company entered into debt and lease agreements with a
leasing company. The debt and lease agreements provide total borrowing
capability of up to $1,000,000 for equipment purchases. As of December 31,
1997, the Company had approximately $655,000 outstanding under these
agreements and $345,000 available for future equipment purchases.
During 1997, the Company paid all amounts outstanding under the note payable
to a former shareholder. In accordance with the agreement, the Company retired
the treasury shares provided as collateral for the note.
F-17
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
December 31:
1998................................................................ $1,841
1999................................................................ 256
2000................................................................ 241
------
$2,338
======
</TABLE>
6. ROYALTY AGREEMENTS
The Company is a party to royalty and other equipment manufacturer
agreements for certain of its applications. The Company incurred a total of
$227,000, $355,000 and $1,109,000 in royalty fees for the years ended December
31, 1995, 1996 and 1997, respectively, pursuant to these agreements. The
royalties and fees paid are included in cost of revenues--license fees in the
accompanying statements of operations.
During 1992, the Company entered into a royalty agreement with a former
stockholder. This agreement grants a 3.75% royalty on certain revenues of the
Company, less certain discounts or commissions, collected from any transfer,
sale, or licensing of specific modules of the software. The Company incurred
royalties of $135,000, $177,000 and $295,000 for the years ended December 31,
1995, 1996 and 1997, respectively, pursuant to this royalty agreement.
7. EMPLOYEE BENEFIT PLANS
The Company sponsors the SQL Financials 401(k) Plan (the "Plan"), a defined
contribution plan covering substantially all employees of the Company. Under
the Plan's deferred compensation arrangement, eligible employees who elect to
participate in the Plan may contribute between 2% and 20% of eligible
compensation, as defined, to the Plan. The Company, at its discretion, may
elect to provide for either a matching contribution or discretionary profit
sharing contribution or both. During the years ended December 31, 1995, 1996,
and 1997, the Company did not make matching or discretionary profit sharing
contributions to the Plan.
8. STOCK OPTION PLAN
The Company has a stock option plan for employees, consultants, and other
individual contributors to the Company which enables the Company to grant up
to 1,633,938 qualified and nonqualified incentive stock options (the "1992
Plan"). The qualified options are to be granted at an exercise price not less
than the fair market value at the date of grant. The nonqualified options are
to be granted at an exercise price of not less than 85% of the fair market
value at the date of grant. Fair market values are to be determined by the
board of directors. The stock option committee determines the period within
which options may be exercised, but no option may be exercised more than ten
years from the date of grant. The stock option committee also determines the
period over which the options vest. Options are generally exercisable for
seven years from the grant date and generally vest over a period of four years
at a rate of 20% for years one and two and 30% for years three and four. At
December 31, 1997, the Company had options outstanding to acquire 1,368,744
shares of common stock under the stock option plan and 256,794 shares
available for grant.
The stock option plan also provides for stock purchase authorizations and
stock bonus awards. As of December 31, 1997, no such awards have been granted
under the plan.
F-18
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company adopted the 1998 Stock Incentive Plan (the "1998 Plan") in the
first quarter of 1998. Under the 1998 Plan, the board of directors have the
flexibility to determine the type and amount of awards to be granted to
eligible participants, who must be employees of the Company or its
subsidiaries. The 1998 Plan provides for grants of incentive stock options,
nonqualified stock options, restricted stock awards, stock appreciation rights
and restricted units. The Company has authorized and reserved for issuance an
aggregate of 200,000 shares of common stock under the 1998 Plan, to be
automatically increased to 1,000,000 shares of common stock upon completion of
the offering. See Note 11. The aggregate number of shares of common stock that
may be granted through awards under the 1998 Plan to any employee in any
calendar year may not exceed 200,000 shares. No options have been granted
under the 1998 Plan. The 1998 Plan will continue in effect until February 2008
unless sooner terminated.
The Company applies the principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plan. Accordingly, the
Company recognizes deferred compensation when the exercise price of the
options granted is less than the fair market value of the stock at the date of
grant, as determined by the board of directors. The deferred compensation is
presented as a component of equity in the accompanying balance sheets and is
amortized over the periods expected to be benefited, generally the vesting
period of the options.
During 1996 and 1997, the Company granted options with exercise prices below
the fair market value at the date of grant. These fair values are as follows:
<TABLE>
<CAPTION>
FAIR
PERIOD VALUE
------ -----
<S> <C>
August 28, 1996 through December 4, 1996.............................. $1.23
December 5, 1996 through July 23, 1997................................ 1.43
July 24, 1997 through November 9, 1997................................ 2.00
November 10, 1997..................................................... 4.10
December 10, 1997 through December 31, 1997........................... 5.00
</TABLE>
Accordingly, the Company recorded deferred compensation of $148,000 and
$328,000 for options granted during the years ended December 31, 1996 and
1997, respectively. The Company amortizes deferred compensation over four
years, the vesting period of the options. The Company recognized $58,000 of
compensation expense related to option grants for the year ended December 31,
1997.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black Scholes option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Dividend yield.......................... 0% 0% 0%
Expected volatility..................... 70 70 65
Risk free interest rate at the date of
grant.................................. 5.39%-7.60% 5.27%-6.69% 5.78%-6.82%
Expected life........................... Five years Five years Four years
</TABLE>
Using these assumptions, the fair values of the stock options granted during
the years ended December 31, 1995, 1996, and 1997 are $76,000, $355,000, and
$699,000, respectively, which would be amortized over the vesting period of
the options. Had compensation cost been determined consistent with the
provisions of SFAS
F-19
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No. 123, the Company's pro forma net loss and net loss per share in accordance
with SFAS No. 123 for the years ended December 31, 1995, 1996, and 1997 would
have been as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net loss:
As reported.................................... $(8,049) $(7,879) $(4,110)
Pro forma in accordance with SFAS No. 123...... (8,059) (7,911) (4,269)
Basic and diluted net loss per share:
As reported.................................... (6.19) (5.74) (2.97)
Pro forma in accordance with SFAS No. 123...... (6.20) (5.76) (3.08)
</TABLE>
Because SFAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that expected in future years.
A summary of changes in outstanding options during the years ended December
31, 1995, 1996, and 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
December 31, 1994..................... 220,326 $0.67 $0.67
Granted............................. 220,875 $0.67 $0.67
Canceled............................ (140,661) $0.67 $0.67
Exercised........................... (6,000) $0.67 $0.67
---------
December 31, 1995..................... 294,540 $0.67 $0.67
Granted............................. 559,830 $0.67-$1.00 $0.87
Canceled............................ (63,579) $0.67 $0.67
Exercised........................... (4,350) $0.67 $0.67
---------
December 31, 1996..................... 786,441 $0.67-$1.00 $0.81
Granted............................. 802,845 $1.00-$3.67 $2.96
Canceled............................ (203,730) $0.67-$3.67 $0.95
Exercised........................... (16,812) $0.67-$1.00 $0.68
---------
December 31, 1997..................... 1,368,744 $0.67-$3.67 $2.05
=========
Vested and exercisable at December 31,
1997................................. 264,369 $0.67-$1.00 $0.73
=========
</TABLE>
F-20
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the exercise price range, weighted average
exercise price and remaining contractual lives by year of grant for the number
of options outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE WEIGHTED REMAINING
NUMBER PRICE AVERAGE CONTRACTUAL
YEAR OF GRANT OF SHARES RANGE PRICE LIFE (YEARS)
------------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C>
1995 and prior:
Options granted at fair value.. 222,765 $ 0.67 $0.67 4.01
1996:
Options granted at fair value.. 134,895 0.67 0.67 5.42
Options granted at less than
fair value.................... 249,489 1.00 1.00 5.93
1997:
Options granted at less than
fair value.................... 761,595 1.00-3.67 3.06 6.73
---------
Total........................ 1,368,744 0.67-3.67 2.05 6.01
=========
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1996 and 1997 was $1.14 and $3.04, respectively.
Subsequent to December 31, 1997, the Company granted options to acquire
182,250 shares of common stock under the 1992 Plan to certain employees at an
average exercise price equal to $4.45.
9. STOCKHOLDERS' EQUITY
STOCKHOLDERS' AGREEMENT
All owners of the Company's common stock are parties to the Company's
stockholders' agreement. This agreement provides, among other things, for a
right of first refusal to the Company and then to all other stockholders of
the Company to purchase any selling stockholders' shares at a price equal to
that agreed to by a third party. The stockholders' agreement terminates upon
an initial public offering, with the exception of the registration rights of
the shares covered by the agreement.
All the holders of common stock are party to a stockholders' voting
agreement dated September 1, 1995 whereby the Officer is named voting trustee
and votes all common shares. As of December 31, 1997, the Officer controlled
the right to vote 22.6% of the Company's outstanding voting stock, after
dilution from the preferred stockholders. The stockholders' agreement naming
the Officer as voting trustee terminates upon the consummation of an initial
public offering (Note 11).
PREFERRED STOCK
The Company is authorized to issue 3,500,000 shares of preferred stock. Of
this authorized amount, the Company has issued and outstanding 262,500 of
Series A Preferred Stock ("Series A"), 454,888 of Series B Preferred Stock
("Series B"), 428,572 of Series C Preferred Stock ("Series C"), 701,755 of
Series D Preferred Stock ("Series D"), 697,675 of Series E Preferred Stock
("Series E"), and 628,809 of Series F Preferred Stock ("Series F") at December
31, 1997.
Preferred stockholders are entitled to participate in any dividends paid to
common stockholders and have the voting rights and powers of the common
stockholders, as defined. Preferred stockholders receive preferential
F-21
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
distributions in the event of liquidation of the Company for $4 per share of
Series A, $6.65 per share of Series B, $7 per share of Series C, $8.55 per
share of Series D, $8.60 per share of Series E, and $9.60 per share of Series
F, plus any unpaid declared dividends.
Each share of preferred stock is convertible at the option of the holder at
any time into the number of common shares which results from the effective
conversion rate, as defined. The conversion values at December 31, 1997 are $4
for Series A, $6.65 for Series B, $7 for Series C, $8.55 for Series D, $8.60
for Series E, and $9.60 for Series F. The conversion prices at December 31,
1997 are $2.67 for Series A, $4.43 for Series B, $4.67 for Series C, $5.70 for
Series D, $5.73 for Series E, $6.40 for Series F. Further, in accordance with
the Company's certificate of incorporation, the preferred stock will
automatically convert at the defined conversion rate if the Company
consummates an initial public offering with a price per share and gross
proceeds in excess of defined thresholds. The Company is in the process of
obtaining waivers in regards to these thresholds and redemption rights. See
Note 12.
Certain quantities of all series of preferred shares may be put to the
Company by the preferred stockholders within 30 days following the preferred
redemption dates for an amount per share equal to the conversion value of the
preferred stock plus any declared but unpaid dividends. The preferred
redemption dates and the applicable quantities of shares eligible for
redemption, as defined in the certificate of incorporation, are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING VALUE OF
REDEEMABLE STOCK
CONVERTIBLE ELIGIBLE FOR
PREFERRED STOCK REDEMPTION
--------------- ------------
<S> <C> <C>
Preferred redemption dates:
September 30, 1998........................... 33.3% $ 8,371
September 30, 1999........................... 50.0 12,556
September 30, 2000........................... 100.0 25,112
Date of termination of employment of the
Officer, as defined........................... 100.0 25,112
</TABLE>
SERIES A
On November 24, 1992, pursuant to a stock purchase agreement, the Company
sold 250,000 shares of Series A to Greylock Limited Partnership ("Greylock")
for an aggregate sum of $1,000,000. Stock issuance costs of $62,000 were
incurred in connection with the sale of the preferred shares, resulting in net
proceeds of $938,000. Additionally, on June 30, 1993, pursuant to a stock
purchase agreement, the Company sold 12,500 shares of Series A for an
aggregate sum of $50,000.
SERIES B
On September 21, 1993, pursuant to a stock purchase agreement, the Company
sold a total of 454,888 shares of Series B at a price of $6.65 per share to
Greylock and additional third party investors. The aggregate proceeds from the
sale of this stock totaled $3,025,000. Stock issuance costs of $30,000 were
incurred in connection with the sale of the preferred shares, resulting in net
proceeds of $2,995,000.
SERIES C
On April 1, 1994, pursuant to a stock purchase agreement, the Company sold a
total of 428,572 shares of Series C at a price of $7 per share to certain
existing stockholders and additional third-party investors, resulting in
aggregate proceeds of $3,000,000. Stock issuance costs of $16,000 were
incurred, resulting in net proceeds of $2,984,000.
F-22
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 1, 1994, the Company sold 87,500 shares of Series C Preferred
Stock to Tech Ventures for a purchase price of $7.00 per share, the same price
per share as sold to the Series C investors in April 1994. Tech Ventures paid
the purchase price through the delivery of a secured promissory note. The note
was guaranteed by an officer of the Company who controlled Tech Ventures and
is secured by the assets of an entity controlled by such officer. As of
December 31, 1996 and 1997, the note was reflected as a reduction of
stockholders' equity in the accompanying balance sheets. The Company was
almost entirely dependent at the time on the implementation services of McCall
Consulting Group, a wholly owned subsidiary of Tech Ventures who was
performing substantially all of the implementation services for the Company's
software. In July of 1995 at the request of and as a financial accommodation
to Tech Ventures, the Company converted the 87,500 shares of Series C
Preferred Stock into a warrant to purchase such shares on the same terms and
conditions as set forth in the promissory note. Based on its dependency on
McCall Consulting Group, the Company believed it in its best interest to
maintain Tech Ventures' long-term interest in the success of the Company
through a continuing equity interest. The note was amended effective July 31,
1995 so that the principal amount is due and payable only upon the exercise of
the warrant. The warrant has been reflected in the statement of stockholders'
deficit, with the corresponding note as a reduction of stockholders' deficit.
The warrant expires on the earlier of August 1, 1999 or an initial public
offering.
SERIES D
On January 24, 1995, the Company received an advance on a pending equity
financing arrangement. The Company issued promissory notes to certain existing
preferred stockholders totaling $750,000 at an interest rate of 6%. In
addition, the Company issued warrants to the above parties to purchase 17,544
shares of Series D at a price of $8.55 per share.
On February 21, 1995, the Company issued 701,755 shares of Series D for
$8.55 per share to certain existing preferred stockholders and additional
third party investors. Of the proceeds, $750,000 was used to repay the advance
on financing discussed above. Gross proceeds before stock issuance costs were
$6,000,000. Stock issuance costs of $73,000 were incurred, resulting in net
proceeds of $5,927,000.
On January 5, 1996, the Company entered into an agreement with its bank to
extend its old working capital line of credit. As part of the agreement, the
Company granted the bank a warrant to purchase 8,201 shares of Series D
convertible preferred stock at $8.55 per share. The warrant expires on January
4, 1999.
SERIES E
On February 15, 1996, the Company issued 697,675 shares of Series E for
$8.60 per share to certain existing preferred stockholders and additional
third party investors. Of the proceeds, $2,000,000 was used to repay an
advance on the financing received in 1995. Proceeds from the sale of this
stock, before stock issuance costs, were $6,000,000. Stock issuance costs of
$34,000 were incurred, resulting in net proceeds of $5,966,000.
On March 28, 1997, the Company entered into an agreement with its bank to
amend its working capital line of credit. As part of the agreement, the
Company granted the bank a warrant to purchase 8,721 shares of Series E
convertible preferred stock at $8.60 per share. The warrant expires on March
28, 2000.
SERIES F
On June 5, 1997 and August 5, 1997, the Company received advances on a
pending equity financing arrangement. The Company issued convertible
promissory notes to certain existing preferred stockholders totaling
approximately $2,000,000 and bearing interest at a rate of 8.5%. The notes
were convertible upon the consummation of a private equity offering providing
gross proceeds in excess of defined thresholds. In connection with the
issuance of the notes, the Company issued warrants to the above parties to
purchase 46,821 shares of Series F at a price of $9.60 per share. The value of
the warrants of $40,000 was recorded as a debt discount and was amortized over
the period in which the convertible notes were outstanding. For the year ended
December 31, 1997, the Company amortized $18,000 of the discount to interest
expense.
F-23
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On September 27, 1997, the Company issued 416,668 shares of Series F to
third party investors for $9.60 per share. Upon issuance of Series F to the
third party investors, the aforementioned convertible notes and accrued
interest were converted to 212,141 shares of Series F at $9.60 per share.
Gross proceeds before stock issuance costs were $6,037,000. Stock issuance
costs of $50,000 were incurred, resulting in net proceeds of $5,987,000.
10. COMMITMENTS AND CONTINGENCIES
LEASES
On March 20, 1997, the Company entered into an 85 month lease for office
space beginning on June 15, 1997. The lease requires annual payments of
$386,000 beginning July 1, 1997 for the first 12 month period with an increase
of 3% in each 12 month period after the first year. The Company is also
receiving the first month's rent free. The 3% escalation and the first month's
free rent are recognized on a straight line basis over the life of the lease.
Lease expenses relate to the lease of office space, telephone, and computer
equipment. Rents charged to expense were approximately $576,000, $749,000, and
$772,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
Aggregate future minimum lease payments under noncancelable operating leases
as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
December 31:
1998................................................................ $ 616
1999................................................................ 501
2000................................................................ 513
2001................................................................ 526
2002................................................................ 491
Thereafter............................................................ 841
------
$3,488
======
</TABLE>
LETTERS OF CREDIT
At December 31, 1997, standby letters of credit of approximately $290,000
and $210,000 had been issued in accordance with provisions under certain of
the Company's lease and financing agreements. The letters of credit of
$290,000 and $210,000 expire in July 1998 and August 1998, respectively.
PRODUCT LIABILITY
As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released.
There can be no assurance that, despite testing by the Company and testing and
use by current and potential customers, errors will not be found in new
financial applications after commencement of commercial shipments or, if
discovered, that the Company will be able to successfully correct such errors
in a timely manner or at all. The occurrence of errors and failures in the
Company's products could result in loss of or delay in the market acceptance
of the Company's financial applications, and alleviating such errors and
failures could require significant expenditure of capital and other resources
by the Company. The consequences of such errors and failures could have a
material adverse effect on the Company's business, results of operations and
financial condition.
F-24
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LITIGATION
The Company is subject to litigation related to matters arising in the
normal course of business, including product liability. As of December 31,
1997, management is not aware of any unasserted, asserted, or pending material
litigation or claims against the Company.
11. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
The Company is planning an initial public offering (the "Offering") of its
common stock which is targeted for completion in the second quarter of 1998.
There can be no assurance that the Offering will be completed.
TRANSACTIONS WITH OFFICER
In February 1998, the Company entered into an agreement with the Officer
whereby the Officer resigned as the Company's chief executive officer and as
chairman, chief executive officer and manager of the Services Subsidiary. The
Officer agreed to remain an employee of the Company at his current salary,
including incentive compensation, until the completion of the Offering, at
which time he will become a consultant to the Company for a period of one year
pursuant to the terms of an independent contractor agreement. For his
consulting services, the Company will pay the Officer the sum of $125,000 over
the one year period, with the ability to earn an additional $100,000 in
incentive compensation if certain revenue targets are met by the Company. The
Officer has agreed to continue to serve on the Company's board of directors
for at least six months following the termination of his employment. In
recognition of past services to the Company, the termination of the voting
trust discussed in Note 9, and resignations of certain positions noted above,
the Company agreed to pay the Officer a lump sum of $225,000 on or before June
30, 1998 and will pay the Officer as severance an additional $75,000, payable
in semi monthly installments over a one year period beginning on the effective
date of the termination of his employment with the Company.
CONVERSION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
In accordance with the Company's certificate of incorporation, all
redeemable convertible preferred shares will convert to common shares on the
closing date of the initial public offering if the initial public offering
meets certain defined thresholds. See Note 12.
STOCK SPLIT
On February 19, 1998, the Company's board of directors approved a three-for-
two stock split on the Company's common stock to be affected in the form of a
stock dividend. All share and per share data in the accompanying financial
statements have been adjusted to reflect the split. The effect of the split is
presented retroactively within stockholders' deficit at December 31, 1994 by
transferring the par value for the additional shares issued from the
additional paid-in capital account to the common and preferred stock accounts.
ACQUISITION OF MINORITY INTEREST IN THE SERVICES SUBSIDIARY
On February 5, 1998, the Company purchased Technology Ventures' 20%
ownership in the Services Subsidiary for a purchase price of $4,196,000. In
exchange for the 20% interest in the Services Subsidiary, the
F-25
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company issued 225,000 shares of common stock to Technology Ventures and
granted Technology Ventures a warrant to purchase an additional 300,000 shares
of common stock at a purchase price of $3.67 per share. The warrant expires on
February 5, 2000. In addition, the Company agreed to pay Technology Ventures
the sum of $1,100,000 February 5, 2000 pursuant to a nonnegotiable,
noninterest-bearing subordinated promissory note (the "Note"). Technology
Ventures has agreed not to sell any of its shares for a period of 180 days
after the effective date of the Offering. In addition, prior to the purchase
and sale, the Services Subsidiary distributed approximately $241,000 to
Technology Ventures as the accumulated unpaid profits earned by the Services
Subsidiary prior to February 5, 1998. The Company also agreed to pay
Technology Ventures a monthly sum equal to 20% of the net profits of the
Services Subsidiary until the earlier of (i) the completion of the Offering or
(ii) a sale of the Company. Any payments made to Technology Ventures for this
20% of net profits of the Services Subsidiary will be recorded by the Company
as additional purchase price at the time of payment. All of the material terms
of the purchase and sale were agreed to by Technology Ventures and the Company
in January 1998, and the purchase and sale have been accounted for in the
first quarter of 1998 based on the value of the common stock issued in such
transaction at $8.00 per share at such time. In February 1998, the Services
Subsidiary also paid Technology Ventures approximately $33,000 as
consideration for the termination of a management services agreement entered
into between the parties in March 1995, and Technology Ventures paid in full
to the Services Subsidiary the remaining principal balance and all accrued
interest due under its $75,000 promissory note (the "Tech Ventures Note").
The purchase price of $4,196,000 was determined by including the following:
(i) 225,000 shares of common stock at $8.00 per share or $1,800,000, (ii) a
note payable of $1,100,000 discounted for no interest at 9.0% for two years
resulting in a net note payable of $934,000, (iii) cash paid of $62,000, and
(iv) a warrant valued at $1,400,000, determined using the Black Scholes Model
using expected volatility of 65%, an expected term of two years, and a risk
free rate of 5.5% to determine a value per share of $4.67 or a total value of
$1,400,000. The Company has accounted for the transaction using the purchase
method of accounting. The purchase price has been allocated to assets acquired
and liabilities assumed based on the fair market value at the date of
acquisition. Goodwill resulting from the transaction in the amount of
$4,159,000 will be amortized over 15 years. The Company will impute interest
on the note payable and recognize the interest over the term of the note, two
years.
12. PREFERRED STOCK CONVERSION WAIVERS
Subsequent to December 31, 1997, the Company obtained waivers from the
preferred stockholders eliminating the requirement that the initial public
offering price and the gross proceeds from an initial public offering be at a
defined threshold in order for the conversion of the preferred stock to be
effected immediately upon an initial public offering. See Note 9.
F-26
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE
30, DECEMBER 31,
1998 1997
------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $26,090 $ 7,213
Trade accounts receivable, less allowance for doubtful
accounts of $316 and $338 in 1998 and 1997,
respectively............................................ 5,818 4,050
Prepaid and other current assets......................... 354 494
------- -------
Total current assets................................... 32,262 11,757
------- -------
PROPERTY AND EQUIPMENT--net............................... 2,069 1,507
------- -------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$1,534 and $1,127 in 1998 and 1997, respectively........ 5,508 1,267
Deposits and other long-term assets...................... 186 150
------- -------
Total other assets..................................... 5,694 1,417
------- -------
TOTAL ASSETS.............................................. $40,025 $14,681
======= =======
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-27
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable, net of discount of $131 in 1998...... $ 969 $ -0-
Accounts payable and accrued liabilities........... 5,062 4,598
Accounts payable-related party..................... -0- 54
Deferred revenue................................... 5,878 5,717
Current maturities of long-term debt............... 264 1,841
-------- --------
Total current liabilities........................ 12,173 12,210
NONCURRENT LIABILITIES:
Deferred revenue................................... 3,355 4,480
Long-term debt, net of current maturities.......... 375 497
Other non-current liabilities...................... 65 49
-------- --------
Total liabilities ............................... 15,968 17,236
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY........ -0- 243
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A, 262,500 shares issued and outstanding in
1997,............................................. -0- 1,050
Series B, 454,888 shares issued and outstanding in
1997,............................................. -0- 3,025
Series C, 428,572 shares issued and outstanding in
1997,............................................. -0- 3,000
Series D, 701,755 shares issued and outstanding in
1997,............................................. -0- 6,000
Series E, 697,675 shares issued and outstanding in
1997,............................................. -0- 6,000
Series F, 628,809 shares issued and outstanding in
1997,............................................. -0- 6,037
-------- --------
Total redeemable convertible preferred stock..... -0- 25,112
STOCKHOLDERS' EQUITY (DEFICIT) (Note 3):
Common Stock, $.0001 par value; 25,000,000 and
9,000,000 shares authorized in 1998 and 1997,
respectively; 9,061,304 and 1,467,160 shares
outstanding in 1998 and 1997, respectively........ 1 -0-
Additional paid in capital......................... 51,354 489
Accumulated deficit................................ (28,058) (28,019)
Warrants........................................... 1,440 652
Treasury stock, at cost............................ (2) (2)
Note from stockholder.............................. -0- (612)
Deferred compensation.............................. (678) (418)
-------- --------
Total stockholders' equity (deficit)............. 24,057 (27,910)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 40,025 $ 14,681
======== ========
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-28
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
---------------
<S> <C> <C>
1998 1997
------ -------
<CAPTION>
REVENUES:
<S> <C> <C>
License fees................................................. $8,443 $ 4,728
Services fees................................................ 6,890 3,276
Maintenance fees............................................. 3,414 1,917
------ -------
Total revenues.............................................. 18,747 9,921
COST OF REVENUES:
License fees................................................. 565 378
Services fees................................................ 4,507 2,322
Maintenance fees............................................. 1,516 850
------ -------
Total cost of revenues...................................... 6,588 3,550
OPERATING EXPENSES:
Research and development..................................... 2,529 3,824
Sales and marketing.......................................... 5,391 4,604
General and administrative................................... 2,548 1,349
Depreciation and amortization................................ 929 698
Non-cash compensation........................................ 803 23
------ -------
Total operating expenses.................................... 12,200 10,498
OPERATING INCOME (LOSS)....................................... (41) (4,127)
INTEREST INCOME............................................... 159 27
INTEREST EXPENSE.............................................. 121 118
MINORITY INTEREST............................................. 36 189
------ -------
NET INCOME (LOSS)............................................. $ (39) $(4,407)
====== =======
Income (loss) per common share:
Basic........................................................ $(0.01) $ (3.19)
Diluted...................................................... $(0.01) $ (3.19)
Weighted average shares outstanding
Basic........................................................ 3,026 1,382
Diluted...................................................... 3,026 1,382
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-29
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30
----------------
1998 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (39) $(4,407)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 929 698
Minority interest in subsidiary............................ 36 189
Amortization of debt discount.............................. 34 -0-
Deferred compensation...................................... 803 23
Changes in operating assets and liabilities:
Accounts receivable....................................... (1,768) (2,201)
Prepaids and other current assets......................... 140 (62)
Deposits and other long-term assets....................... (32) (286)
Accounts payable and accrued liabilities.................. 335 1,052
Deferred revenue.......................................... (961) 1,281
Other noncurrent liabilities.............................. 16 31
------- -------
NET CASH USED IN OPERATING ACTIVITIES................... (507) (3,682)
INVESTING ACTIVITIES:
Purchase of intangible assets.............................. (150) -0-
Purchase of minority interest in subsidiary................ (326) -0-
Additions to property and equipment........................ (1,089) (247)
------- -------
NET CASH USED IN INVESTING ACTIVITIES................... (1,565) (247)
FINANCING ACTIVITIES:
Dividends paid to holder of minority interest.............. (241) (160)
Proceeds from notes payable and short term borrowings...... 1,645 12,414
Repayments of notes payable and short term borrowings...... (3,343) (9,712)
Proceeds from the exercise of warrants..................... 612 9
Proceeds from issuance of common stock, net................ 22,126 -0-
Proceeds from issuance of preferred stock.................. 150 -0-
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES............... 20,949 2,551
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 18,877 (1,378)
CASH AND CASH EQUIVALENTS, beginning of period.............. 7,213 3,278
------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $26,090 $ 1,900
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest..................................... $ 93 $ 106
======= =======
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
F-30
<PAGE>
SQL FINANCIALS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SQL Financials International, Inc. (the "Company") have been prepared in
accordance with Generally Accepted Accounting Principles for interim financial
information and instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information in notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the unaudited financial
statements for this interim period have been included. The results of the
interim periods are not necessarily indicative of the results to be obtained
for the year ended December 31, 1998. These interim financial statements
should be read in conjunction with the Company's audited consolidated
financial statements and footnotes thereto included in the Company's
Prospectus dated May 26, 1998, filed under Form S-1 with the Securities and
Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Basic and diluted net income (loss) per share was computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share," using the weighted average number of common shares outstanding.
Diluted net losses per share for the six months ended June 30, 1998 and 1997,
and the quarter ended June 30, 1997, do not include the effect of common stock
equivalents, including redeemable convertible preferred stock, as their effect
would be antidilutive. Diluted net income per share for the quarter ended June
30, 1998, includes the effect of common stock equivalents.
NOTE 3. STOCKHOLDERS' EQUITY
On May 26, 1998, the Company completed its initial public offering of 2.5
million shares of its common stock at an offering price of $10.00 per share.
The proceeds, net of expenses, from this public offering of approximately
$22.1 million were placed in investment grade cash equivalents. Immediately
prior to the effective date of the Company's Registration Statement the
redeemable convertible preferred stock was converted to common stock.
NOTE 4. ACQUISITION OF MINORITY INTEREST IN THE SERVICES SUBSIDIARY
On February 5, 1998, the Company purchased the 20% interest in SQL Financial
Services, LLC (the "Services Subsidiary") from Technology Ventures, LLC
("Technology Ventures") a related party controlled by Joseph S. McCall, a
director of the Company. In exchange for the 20% interest in the Services
Subsidiary, the Company issued 225,000 shares of common stock to Technology
Ventures and granted Technology Ventures a warrant to purchase an additional
300,000 shares of common stock at a purchase price of $3.67 per share. The
warrant expires on February 5, 2000. In addition, the Company agreed to pay
Technology Ventures the sum of $1 million due February 5, 2000, pursuant to a
non-negotiable, non-interest-bearing subordinated promissory note. Technology
Ventures has agreed not to sell any of its shares for a period of 180 days
after the effective date of the Offering. The Company also agreed to pay
Technology Ventures a monthly sum equal to 20% of the net profits of the
Services Subsidiary until the completion of the Company's Initial Public
Offering. The Company as additional purchase price recorded payments made to
Technology Ventures for this 20% of net profits of the Services Subsidiary at
the time of payment.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
August 17, 1998
To the Board of Directors
and Shareholders of
ELEKOM Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of ELEKOM Corporation (a development
stage enterprise) at December 31, 1997 and 1996 and the results of its
operations and its cash flows for the years then ended and for the period
August 7, 1995 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has suffered losses from operations and has
used significant cash in its operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As described in Note 1, ELEKOM Corporation (a development stage enterprise)
was a wholly owned subsidiary of Egghead, Inc. prior to November 10, 1997.
PRICEWATERHOUSECOOPERS
F-32
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 2,777,408 $ 1,683,272
Accounts receivable.................................. 50,000 8,090
Prepaid expenses..................................... 23,030 87,862
----------- -----------
Total current assets............................... 2,850,438 1,779,224
Property and equipment, net.......................... 364,015 338,370
----------- -----------
$ 3,214,453 $ 2,117,594
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable..................................... $ 35,304 $ 98,236
Accrued payroll and related benefits................. 236,796 32,314
Current portion, capital lease obligations........... 110,041 75,009
Deferred revenue..................................... 50,000 --
Due to Egghead, Inc.................................. -- 4,978,012
Other accrued liabilities............................ 89,902 38,786
----------- -----------
Total current liabilities.......................... 522,043 5,222,357
----------- -----------
Capital lease obligation, net of current portion
(Note 4)............................................ 117,574 157,286
----------- -----------
Commitments and contingencies (Note 4)
Shareholders' equity (deficit)
Convertible preferred stock:
Series B, $.01 par value; 4,389,945 shares
authorized; 4,255,944 shares issued and
outstanding in 1997 and none issued and
outstanding in 1996............................... 42,559 --
Series A, $.01 par value; 917,229 shares
authorized, issued and outstanding in 1997 and
none issued and outstanding in 1996............... 9,172 --
Common stock, $.01 par value; 9,692,826 shares
authorized; 50 shares issued and outstanding in
1997 and 1996..................................... -- --
Additional paid-in capital......................... 10,979,754 --
Deficit accumulated during the development stage... (8,456,649) (3,262,049)
----------- -----------
Total shareholders' equity (deficit)............. 2,574,836 (3,262,049)
----------- -----------
$ 3,214,453 $ 2,117,594
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
AUGUST 7, 1995
YEAR ENDED (INCEPTION)
DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
1997 1996 1997
----------- ----------- --------------
<S> <C> <C> <C>
Sales................................. $ 16,930 $ 5,532 $ 22,462
Cost of sales......................... 12,613 155 12,768
----------- ----------- -----------
Gross profit........................ 4,317 5,377 9,694
----------- ----------- -----------
Operating expenses:
Research and development............. 1,171,941 409,062 1,793,769
Sales and marketing.................. 1,425,063 726,671 2,288,582
General and administrative (Note 1).. 2,001,083 1,247,562 3,628,781
----------- ----------- -----------
Total operating expenses............ 4,598,087 2,383,295 7,711,132
----------- ----------- -----------
Operating loss........................ (4,593,770) (2,377,918) (7,701,438)
Interest expense...................... (616,527) (192,655) (809,182)
Other income.......................... 15,697 38,274 53,971
----------- ----------- -----------
Loss before income taxes expense...... (5,194,600) (2,532,299) (8,456,649)
Income tax expense.................... -- -- --
----------- ----------- -----------
Net loss.............................. $(5,194,600) $(2,532,299) $(8,456,649)
=========== =========== ===========
Basic and diluted net loss per common
shares............................... $ (103,892) $ (50,646) $ (169,133)
=========== =========== ===========
Weighted average number of common
shares outstanding................... 50 50 50
=========== =========== ===========
Pro forma basic and diluted net loss
per common shares (Note 1)........... $ (.84)
===========
Pro forma weighted average number of
common shares
outstanding (Note 1)................. 6,183,097
===========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------- ----------------- ------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ------- --------- ------- ------ ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock, August 7, 1995
(inception)............ -- $ -- -- $ -- 50 $-- $ -- $ -- $ --
Net loss................ -- -- -- -- -- -- $ (729,750) $ (729,750)
-------- ------- --------- ------- --- ---- ----------- ----------- ----------
December 31, 1995....... -- -- -- -- 50 -- -- (729,750) (729,750)
Net loss................ -- -- -- -- -- -- (2,532,299) (2,532,299)
-------- ------- --------- ------- --- ---- ----------- ----------- ----------
December 31, 1996....... -- -- -- -- 50 -- -- (3,262,049) (3,262,049)
Issuance of Series A
convertible preferred
stock, net............. 917,229 $ 9,172 -- -- -- -- $ 8,122,313 -- 8,131,485
Issuance of Series B
convertible preferred
stock, net............. -- -- 4,255,944 $42,559 -- -- 2,857,441 -- 2,900,000
Net loss................ -- -- -- -- -- -- -- (5,194,600) (5,194,600)
-------- ------- --------- ------- --- ---- ----------- ----------- ----------
December 31, 1997....... 917,229 $ 9,172 4,255,944 $42,559 50 $-- $10,979,754 $(8,456,649) $2,574,836
======== ======= ========= ======= === ==== =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
AUGUST 7, 1995
YEAR ENDED (INCEPTION)
DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
1997 1996 1997
----------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................. $(5,194,600) $(2,532,299) $(8,456,649)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation....................... 204,002 39,838 249,606
Changes in assets and liabilities:
Accounts receivable............... (41,910) (8,090) (50,000)
Prepaid expenses and other assets. 64,834 (87,733) (23,030)
Accounts payable.................. 110,900 98,107 209,136
Accrued payroll and related
benefits......................... 204,482 32,314 236,796
Deferred revenue.................. 50,000 -- 50,000
Other accrued liabilities......... 51,116 38,786 89,902
----------- ----------- -----------
Net cash used in operating
activities...................... (4,551,176) (2,419,077) (7,694,239)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................. (136,881) (129,527) (282,512)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of capital lease obligations. (97,448) (6,046) (103,494)
Net borrowings from Egghead Inc...... 2,979,641 4,237,922 7,957,653
Proceeds from issuance of Series B
convertible preferred stock......... 2,900,000 -- 2,900,000
----------- ----------- -----------
Net cash provided by financing
activities...................... 5,782,193 4,231,876 10,754,159
----------- ----------- -----------
Net increase in cash and cash
equivalents.......................... 1,094,136 1,683,272 2,777,408
Cash and cash equivalents at beginning
of year.............................. 1,683,272 -- --
----------- ----------- -----------
Cash and cash equivalents at end of
year................................. $ 2,777,408 $ 1,683,272 $ 2,777,408
=========== =========== ===========
Property and equipment acquired under
capital leases....................... $ 92,767 $ 238,342 $ 331,109
=========== =========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans from Egghead, Inc., in the amount of $6,612,524, were forgiven in
November 1997, just prior to the recapitalization, and Egghead paid accounts
payable outstanding at November 4, 1997 totaling $173,832 on ELEKOM's behalf
in exchange for 917,229 shares of Series A convertible preferred stock.
Additionally, allocated expenses from Egghead, including imputed interest on
the intercompany debt, totaling $1,345,129 were also forgiven. The amounts
forgiven by Egghead, Inc. were recorded as capital contributions by ELEKOM.
F-36
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
See accompanying notes to financial statements.
1. ORGANIZATION AND BUSINESS
Organization
ELEKOM Corporation ("ELEKOM" or the "Company") was founded in 1995 and is a
privately owned Washington corporation. The Company was formed as a subsidiary
of Egghead, Inc. ("Egghead") to focus on the development of advanced supplier-
independent electronic procurement systems for large enterprises. The
Company's initial product, ELEKOM Procurement, integrates all of the
activities associated with procurement into a comprehensive Intranet business
application that streamlines the entire process. ELEKOM Procurement is
directed at mid- to large-sized corporations where nonproduction purchasing is
expensive and time-consuming.
On November 10, 1997, the Company was recapitalized. In connection with the
recapitalization, ELEKOM reacquired debt in the amount of $6,612,524 owed to
Egghead in exchange for 917,229 shares of Series A preferred stock of the
Company. Additionally, allocated expenses from Egghead, including imputed
interest, Egghead assumed responsibility for all accounts payable, totaling
$173,832 incurred before or on November 4, 1997.
In connection with the recapitalization, ELEKOM sold 4,255,944 shares of
Series B convertible preferred stock to new investors for $2,900,000.
The financial statements for all periods prior to November 10, 1997 reflect
the results of operations, financial position, and cash flows of ELEKOM as a
wholly owned subsidiary of Egghead and may not be indicative of actual results
of operations and financial position of the Company under other ownership.
The statement of operations reflects certain expense items incurred by
Egghead which were allocated to the Company on a basis which management
believes represents a reasonable allocation of such costs to present ELEKOM as
a stand-alone company. These allocations consist primarily of corporate
expenses such as executive and other compensation, depreciation of corporate
assets, rent expense and legal fees and interest expense on intercompany
borrowings. The corporate expenses have been allocated based on an estimate of
Egghead personnel time dedicated to the operations and management of ELEKOM.
Interest expense has been allocated based on ELEKOM's estimated borrowing rate
(10%) and actual intercompany borrowings. A summary of these allocations is as
follows:
<TABLE>
<CAPTION>
CORPORATE INTEREST
EXPENSE EXPENSE
--------- --------
<S> <C> <C>
Inception through December 31, 1997......................... $551,535 $793,594
Year ended December 31, 1996................................ $186,291 $192,655
Year ended December 31, 1997................................ $365,244 $600,939
</TABLE>
Business
The Company was in the development stage as of and for the period from
inception through December 31, 1997. In connection with its development
activities, the Company has incurred costs to incorporate and establish its
business activities as well as the design and development of the Company's
initial product, ELEKOM Procurement, which was available for sale in June
1997. As a result, cash requirements have exceeded cash receipts and the
Company must obtain interim financing or additional capital to continue its
development, sales and marketing efforts. Management plans to obtain such
financing or capital during the year; however, there can be no assurance that
financing or capital can be obtained. As a result, even though the
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
F-37
<PAGE>
ELEKOM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
Cash equivalents consist of highly liquid investments purchased within 90
days or less of maturity. They are recorded at cost which approximates fair
value. The Company places its cash in high credit quality financial
institutions. The Company has not experienced any losses on its cash and cash
equivalents.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
are depreciated using the straight-line method over their estimated useful
lives. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Office furniture and equipment....................... Five years
Computer hardware and software....................... Two to three years
Leasehold improvements............................... Over the life of the lease
</TABLE>
Deferred revenues
Deferred revenues consist of advanced billings and payments on software
contracts.
Revenue recognition
Revenue from software contracts is recognized using the percentage-of-
completion contract accounting method, or on a completed contract basis, in
accordance with the American Institute of Certified Public Accountant's
Statement of Position 91-1, Software Revenue Recognition. American Institute
of Certified Public Accountant's Statement of Position 97-2 (SOP 97-2),
Software Revenue Recognition, will be adopted by the Company during fiscal
1998. Applying the provisions of SOP 97-2 is not expected to materially impact
the Company's financial statements.
Research and development
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
Income taxes
The Company accounts for income taxes under the asset and liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. If it is more likely than
not that some portion of a deferred tax asset will not be realized, a
valuation allowance is recorded. Commencing August 7, 1995 through November
10, 1997, the Company's operations have been included in consolidated income
tax returns filed by Egghead. Income taxes in the accompanying financial
statements for the associated period have been computed assuming the Company
filed a separate income tax return.
Net loss per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), Earnings Per Share. FAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share
excludes any
dilutive effects of options and convertible securities. Earnings per share for
1996 and for the periods from August 7, 1995 (inception) through December 31,
1997 reflect the adoption of FAS 128. Net loss per share assuming dilution for
the years ended December 31, 1997 and 1996 is equal to net loss per share due
to the fact that the effect of common stock equivalents outstanding during the
periods is anti-dilutive.
Proforma net loss per share
Given the changes in ELEKOM's capital structure as a result of the 1997
recapitalization and the changes to be effected as a result of the agreement
to sell 100% of the Company's stock (Note 7) pro forma earnings per
F-38
<PAGE>
ELEKOM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
share is presented. Pro forma earnings per share is calculated based on the
number of shares of common stock and preferred stock outstanding at June 30,
1998 and has been adjusted to give effect to the conversion of all shares of
preferred stock into common stock that will occur in connection with the sale
of 100% of the Company's stock (Note 7). Stock options outstanding at each
period and have not been included in the loss per share calculations as their
effect is antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Advertising expenses
The Company expenses advertising costs as incurred. Total advertising
expense was $89,860 and $147,914 for the years ended December 31, 1997 and
1996, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
--------- --------
<S> <C> <C>
Computer hardware and software............................. $ 531,469 $327,269
Office furniture and equipment............................. 61,178 35,731
Leasehold improvements..................................... 20,974 20,974
--------- --------
613,621 383,974
Less: Accumulated depreciation............................. (249,606) (45,604)
--------- --------
$ 364,015 $338,370
========= ========
</TABLE>
4. LEASE COMMITMENTS
The Company's office facilities are leased under an operating lease that
provides for minimum rentals. The lease expired in May 1998, but was renewed
until the end of June 1998, at which time the Company moved to another
facility. Future lease payments over the life of the new lease are
approximately $628,000. In addition, the Company also rents certain equipment
under agreements treated for financial reporting purposes as capital leases.
The Company's property under capital leases which is included in property and
equipment on the balance sheet at December 31, 1997 and 1996 was $224,890 and
$231,720, respectively, which is net of accumulated depreciation of $106,217
and $6,621, respectively.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998.............................................................. $120,972
1999.............................................................. 113,705
2000.............................................................. 7,926
--------
Total minimum lease payments.......................................... 242,603
Less: Amount representing interest.................................... 14,988
--------
Present value of net minimum lease payments........................... 227,615
Current portion....................................................... 110,041
--------
$117,574
========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $171,172 and
$101,051, respectively.
F-39
<PAGE>
ELEKOM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SHAREHOLDERS' EQUITY
On December 1, 1997, the Board of Directors authorized a one-for-ten reverse
stock split for all outstanding securities. All references in the financial
statements to number of shares and per share amounts of the Company's
preferred and common stock have been retroactively restated to reflect the
decreased number of shares outstanding.
Recapitalization
Pursuant to the terms of the Stock Exchange Agreement and the Separation
Agreement entered into between the Company and Egghead dated November 10,
1997, Egghead forgave debt in the amount of $6,612,524 owed from ELEKOM and
assumed responsibility for outstanding accounts payable totaling $173,832, in
exchange for 917,229 shares of Series A convertible preferred stock of the
Company. The allocated corporate expenses and interest expense of $1,345,129
included in the Statement of Operations have also been forgiven by Egghead and
therefore, are reflected as an increase to additional paid-in capital. The
terms of the agreements also authorized the Company to issue 4,255,944 shares
of Series B convertible preferred stock at $0.68 per share in the Company's
initial private placement offering. Accordingly, effective November 10, 1997
as a result of the foregoing transactions, the Company was no longer a wholly
owned subsidiary of Egghead.
Preferred stock
The preferred Series A and B shares are convertible into one share of common
stock (subject to antidilution adjustments) at any time at the option of the
holder. Outstanding preferred shares automatically convert into common stock
upon consummation of an underwritten public offering with an offering price of
not less than $3.40 per share and aggregate proceeds in excess of $10,000,000.
The Company has reserved and set aside 5,307,174 shares of its authorized but
unissued common stock required for issuance and delivery upon conversion of
Series A and Series B convertible preferred stock. Both Series A and Series B
preferred shareholders are entitled to a noncumulative dividend of $.055 per
share when and if declared by the Board of Directors. Terms of the Stock
Purchase and Stock Exchange Agreements provide anti-dilution protection,
provide right of first negotiation on proposed equity and debt financing and
prohibit authorization of any senior class of equity instrument without
approval. Series B convertible preferred stock have liquidation preferences
over both Series A convertible preferred stock and common stock. Holders of
Series A and Series B convertible preferred stock are entitled to the number
of votes equal to the number of shares of common stock into which the
preferred shares are convertible. The holders of Series A convertible
preferred stock, voting as a class, have the right to elect one director. The
holders of preferred stock and common stock, voting as a single class, shall
be entitled to elect any remaining directors.
Pursuant to the amended articles of incorporation of the Company dated May
1, 1998, in the event of liquidation, Series B preferred shareholders will be
entitled to receive an amount equal to the purchase price for each share owned
plus accrued dividends. If assets remain after this initial distribution, the
holders of the Series A preferred stock will receive 17.28% of the assets
distributed and the Series B and common stock shareholders will receive 82.72%
of the assets distributed on a pro rata basis until Series A preferred
shareholders have received an amount equal to the purchase price of each share
owned plus accrued dividends. Thereafter, all shareholders of preferred stock
and common stock share on an as-converted basis. The distribution provisions
in effect at December 31, 1997 called for distribution to the Series A in an
amount equal to the original purchase price for each share owned plus accrued
dividends prior to any distributions to the common stock shareholders.
Stock options
The 1996 Stock Option Plan (the Plan) was approved by shareholders of the
Company in August 1996 and became effective August 8, 1996 and was amended on
November 6, 1997 to increase the number of options available for grants to a
maximum of 1,528,664 shares of the Company's common stock. Qualified stock
options may be granted to an employee of the Company and nonqualified stock
options may be granted to an employee or a nondirector of the Company or to
consultants, agents, advisors and independent contractors who provide services
or other benefits to the Company. The option price per share may not be less
than the estimated fair
F-40
<PAGE>
ELEKOM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
market value of a share of common stock as determined by the board of
directors on the date of grant, and the maximum term of an option may not
exceed ten years. Each option is exercisable at the time it is granted and the
shares covered by the option vest at a rate of 25% each year, unless
accelerated by the plan administrator or upon certain other circumstances as
defined in the plan document.
At the sole discretion of the plan administrator, consideration for the
purchase of shares under the Plan may be paid either at the time the options
are granted or at any time prior to exercise of the option. Payment may be in
the form of cash, common stock already owned by the optionee, promissory notes
or such other consideration as the plan administrator may permit. Unvested
options for which consideration has been exchanged prior to exercise of the
options are subject to repurchase by the Company upon termination of
employment or services at the exercise price paid for the shares. Accordingly,
all options outstanding are considered exercisable although the options may be
unvested.
In December 1997, all but 29,457 options previously issued were canceled and
reissued at an exercise price equal to $0.068, the fair market value of the
Company's common stock at the new date of grant. The term of all outstanding
options is ten years. The vesting of outstanding options reissued in December
1997 has been accelerated to account for prior years of service, the balance
to vest in accordance with the Plan. In 1997 and 1996, no stock options issued
under the Plan were exercised.
In addition, during the year ended December 31, 1997 a warrant to purchase
23,000 shares of common stock for $0.068 per share was issued as part of a
severance agreement.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
its plan. No compensation cost has been charged against income for the Plan
for the year ended December 31, 1997 and 1996. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant dates consistent with the method of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), the
Company's net loss would have increased by $164,582 for the period from August
7, 1995 (inception) to December 31, 1997 and by $109,640 and $54,942 for the
years ended December 31, 1997 and 1996, respectively.
For SFAS 123 pro forma disclosure, the fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996; dividend and volatility of zero; risk-free interest rates of 5.63% and
6.62%, respectively; and an expected life of 5 years.
As of December 31, 1997 and 1996, options for 728,166 and 882 shares of
common stock, respectively, were available for future grant.
F-41
<PAGE>
ELEKOM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option plan as of December 31, 1997 and
changes during the period from inception through December 31, 1995 and the
years ended December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at August 7, 1995 (inception)............... --
Granted................................................. --
Exercised............................................... --
Canceled................................................
-------
Outstanding at December 31, 1995........................ --
Granted................................................. 74,118 $10.00
Exercised............................................... --
Canceled................................................
-------
Outstanding at December 31, 1996........................ 74,118 $10.00
Granted................................................. 776,879 $ 0.14
Exercised...............................................
Canceled................................................ 50,499 $10.00
-------
Outstanding at December 31, 1997........................ 800,498 $ 0.43
=======
Options exercisable at year-end......................... 800,498 $ 0.43
=======
Weighted-average fair value of:
Options granted during 1997........................... $ 0.04
======
Options granted during 1996........................... $ 2.82
======
Weighted-average remaining contractual life at December
31, 1997............................................... 9.95
======
Weighted-average remaining contractual life at December
31, 1996............................................... 9.42
======
</TABLE>
6. INCOME TAXES
A current provision for income taxes was not recorded for the year ended
December 31, 1997 due to taxable losses incurred during such period. A
valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income
prior to the expiration of net operating loss carry-forwards.
Deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
----------- ---------
<S> <C> <C>
Net operating loss carry-forward........................ $ 2,009,000 $ 596,000
Less: Valuation allowance............................... (2,009,000) (596,000)
----------- ---------
$ -- $ --
=========== =========
</TABLE>
F-42
<PAGE>
ELEKOM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, the Company has net operating loss carry-forwards of
approximately $5,909,000 for federal income tax reporting purposes of which
approximately $2,944,000 were generated in periods in which the Company was a
subsidiary of Egghead. The net operating losses will expire beginning in 2012
if not previously utilized. Based upon the ownership changes in November 1997,
as described in Note 5, utilization of substantially all of the net operating
loss carry-forwards is limited to $219,583 per year.
7. SUBSEQUENT EVENT
On August 31, 1998, the Company and its stockholders entered into an
agreement to sell 100% of its stock.
F-43
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1998
------------
<S> <C>
ASSETS
Cash and cash equivalents........................................ $ 1,467,000
Accounts receivable.............................................. 114,000
Prepaid expenses................................................. 1,000
------------
Total current assets........................................... 1,582,000
Other assets..................................................... 40,000
Property and equipment, net...................................... 477,000
------------
$ 2,099,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................. $ 90,000
Accrued payroll and related benefits............................. 206,000
Current portion, capital lease obligations....................... 116,000
Deferred revenue................................................. 180,000
Other accrued liabilities........................................ 366,000
------------
Total current liabilities...................................... 958,000
------------
Capital lease obligation, net of current portion................. 24,000
------------
Commitments and contingencies
Shareholders' equity
Convertible preferred stock:
Series B, $.01 par value; 4,389,945 shares authorized, issued
and outstanding at June 30, 1998.............................. 43,000
Series A, $.01 par value; 917,229 shares authorized, issued and
outstanding at June 30 1998................................... 9,000
Common stock, $.01 par value; 9,692,826 shares authorized;
875,923 shares issued and outstanding at June 30, 1998......... 9,000
Additional paid-in capital...................................... 11,124,000
Deficit accumulated during the development stage................ (10,068,000)
------------
Total shareholders' equity..................................... 1,117,000
------------
$ 2,099,000
============
</TABLE>
See accompanying notes to unaudited interim financial statements.
F-44
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales................................................ $ 376,000 $
Cost of sales........................................ 110,000
----------- -----------
Gross profit....................................... 266,000
----------- -----------
Operating expenses:
Research and development........................... 967,000 629,000
Sales and marketing................................ 468,000 880,000
General and administrative......................... 488,000 1,037,000
----------- -----------
Total operating expenses......................... 1,923,000 2,546,000
----------- -----------
Operating loss....................................... (1,657,000) (2,546,000)
Interest expense..................................... (274,000)
Other income......................................... 46,000 6,000
----------- -----------
Loss before income tax expense....................... (1,611,000) (2,814,000)
Income tax expense................................... -- --
----------- -----------
Net loss............................................. $(1,611,000) $(2,814,000)
=========== ===========
Basic and diluted net loss per common share.......... $ (2.55) $ (56,280)
=========== ===========
Weighted average number of common shares outstanding. 633,088 50
=========== ===========
Pro forma basic and diluted net loss per common
share............................................... $ (.26)
===========
Pro forma weighted average number of common shares
outstanding......................................... 6,183,097
===========
</TABLE>
See accompanying notes to unaudited interim financial statements.
F-45
<PAGE>
ELEKOM CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................... $(1,611,000) $(2,814,000)
Adjustments to reconcile net loss to net cash used
in operations
Depreciation..................................... 82,000 72,000
Changes in assets and liabilities:
Accounts receivable............................ (65,000) 8,000
Prepaid expenses and other assets.............. (18,000) 60,000
Accounts payable............................... 55,000 (8,000)
Accrued payroll and related benefits........... (30,000) 3,000
Deferred revenue............................... 129,000
Other accrued liabilities...................... 271,000 12,000
----------- -----------
Net cash used in operating activities........ (1,187,000) (2,667,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................... (186,000) (44,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of capital lease obligations............... (88,000) (45,000)
Proceeds from issuance of Series B convertible
preferred stock................................... 91,000
Proceeds from exercise of stock options............ 60,000
Net borrowings from Egghead, Inc................... 1,710,000
----------- -----------
Net cash provided by financing activities........ 63,000 1,665,000
----------- -----------
Net increase (decrease) in cash and cash equivalents. (1,310,000) 1,046,000
Cash and cash equivalents at beginning of period..... 2,777,000 1,683,000
----------- -----------
Cash and cash equivalents at end of period........... $ 1,467,000 $ 637,000
=========== ===========
</TABLE>
See accompanying notes to unaudited interim financial statements.
F-46
<PAGE>
ELEKOM CORPORATION
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The balance sheet presented as of June 30, 1998 and for the six months ended
June 30, 1998 and 1997 has not been audited. In the opinion of management, the
unaudited interim balance sheet, statements of income and of cash flows
include all adjustments consisting solely of normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows as of and for the periods presented of ELEKOM Corporation (the
Company).
The financial statements of the Company for all periods prior to November
10, 1997 reflect the results of operations, financial position, and cash flows
of ELEKOM as a wholly owned subsidiary of Egghead and may not be indicative of
actual results of operations and financial position of the Company under other
ownership.
The statement of operations for the six months ended June 30, 1997 reflects
certain expense items incurred by Egghead which were allocated to the Company
on a basis which management believes represents a reasonable allocation of
such costs to present ELEKOM as a stand-alone company. These allocations
consist primarily of corporate expenses such as executive and other
compensation, depreciation of corporate assets, rent expense and legal fees
and interest expense on intercompany borrowings. The corporate expenses have
been allocated based on an estimate of Egghead personnel time dedicated to the
operations and management of ELEKOM. Interest expense has been allocated based
on ELEKOM's estimated borrowing rate (10%) and actual intercompany borrowings.
A summary of these allocations is as follows:
<TABLE>
<CAPTION>
CORPORATE INTEREST
EXPENSE EXPENSE
--------- --------
<S> <C> <C>
Six months ended June 30, 1997.............................. $284,000 $274,000
</TABLE>
BUSINESS
The Company was in the development stage as of and for the period from
inception through June 30, 1998. In connection with its development
activities, the Company has incurred costs to incorporate and establish its
business activities as well as the design and development of the Company's
initial product, ELEKOM Procurement, which was available for sale in June
1997. As a result, cash requirements have exceeded cash receipts and the
Company must obtain interim financing or additional capital to continue its
development, sales and marketing efforts. Management plans to obtain such
financing or capital during the year; however, there can be no assurance that
financing or capital can be obtained. As a result, even though the
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), Earnings per Share. FAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options and convertible securities. Earnings
per share for 1996 reflect the adoption of FAS 128. Net loss per share
assuming dilution for the six months ended June 30, 1998 and 1997 is equal to
net loss per share due to the fact that the effect of common stock equivalents
outstanding during the periods is anti-dilutive.
Given the changes in ELEKOM's capital structure as a result of the 1997
recapitalization and the changes to be effected as a result of the Merger pro
forma earnings per share is presented. Pro forma earnings per share is
calculated based on the number of shares of common stock and preferred stock
outstanding at June 30, 1998 and has been adjusted to give effect to the
conversion of all shares of preferred stock into common stock that will occur
in connection with the Merger. Stock options outstanding at each period and
have not been included in the loss per share calculations as their effect is
antidilutive
F-47
<PAGE>
EXHIBIT 2.1
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (together with all Schedules and
Exhibits hereto, this "Agreement"), dated as of August 31, 1998, is entered into
by and among ELEKOM CORPORATION, a Washington corporation (the "Company") and
CLARUS CORPORATION, formerly known as SQL FINANCIALS INTERNATIONAL, INC., a
Delaware corporation ("Parent"), and CLARUS CSA, INC., a Delaware corporation
and wholly owned subsidiary of Parent ("Newco"). Parent and Newco are
collectively referred to as "Acquiror."
R E C I T A L S :
1. The Company is in the business of developing, marketing and licensing
computer software programs specifically for electronic procurement (the
"Business").
--------
2. The respective Boards of Directors of Parent, Newco and the Company
have approved the merger of the Company with and into Newco, upon the terms and
subject to the conditions set forth herein.
A G R E E M E N T :
NOW, THEREFORE, for and in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency
which is hereby acknowledged, the Company and Acquiror agree as follows:
ARTICLE I
PLAN OF REORGANIZATION
1.1 The Merger. Subject to the terms and conditions of this Agreement,
----------
the Certificate of Merger (the "Certificate of Merger") will be filed with the
---------------------
Secretary of State of the States of Washington and Delaware on the Closing Date
substantially in the form of Exhibit "A" hereto. The date and time that the
Certificate of Merger is filed with the Secretary of State of Delaware and the
Merger thereby become effective will be referred to in this Agreement as the
"Effective Time." Subject to the terms and conditions of this Agreement and the
--------------
Certificate of Merger, the Company will be merged with and into Newco in a
statutory merger pursuant to the Certificate of Merger and in accordance with
applicable law as follows:
AGREEMENT AND PLAN OR REORGANIZATION PAGE 1
<PAGE>
1.1.1 Conversion of Company's Shares. Each share of capital stock
------------------------------
of the Company (the "Company Shares"), that is issued and outstanding
--------------
immediately prior to the Effective Time, will, by virtue of the Merger and at
the Effective Time, be converted into (i) a specified amount of cash
consideration, or (ii) a number of shares of fully paid and nonassessable common
stock of Parent, $.0001 par value per share ("Parent Common Stock") or (iii) a
-------------------
combination of cash consideration and Parent Common Stock pursuant to the cash
election and allocation procedures set forth on Schedule 1.1 hereto, so that the
------------
total number of shares of Parent Common Stock issued to the shareholders of the
Company at the Effective Time (the "Shareholders") will equal One Million Three
------------
Hundred Fifty Thousand (1,350,000) shares, subject only to the adjustment set
forth below in Subsection 1.1.3, and the total cash consideration received by
the Shareholders will equal an aggregate amount of Eight Million Dollars
($8,000,000). Subject to Section 1.5, the cash consideration shall be paid at
Closing by wire transfer or certified check. As of the Closing, the Company will
have allocated the cash and stock consideration substantially in the manner
described on Schedule 1.1, and in a manner to fully satisfy all dividend rights,
------------
interest accruals, liquidation preferences and other rights and preferences of
the Company's preferred stock, which Company represents is in compliance with
the Company's Articles of Incorporation, and has otherwise allocated the cash
and stock consideration disproportionately but in a manner which Company
represents fully complies with its Articles of Incorporation, contractual
commitments and applicable law. No rights, preferences or benefits of the
Company's preferred stock, whether by contract or otherwise, will survive the
closing of the Merger hereunder.
1.1.2 Newco Shares. Each share of Newco common stock, par value
------------
$0.0001 ("Newco Common Stock"), that is issued and outstanding immediately
------------------
prior to the Effective Time, will remain outstanding after the Effective Time.
1.1.3 Stock Adjustment. In the event the last reported sales price
----------------
for Parent Common Stock as reported by Nasdaq on the trading day immediately
preceding the Closing Date is less than $5.93, then, subject to the termination
rights set forth in Sections 10.1(f), 10.1(g) and 10.1(h) hereof, the aggregate
number of shares of Parent Common Stock to be issued to the Shareholders in
connection herewith shall be increased by a number of shares necessary so that
the aggregate value of such shares, based on the last reported sales price per
share as reported by Nasdaq on the trading day immediately preceding the Closing
Date, shall equal Eight Million Dollars ($8,000,000), provided that the maximum
number of additional shares shall not exceed 41,305. Any increased number of
shares will be allocated to the Shareholders pursuant to the cash election and
allocation procedures set forth in Schedule 1.1.
1.2 Fractional Shares. No fractional shares of Parent Common Stock will
-----------------
be issued in connection with the Merger.
1.3 Effects of the Merger. At the Effective Time: (a) the separate
---------------------
existence of the Company will cease and the Company will be merged with and into
Newco, and Newco will be the surviving corporation (the "Surviving Corporation")
pursuant to the terms of the Certificate of Merger; (b) the Articles of
Incorporation and Bylaws of Newco will be the Articles
AGREEMENT AND PLAN OR REORGANIZATION PAGE 2
<PAGE>
of Incorporation and Bylaws of the Surviving Corporation; (c) the directors of
Newco in effect at the Effective Time will be the directors of Newco as the
surviving corporation, and the officers of Newco will be the officers of Newco
as the surviving corporation; (d) all Company Shares outstanding immediately
prior to the Effective Time will be converted as provided in Section 1.1.1; (e)
each share of Newco Common Stock outstanding immediately prior to the Effective
Time will remain outstanding as provided in Section 1.1.2 above; and (f) the
Merger will, at and after the Effective Time, have all of the effects provided
by applicable law. All rights, franchises and interests of the Company in and to
every type of property (real, personal, tangible, intangible and mixed), and all
choses in action of the Company shall be transferred to and vested in Newco
without any deed or other transfer. Newco, upon consummation of the Merger and
without any order or other action on the part of any court or otherwise, shall
hold and enjoy all rights of property, franchises and interests in the same
manner and to the same extent as such rights, franchises and interests were held
or enjoyed by the Company at the Effective Time.
1.4 Tax-Free Reorganization. The parties intend to adopt this Agreement
-----------------------
as a tax-free plan of reorganization and to consummate the Merger in accordance
with the provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended (the "Code"). The parties believe that the
value of the Parent Common Stock and the cash consideration to be received by
the Shareholders in the Merger is equal to the value of the Company Shares to be
surrendered in exchange therefor. The Parent Common Stock issued in the Merger
will be issued solely in exchange for the Company Shares, and no other
transaction other than the Merger represents, provides for or is intended to be
an adjustment to, the consideration paid for the Company Shares. No
representations have been made by Acquiror or its counsel, accountants or
advisors with respect to the tax consequences of the Merger.
1.5 Escrow. Two Million Five Hundred Thousand Dollars ($2,500,000) of the
------
total cash consideration to be paid to the Shareholders will be placed in escrow
at Closing with NationsBank, N.A., who shall hold such funds in escrow until
April 30, 2000, in accordance with the Escrow and Indemnity Agreement
substantially in the form attached to this Agreement as Exhibit 1.5, which will
-----------
be executed and delivered by Acquiror, Company and the Company's preferred
shareholders at the Closing with changes requested by NationsBank, N.A. that are
mutually agreeable to Acquiror, Company and each of the Company's preferred
shareholders (the "Escrow and Indemnity Agreement").
------------------------------
1.6 Stock Options. As of Closing, there shall be no stock options of the
-------------
Company outstanding; it being specifically understood and agreed that the
Acquiror shall not assume any warrants, stock options or other similar rights to
acquire stock or any other equity interest, or liabilities of, in the Company.
1.7 Dissenting Shareholders. Any Shareholder who perfects such holder's
-----------------------
dissenters' rights of appraisal in accordance with and as contemplated by
Chapter 23B.13 of the Washington Business Corporations Act shall be entitled to
receive the value of such shares in cash as determined pursuant to such
provision of law; provided, that no such payment shall be made to any dissenting
Shareholder unless and until such dissenting Shareholder has complied
AGREEMENT AND PLAN OR REORGANIZATION PAGE 3
<PAGE>
with the applicable provisions of the Washington Corporate Code and surrendered
to Acquiror the certificate or certificates representing the shares for which
payment is being made. In the event that after the Effective Time a dissenting
Shareholder fails to perfect, or effectively withdraws or loses, such holder's
right to appraisal and of payment for such holder's shares, Acquiror shall issue
and deliver the consideration to which such holder of Company Shares is entitled
under this Article I (without interest) upon surrender by such holder of the
certificate or certificates representing Company Shares held by such holder.
1.8 Exchange Procedures. After the Effective Time, each Shareholder shall
-------------------
surrender the certificate or certificates representing such Shareholder's
Company Shares to Parent or a transfer agent designated by Parent and shall
promptly upon surrender thereof receive in exchange therefor the consideration
provided in Section 1.1.1 of this Agreement. Parent shall not be obligated to
deliver the consideration to which any Shareholder is entitled as a result of
the Merger until such holder (i) surrenders his or her certificate or
certificates representing the Company Shares for exchange as provided in this
Section 1.8, (ii) warrants that such holder holds all right, title and interest
in the Company Shares free and clear of any lien, claim or encumbrances, and
(iii) indemnifies the Company and each of the preferred shareholders identified
on Schedule 9.1 (the "Preferred Shareholders") for breach of such warranty. The
certificate or certificates of Company Shares so surrendered shall be duly
endorsed as may be required by the Parent's transfer agent.
1.9 Rights of Former Shareholders. At the Effective Time, the stock
-----------------------------
transfer books of Company shall be closed as to holders of Company Shares
immediately prior to the Effective Time, and no transfer of Company Shares by
any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 1.8 of this Agreement,
each certificate theretofore representing Company Shares (other than shares as
to which dissenters' rights have been perfected as provided in Section 1.7 of
this Agreement) shall, from and after the Effective Time, represent for all
purposes only the right to receive the consideration provided in Section 1.1.1
of this Agreement in exchange therefor.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants to Acquiror as follows:
2.1 Capital Stock.
-------------
(a) The authorized capital stock of the Company consists (i) of 9,712,826
shares of common stock, of which 930,423 shares are issued and outstanding as
of the date of this Agreement, and up to an additional 251,235 shares are
subject to outstanding options as of the date of this Agreement; and (ii)
5,327,174 shares of preferred stock, of which (1) 917,229 shares are
designated Series A Preferred Stock, of which 917,229 are issued and
outstanding as of the date of this Agreement and will be issued and
outstanding as of the Closing Date, and (2) 4,409,945 shares are designated
Series B Preferred Stock, of which
AGREEMENT AND PLAN OR REORGANIZATION PAGE 4
<PAGE>
4,389,945 shares are issued and outstanding as of the date of this Agreement
and will be issued and outstanding as of the Closing Date. All of the issued
and outstanding shares of capital stock of the Company are duly and validly
issued and outstanding and are fully paid and nonassessable. None of the
outstanding Company Shares has been issued in violation of any preemptive
rights of the current or past shareholders of the Company.
(b) Except as set forth on Schedule 2.1(b), there are no shares of capital
---------------
stock or other equity securities of the Company outstanding and no outstanding
Rights relating to the capital stock of the Company. For purposes hereof,
"Rights" shall mean all arrangements, calls, commitments, contracts, options,
------
rights to subscribe to, scrip, understandings, warrants and other binding
obligations of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of the
Company or by which the Company is or may be bound to issue additional shares
of its capital stock or other Rights.
(c) The Company has no subsidiaries and owns no equity or other interest in
any corporation, partnership, joint venture, limited liability company or
other entity whatsoever.
(d) Each Shareholder has the unrestricted right to exchange his Company
Shares for the Parent Common Stock to be issued pursuant to the Merger.
2.2 Organization and Good Standing; Governing Documents. The Company is a
---------------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Washington. The Company has all requisite power and authority
to own, operate its assets and to conduct its operations as presently conducted.
The Company is duly qualified to do business as a foreign corporation in all
other jurisdictions in which the character of the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, and such jurisdictions are listed on Schedule 2.2.
------------
Company has previously delivered to Acquiror true and complete copies of its
Bylaws and Articles of Incorporation, including all amendments thereto.
2.3 Authority. Company has all requisite power and authority to execute
---------
and deliver this Agreement, the Certificate of Merger, the Escrow and Indemnity
Agreement, the Escrow and Minority Investment Agreement and the Shareholders
have the requisite power and authority to execute and deliver the agreements
contemplated herein to be executed by the Shareholders (collectively, the
"Company Agreements") and to consummate the transactions contemplated hereby and
------------------
thereby, other than the approval of the shareholders of the Company. Except for
such shareholder approval, the execution, delivery and performance of the
Company Agreements have been duly and validly authorized by all necessary
corporate and shareholder action on the part of Company. The Company Agreements
have been, or, with respect to Company Agreements to be executed at the Closing,
will be duly executed and delivered by
AGREEMENT AND PLAN OR REORGANIZATION PAGE 5
<PAGE>
Company and the Shareholder and each constitutes or will constitute when
executed and delivered a valid and binding obligation of Company and the
Shareholders, enforceable against Company and the Shareholders, respectively, in
accordance with its terms, except as may be limited by bankruptcy, judicial
discretion, public policy and other equitable principles.
2.4 No Conflict or Breach. Except as disclosed on Schedule 2.4, the
---------------------
execution, delivery and performance of the Company Agreements do not and will
not (a) conflict with or constitute a violation of the Articles of Incorporation
or Bylaws of Company; (b) conflict with or constitute a violation of any law,
statute, judgment, order, decree or regulation of any legislative body, court,
administrative agency, governmental authority or arbitrator applicable to or
relating to Company or the Business; (c) conflict with, constitute a default
under, result in a material breach or acceleration of or, except as set forth
on Schedule 2.5, require notice to or the consent of any third party or result
------------
in any rights of a third party under any contract, agreement, commitment,
mortgage, note, license or other instrument or obligation to which Company is
party or by which it is bound or by which its assets are affected; or (d) result
in the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever on or give any third party any rights in any of the Company's assets.
2.5 Consents and Approvals. Schedule 2.5 describes (a) each consent,
---------------------- ------------
approval, authorization, registration or filing with any federal, state or local
judicial or governmental authority or administrative agency, and (b) each
consent, approval, authorization of or notice to any other third party, which is
required in connection with the valid execution and delivery by Company of the
Company Agreements or the consummation by Company of the transactions
contemplated herein or therein (the items described in clauses (a) and (b),
collectively, the "Company's Required Consents").
---------------------------
2.6 Financial Statements. Company has previously delivered to Acquiror
--------------------
true and complete copies of (a) the audited balance sheet of Company as of
December 31, 1997 and the related statements of operations, shareholders' equity
and cash flows for the fiscal year then ended, including the footnotes thereto
and the report prepared in connection therewith by the independent certified
public accountants reviewing such financial statements; and (b) interim
unaudited financial reports prepared for the six month period ended June 30,
1998. Except as disclosed on Schedule 2.6, the documents described in clauses
(a) and (b), collectively, the "Financial Statements":
--------------------
(a) are consistent with the books and records of the Company;
(b) present fairly the assets, liabilities and financial condition of
Company in all material respects as of the respective dates thereof, and the
results of operations and cash flows for the periods then ended; and
(c) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved
except as otherwise noted therein and subject, in the case of the interim
unaudited financial reports prepared for the six month period ended June 30,
AGREEMENT AND PLAN OR REORGANIZATION PAGE 6
<PAGE>
1998, to normal year-end adjustments (other than reclassifications having no
effect on profit or loss) which will not have a net negative effect on profit
or loss of $50,000 or more in the aggregate and except that such interim
financial statements do not contain the notes required by generally accepted
accounting principles.
Company has no material liability or obligation, whether accrued, absolute, or
contingent that is not reflected or reserved against in the Financial
Statements. Any material items of income or expense which are unusual or of a
nonrecurring nature are separately disclosed in the Financial Statements.
Prior to the Closing, the Company will deliver to Parent an audited balance
sheet of the Company as of December 31, 1996, and the related statements of
operations, shareholders' equity and cash flows for the fiscal year then ended,
including the footnotes thereto and the report prepared in connection therewith
by the independent certified public accountants reviewing such financial
statements which:
(a) will be consistent with the books and records of the Company;
(b) will present fairly the assets, liabilities and financial condition of
Company in all material respects as of the respective dates thereof, and the
results of operations and cash flows for the periods then ended; and
(c) will have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved except as otherwise noted therein.
2.7 Books and Records. The books and records of Company relating to the
-----------------
assets are true, accurate and complete in all material respects and have been
maintained in accordance with generally accepted accounting principles applied
on a consistent basis.
2.8 Title to and Sufficiency of Assets. Company has good and marketable
----------------------------------
title to all of its assets, free and clear of any liens, encumbrances, claims,
security interests, mortgages or pledges of any nature (collectively, "Liens"),
-----
other than:
(a) Liens for taxes not yet due and payable; and
(b) Liens described on Schedules 2.8 or 2.24.
---------------------
Company owns or has the right to use, and following the Effective Time, Newco
will own or have the right to use, all of the assets, tangible and intangible,
of any nature whatsoever, required to operate the Business in the manner
presently operated.
2.9 Real Property Lease. Schedule 2.9 contains a description of all real
------------------- ------------
property leased by Company and used in connection with the Business. A true and
correct copy of the Company's lease (the "Real Property Lease") has been
-------------------
delivered to Parent. The Real
AGREEMENT AND PLAN OR REORGANIZATION PAGE 7
<PAGE>
Property Lease is, with respect to Company, valid, binding and enforceable in
accordance with its terms and is in full force and effect, and there are, to the
best of the knowledge of the Chief Executive Officer and Chief Financial Officer
of the Company (the "Company's Knowledge"), no offsets or defenses by either
landlord or tenant thereunder. There are no existing defaults by Company, and no
events or circumstances have occurred and are continuing which, with or without
notice or lapse of time or both, would constitute defaults, under the Real
Property Lease. Except as set forth in Schedule 2.9, the assignment of the Real
Property Lease by Company to Newco will not, with respect to the lease, (i)
permit the landlord to accelerate the rent or cause the lease terms to be
renegotiated, (ii) constitute a default thereunder or (iii) require the consent
of the landlord or any third party, provided that the Company presents to the
landlord the financial statements of Parent and the use of the premises by the
Acquiror is consistent with the use described in the Real Property Lease, and
provided that Parent is as strong or stronger financially than the Company.
2.10 Tangible Personal Property. Except as described on Schedule 2.10,
-------------------------- --------------
each item of Tangible Personal Property, and each item of tangible personal
property leased under the Contracts, is in good operating order, condition and
repair, is suitable for immediate use in the ordinary course of business of the
Business, is free from material defects, is merchantable and is of a quality and
quantity presently usable in the ordinary course of business. No item of
Tangible Personal Property is in need of repair or replacement, other than as
part of routine maintenance in the ordinary course of business. For purposes
hereof, "Tangible Personal Property" shall mean all machinery, equipment, tools,
--------------------------
furniture, office equipment, supplies, materials, vehicles and other items of
tangible personal property of every kind owned by Company.
2.11 Product Compliance. The Software, as defined in Section 2.14
------------------
(excluding the Third Party Software, as defined in Section 2.14) marketed and
licensed by Company will (i) store all date-related information and process all
data interfaces involving dates in a manner that unambiguously identifies the
century, for all date values before, during and after the Year 2000; (ii)
accept, process, store, calculate, sort, report, output and otherwise operate
accurately and without ambiguity and in a consistent manner for all date
information processed by the software, whether before, during or after the Year
2000; (iii) calculate, sort, report and otherwise operate correctly, in a
consistent manner and without interruption regardless of whether the date of
operation is before, during or after the Year 2000; (iv) report and display all
dates with a four-digit date so that the century is unambiguously identified;
and (v) handle all leap years, including but not limited to the Year 2000 leap
year, correctly.
2.12 Contracts. Schedule 2.12(a) lists all contracts, commitments,
--------- ----------------
agreements (including agreements for the borrowing of money or the extension of
credit), licenses, understandings and obligations, whether written or oral, to
which Company is party or by which Company is bound, that are material to the
operation of the Business or which involve the Software referred to herein or
the future payment of more than $50,000 to or by Company (the "Contracts").
---------
Company has delivered to Parent true and complete copies of all written
Contracts and true and complete memoranda of all oral Contracts, including any
and all amendments and
AGREEMENT AND PLAN OR REORGANIZATION PAGE 8
<PAGE>
other modifications thereto. Each of the Contracts is, with respect to the
Company, valid, binding and enforceable in accordance with its terms and is in
full force and effect. No Contract will result in a loss upon completion of
performance, and no purchase commitments are in excess of the normal
requirements of the Business or at excessive prices. Except for any default that
is immaterial, there are no existing defaults by the Company or to the Company's
Knowledge by parties other than the Company under the Contracts, and no events
or circumstances have occurred which, with or without notice or lapse of time or
both, would constitute defaults by the Company, or to the Company's Knowledge by
parties other than the Company under any of the Contracts. Except as set forth
on Schedule 2.12(b), the consummation of the Merger will not, with respect to
----------------
any Contract, (i) constitute a default thereunder, (ii) require the consent of
any person or party, except for the Company's Required Consents, or (iii) affect
the continuation, validity and effectiveness thereof or the terms thereof.
2.13 Receivables. All accounts receivable and trade accounts due to
-----------
Company ("Receivables") reflected on the Company's June 30, 1998 Balance Sheet
-----------
(less any such receivables collected since the date of such financial statement)
and all Receivables presently owing and to be owing at the Closing Date, are,
and at the Closing Date will be, legal, valid and binding obligations, and are
collectible in full at face value, net of the reserves established and reflected
in the Company's June 30, 1998 Balance Sheet (as such reserves are adjusted for
the passage of time through the Closing Date in accordance with the past
practice of Company). All such Receivables were created in the ordinary course
of business. There are, to the Company's Knowledge, no set-offs, counterclaims
or disputes asserted with respect to any Receivable, and no discount or
allowance from any Receivable has been made or agreed to. The reserves
established for doubtful or uncollected accounts as shown on the Company's June
30, 1998 Balance Sheet, as adjusted for the passage of time through the Closing
Date in accordance with the past practice of Company, are consistent in amount
to those historically established with respect to the accounts receivable of the
Company.
2.14 Intellectual Property. Except for the Third-Party Software (defined
---------------------
below), the software identified on Schedule 2.14 (the "Software") was developed
--------
by or for the Company, either by employees of Company within the scope of their
employment or by third party contractors who worked for Company and received
compensation for all such work for Company related to the Software, or by
written agreement agreed that all such work for Company constitutes "work for
hire." Except for the Third Party Software, Company is the sole owner of the
Software and the employees and/or third-party contractors who worked for Company
to develop the Software (other than the Third Party Software) have conveyed to
Company all right, title and interest in the Software and to all work products,
inventions and discoveries made, created, or developed by such party for or on
behalf of the Company other than work products, inventions or discoveries to
which Company is not entitled under its agreements with such third parties. No
person who worked on the creation or development of the Software (other than the
Third Party Software), either as Company's employee or a third party contractor,
has any claim of ownership, or right to, the Software (except the Third Party
Software). Schedule 2.14 sets forth a list of all trademarks of the Company
owned or used by Company, and all United States, foreign and state registrations
relating to any of the trademarks
AGREEMENT AND PLAN OR REORGANIZATION PAGE 9
<PAGE>
(the "Trademark Registrations"). Company has filed no Copyright registrations
-----------------------
with the United States Copyright Office or the office of any foreign
jurisdiction for any of the copyrights with respect to the Software. Schedule
2.14 also contains a list of all patent applications filed by the Company
related to the Software, together with the applicable patent number, application
number, application date and issue date. Company has abandoned all patent
applications, and Company has no existing patents or pending patent
applications. Except as set forth on Schedule 2.14, Company is the owner of the
Trademark Registrations. Company has taken commercially reasonable measures to
protect the confidentiality of its trade secrets, through written agreement,
restricted access or otherwise, and, to the best of Company's Knowledge, has not
experienced any unauthorized disclosure of a trade secret. Schedule 2.14 sets
forth (i) all the components of the Software licensed from third parties (the
"Third Party Software") and (ii) all the rights in the Software that have been
--------------------
licensed by the Company to others. Company owns all right, title and interest in
and to the Software, free and clear of any Liens, licenses or claims of any
third party, except, (y) the Third Party Software and (z) rights in the Software
that have been licensed to others. Except as set forth on Schedule 2.14 or with
-------------
respect to licenses in the ordinary course of business, Company has not licensed
any of the Software to any third party, and no third party has any right to use
any of the Software. The Software, Third Party Software, trade secrets of the
Company and trademark rights to the name Elekom, and the stylized globe
trademark, consists of all intellectual property rights necessary to conduct the
Business as presently conducted. Except as set forth on Schedule 2.14, there are
no claims or suits against Company challenging Company's ownership of or right
to use any of the Software, nor to Company's Knowledge does there exist any
valid basis therefor. Except as set forth on Schedule 2.14, the Software does
not infringe upon any patents, copyrights or other intellectual property rights
(excluding mask works and trademarks) of third parties or misappropriate any
trade secrets of any third party. Except for releases of the Company's software
prior to the version of the Company's software currently being licensed, Company
warrants that the Software which has been commercially released by Company
performs substantially in accordance with the applicable specifications and
technical end user documentation and is free of all known material errors.
Company further warrants, that in the case of the Third Party Software, any
third party software incorporated or used in the Company's Software, that
Company has the unrestricted right and license to use such software in the
manner currently used by Company in the Business and as used in the Software, to
grant a sublicense to use such software in the manner it currently licenses the
Software, and to assign such third party licenses to Newco. Upon consummation of
the Merger, Newco will have the rights of the Third Party Software previously
possessed by Company. Company further warrants that, to the best of Company's
Knowledge, after conducting a test with its current commercially available
software that tests for viruses, the Software to be acquired by Newco pursuant
to the Merger does not contain any software routine, code or instruction,
hardware, component or combination thereof (collectively referred to and defined
for purposes of this Section as a "Virus"), that is designed to repossess or
disable the Software by electronic or other means or otherwise disable, delete,
modify, damage or erase software, hardware or data. The term "Virus" is intended
-----
to include, but is not limited to, components that are commonly referred to as
"viruses," "back doors," "time bombs," "Trojan Horses," "worms" or "drop dead
devices."
AGREEMENT AND PLAN OR REORGANIZATION PAGE 10
<PAGE>
2.15 Major Suppliers and Customers. Each supplier of goods or services to
-----------------------------
whom Company paid more than $100,000, in the aggregate, during the twelve months
ended on June 30, 1998, and each customer of the Company who paid Company more
than $100,000, in the aggregate, during such period, is listed on Schedule 2.15,
-------------
which Schedule reflects in each case the amounts so paid. Except as set forth
in Schedule 2.15, Company is not currently engaged in any material dispute with
any of such suppliers or customers. Company has no reason to believe that the
Merger will have any material adverse effect on the business relationship of any
such suppliers or customers of the Company.
2.16 Litigation. Except as set forth on Schedule 2.16, there are no
----------
claims, actions, suits, arbitration proceedings, inquiries, hearings,
injunctions or investigations ("Claims") pending, or to Company's Knowledge
------
threatened, against the Company, its operations or the Business. Except as set
forth on Schedule 2.16, no Claims have been brought within the last two years
against Company or the Business, or affecting the Company's assets, or relating
to Company's ownership, use or operation of the Business or its assets. Except
as set forth on Schedule 2.16, there are no facts or circumstances exist which
could reasonably serve as the valid basis for any Claim against Company, or, by
virtue of the execution, delivery and performance of this Agreement, against
Acquiror.
2.17 Compliance with Decrees and Laws. There is not outstanding or, to
--------------------------------
the best knowledge of Company, threatened, any order, writ, injunction or decree
of any court, governmental agency or arbitration tribunal against or involving
Company or its assets. Company is currently, and has been at all times, in
substantial compliance with all applicable laws, statutes, rules, regulations,
orders and licensing requirements ("Rules") of federal, state, local and foreign
-----
agencies and authorities (including, without limitation, those relating to
antitrust and trade regulation, civil rights, labor and discrimination, safety
and health). To Company's Knowledge, there has been no allegation of any
violation of any such Rules, and to Company's Knowledge, no investigation or
review by any federal, state or local body or agency is pending, threatened or
planned with respect to Company.
2.18 Permits. Company has obtained all governmental permits,
-------
authorizations, certificates, approvals, licenses, exemptions and
classifications ("Permits") required for the conduct of the Business as
-------
presently conducted and the ownership and operation of the Company's assets, all
of which are described on Schedule 2.18. Company is not in violation of any of
-------------
the Permits, which violation would have a material adverse effect on the
business as presently conducted, and no proceedings are pending or, to the best
knowledge of Company, threatened, to revoke or limit any Permit. The
consummation of the Merger will not impact the validity or continued
effectiveness of the Permits or the operation of the Business thereunder by
Acquiror after the Closing.
2.19 Taxes. Company has properly completed, duly and timely filed in
-----
correct form with the appropriate United States, state and local governmental
agencies and with the appropriate foreign countries and political subdivisions
thereof, all tax returns, reports and declarations to estimated tax ("Tax
---
Returns") required to be filed before the Closing Date. All
- -------
AGREEMENT AND PLAN OR REORGANIZATION PAGE 11
<PAGE>
Tax Returns are accurate, complete and correct as filed, and Company has paid in
full or made adequate provision in its financial statements for all amounts
shown to be due thereon. All United States, state and local income, profits,
franchise, sales, use, occupancy, property, severance, excise, value added,
withholding and other taxes, and all taxes owing to any foreign countries and
political subdivision thereof (including interest, penalties and any additions
to tax) ("Taxes") due from or claimed to be due by each taxing authority in
-----
respect of Company, the Business or the Company's assets, for all periods ending
on or before the Closing Date have been, or will be, fully paid or adequately
provided for in the financial statements of Company. For all such periods,
Company has timely made and will timely make all withholdings of Tax required to
be made under all applicable United States, state and local tax regulations, and
such withholdings have either been paid or will be paid to the respective
governmental agencies or set aside in accounts for such purpose or accrued,
reserved against and entered upon the books of Company. Estimated income Taxes
which are not yet due to be paid to the Internal Revenue Service or any state or
local taxing authority have been accrued, reserved against and entered upon the
books of Company. All Tax Returns required to be filed after the date hereof and
on or before the Closing Date by Company, shall, in each case, be prepared and
filed by Company in a manner consistent in all respects (including elections and
accounting methods and conventions) with such Tax Return most recently filed by
Company in the relevant jurisdiction prior to the date hereof, except as
otherwise required by law or regulation or agreed to by Acquiror. There are no
outstanding elections, agreements or waivers extending the statutory period of
limitation applicable to any Tax Return, or the period for assessment or
collection of any Taxes. Company is not a party to any pending action or
proceeding, nor to the best knowledge of Company, is there threatened any action
or proceeding, by any governmental authority for assessment or collection of
Taxes, and Company has not been notified by any governmental authority that an
audit or review of any tax matter is contemplated. There are no Tax liens (other
than liens for taxes for current and subsequent years which are not yet due and
payable) upon any of the Company's assets. Company is not a "foreign person"
within the meaning of Section 1445 of the Code, and Acquiror has no obligation
under Section 1445 of the Code to withhold taxes from the merger consideration
to be paid to the Shareholders of Company. Company has not agreed, nor is it
required, to make any adjustment under Section 481(a) of the Code, by reason of
a change in accounting method or otherwise. Company has not consented to the
application to it of Section 341(f)(2) of the Code.
2.20 Environmental Protection. The existing and prior uses of the
------------------------
Company's assets and operations of the Business comply in all material respects
with, and at all times have complied with, and the Company is not in material
violation of, and has not materially violated, any applicable federal, state,
county or local statutes, laws, regulations, rules, ordinances, codes, licenses
or permits of any governmental authorities relating to environmental matters,
including by way of illustration and not by way of limitation the Comprehensive
Environmental Response, Compensation and Liability Act as amended, the Resource
Conservation Recovery Act as amended, the Clean Air Act, the Clean Water Act,
the Occupational Safety and Health Act, the Toxic Substances Control Act, any
"Superfund" or "Superlien" law, or any other federal, state or local statute,
law, ordinance, code, rule, regulation, order, decree or guideline (whether
published or unpublished) regulating, relating to or imposing liability or
standards of conduct concerning
AGREEMENT AND PLAN OR REORGANIZATION PAGE 12
<PAGE>
any petroleum, petroleum by-product (including but not limited to crude oil,
diesel oil, fuel oil, gasoline, lubrication oil, oil refuse, oil mixed with
other waste, oil sludge, and all other liquid hydrocarbons, regardless of
specific gravity), natural or synthetic gas, hazardous substance or materials,
toxic or dangerous waste, substance or material, pollutant or contaminant.
2.21 Insurance. Schedule 2.21 describes all insurance policies maintained
--------- -------------
by Company. Such policies are valid, binding and enforceable in accordance with
their terms, are in full force and effect, and all premiums due thereon have
been paid and will be paid through the Closing Date. Such policies provide in
Company's reasonable belief adequate coverage for all risks normally insured
against by entities similarly situated to Company. Company has not been refused
any insurance by any insurance carrier during the past two years.
2.22 Labor and Employment Matters. With respect to employment matters:
----------------------------
(a) No employees of Company are or have been represented by a union or
other labor organization or covered by any collective bargaining agreement,
and to the best knowledge of Company, no union is attempting to organize any
such employees.
(b) There is no labor strike, dispute, slowdown, stoppage or similar labor
difficulty pending or, to the best knowledge of Company, threatened against or
affecting Company.
(c) Company is in substantial compliance with all federal, state and local
laws and regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours, and there is no unfair labor
practice complaint against Company pending or, to the best knowledge of
Company, threatened.
2.23 Employees; Compensation; Benefit Plans.
--------------------------------------
(a) Compensation. Company has previously given to Acquiror a complete and
------------
correct list of the name, position, rate of compensation and any incentive
compensation arrangement, bonuses or commissions or fringe or other benefits,
whether payable in cash or in kind, of each current employee, director,
independent contractor, consultant and agent of Company and each other person
to whom Company pays or provides, or has an obligation, agreement (written or
unwritten), policy or practice of paying or providing, retirement, health,
welfare or other benefits of any kind or description whatsoever.
(b) Employee Benefit Plans.
----------------------
(i) Schedule 2.23(a) contains an accurate and complete list of all Plans,
----------------
as defined below, currently contributed to, maintained or sponsored by
Company, to which Company is obligated to contribute, or with respect to which
AGREEMENT AND PLAN OR REORGANIZATION PAGE 13
<PAGE>
Company has any material liability or potential material liability, whether
direct or indirect. For purposes of this Agreement, the term "Plans" shall
-----
mean: (A) employee benefit plans as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not
-----
funded (B) employment agreements, and (C) personnel policies or fringe benefit
plans, policies, programs and arrangements, whether or not subject to ERISA,
and whether or not funded, including without limitation, stock bonus, deferred
compensation, pension, severance, bonus, vacation, travel, incentive, and
health, disability and welfare plans.
(ii) Except as disclosed in Schedule 2.23(b), Company does not contribute
----------------
to, or have any obligation to contribute to (A) any multiemployer plan (as
such term is defined in Section 3(37) of ERISA), (B) any Plan of the type
described in Sections 4063 and 4064 of ERISA or in Section 413(c) of the Code
(and regulations promulgated thereunder), or (C) any Plan which provides
health, life insurance, accident or other welfare benefits (within the meaning
of Section 3(1) of ERISA) to current or future retirees or current former
employees, their spouses or dependents, other than as required by, or in
accordance with applicable law, including, but, not limited to, Section 4980B
of the Code, Part 6 of Subtitle B of Title I of ERISA and applicable state
continuation coverage law.
(iii) Except as disclosed in Schedule 2.23(c), none of the Plans obligates
----------------
Company to pay separation, severance, termination or similar-type benefits
solely as a result of any transaction contemplated by this Agreement or solely
as a result of a "change in control," as such term is used in Section 280G of
the Code (and regulations promulgated thereunder).
(iv) Each Plan and all related trusts, insurance contracts, and funds have
been maintained, funded and administered in compliance in all material
respects with all applicable laws and regulations, including but not limited
to ERISA and the Code. No Plan that is subject to the funding requirements of
Section 412 of the Code or Section 302 of ERISA has incurred any "accumulated
funding deficiency" as such term is defined in such Sections of ERISA, and the
Code, whether or not waived and all required contributions have been made.
With respect to each other Plan, all required payments, premiums,
contributions, reimbursements or accruals for all periods ending prior to or
as of the Closing Date shall have been made. No liability to the Pension
Benefit Guaranty Corporation ("PBGC") (except for routine payment of premiums)
has been or is expected to be incurred with respect to any Plan that is
subject to Title IV of ERISA, no reportable event (as such term is defined in
Section 4043 of ERISA) has occurred with respect to any such Plan (other than
reportable events for which the 30-day notice requirement of Section 4043 of
ERISA has been waived by statute, regulation or otherwise), and, to Company's
Knowledge, the PBGC has not commenced or threatened the termination of any
Plan. None of the
AGREEMENT AND PLAN OR REORGANIZATION PAGE 14
<PAGE>
assets of the Company is the subject of any lien arising under Section
302(f) of ERISA or Section 412(n) of the Code, Company has not been
required to post any security pursuant to Section 307 of ERISA or Section
401(a)(29) of the Code, and neither Company nor any officer or director of
Company has knowledge of any facts which could be reasonably expected to
give rise to such lien or such posting of security.
(v) With respect to each Plan, Company has provided Acquiror
with true, complete and correct copies, to the extent applicable, of (A)
all current documents pursuant to which the Plans are maintained, funded
and administered, (B) the two most recent annual reports (Form 5500 series)
filed with the Internal Revenue Service (with attachments), (C) the two
most recent actuarial reports, (D) the two most recent financial
statements, and (E) the most recent determination letter issued by the
Internal Revenue Service with respect to such Plan.
2.24 Absence of Certain Changes. Except as described in Schedule
-------------------------- --------
2.24, since June 30, 1998, Company has conducted the operation and business of
- ----
the Business only in the ordinary course, and has not:
(a) Suffered any damage, destruction or loss to any asset of the
Company, whether or not covered by insurance in an aggregate amount of
$10,000 or more;
(b) Other than the ordinary course of business, sold, transferred,
distributed or otherwise disposed of any assets;
(c) Except as provided in Schedules 2.8 and 2.24, incurred any
obligation or liability (whether absolute, accrued, contingent or otherwise
and whether due or to become due) in an aggregate amount of $50,000 or more
except normal trade or business obligations incurred in the ordinary course
of business;
(d) Suffered any material adverse change in the condition (financial
or otherwise), results of operations or business of the Company, or any
other event or condition of any character that might reasonably be expected
to have a material adverse effect on the Company or its Business;
(e) Agreed, whether in writing or otherwise, to take any action
described in this Section.
2.25 Product Warranties. Each product manufactured, licensed or sold
------------------
by Company has been in substantial conformity with all applicable contractual
commitments and express warranties, all of which are described on Schedule 2.25,
-------------
as well as with all warranties implied by law.
AGREEMENT AND PLAN OR REORGANIZATION PAGE 15
<PAGE>
2.26 Related Party Transactions. Except as set forth on Schedule
--------------------------
2.26, the Real Property Lease, personal property leases, and Contracts do not
include any agreement with, or any other commitment to (a) any officer, director
or shareholder of Company; (b) any person related by blood or marriage to any
such officer, director or shareholder; or (c) any corporation, partnership,
trust or other entity in which Company or any such officer, director,
shareholder or related person has an equity or participating interest.
2.27 Brokers. No finder, broker, agent or other intermediary has
-------
acted for or on behalf of Company in connection with the negotiation or
consummation of this Agreement, and there are no claims for any brokerage
commission, finder's fee or similar payment due from Company.
2.28 Names. During the term of its existence, Company has not been
-----
known by or conducted business under any other name. All assets and rights
relating to the Business are held by, and all agreements, obligations, expenses
and transactions relating to the Business have been entered into, incurred and
conducted by Company.
2.29 Disclosure. No representation, warranty or statement made by
----------
Company in this Agreement or in the Company Agreements, or contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact necessary to make the statements contained herein or therein,
in light of the circumstances in which they are made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO
Parent and Newco represent and warrant to Company and the Preferred
Shareholders as follows:
3.1 Capital Stock.
-------------
All Parent Common Stock to be issued to the Shareholders at Closing
will be duly and validly issued and outstanding and fully paid and
nonassessable. None of the outstanding shares of Parent Common Stock issued to
the Shareholders at closing will be issued in violation of any preemptive rights
of the current or past shareholders of the Parent.
3.2 Organization and Good Standing; Governing Documents. Parent and
---------------------------------------------------
Newco are corporations duly organized, validly existing and in good standing
under the laws of the State of Delaware. Parent and Newco have all requisite
power and authority to own, operate its assets and to conduct its operations as
presently conducted. Parent and Newco are duly qualified to do business as a
foreign corporation in all other jurisdictions in which the character of the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary, and such jurisdictions are listed on
Schedule 3.2. Newco has previously delivered to the Company true and complete
- ------------
copies of its Bylaws and Articles of Incorporation, including all amendments
thereto.
AGREEMENT AND PLAN OR REORGANIZATION PAGE 16
<PAGE>
3.3 Authority. Parent and Newco have all requisite power and
---------
authority to execute, deliver and perform this Agreement, the Certificate of
Merger, the Escrow and Indemnity Agreement and the Escrow and Minority
Investment Agreement (collectively the "Acquiror Agreements") and to consummate
-------------------
the transactions contemplated hereby and thereby. The execution, delivery and
performance of the Acquiror Agreements, and the consummation of the transactions
contemplated hereby and thereby, have been duly and validly authorized by all
necessary corporate action on the part of Parent and Newco. The Acquiror
Agreements have been, or, with respect to Acquiror Agreements to be executed at
the Closing, will be duly executed and delivered by Parent and Newco and each
constitutes, or will constitute when executed and delivered, a valid and binding
obligation of Parent and Newco, enforceable against Parent and Newco in
accordance with its terms, except as may be limited by bankruptcy, judicial
discretion, public policy or other equitable principles.
3.4 No Conflict or Breach. The execution, delivery and performance of
---------------------
the Acquiror Agreements do not and will not (a) conflict with or constitute a
violation of the Articles of Incorporation or Bylaws of Parent or Newco; (b)
conflict with or constitute a violation of any law, statute, judgment, order,
decree or regulation of any legislative body, court, administrative agency,
governmental authority or arbitrator applicable to or relating to Parent or
Newco; (c) conflict with, constitute a default under, result in a material
breach or acceleration of or, except as set forth on Schedule 3.5, require
------------
notice to or the consent of any third party or result in any rights of a third
party under any contract, agreement, commitment, mortgage, note, license or
other instrument or obligation to which Parent is party or by which it is bound
or by which its assets are affected; or (d) result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever on or give any third
party any rights in any of Parent's assets.
3.5 Consents and Approvals. Schedule 3.5 describes (a) each consent,
---------------------- ------------
approval, authorization, registration or filing with any federal, state or local
judicial or governmental authority or administrative agency, and (b) each
consent, approval, authorization of or notice to any other third party, which is
required in connection with the valid execution and delivery by Parent and Newco
of the Acquiror Agreements or the consummation by Parent and Newco of the
transactions contemplated herein or therein (the items described in clauses (a)
and (b), collectively, the "Acquiror's Required Consents").
----------------------------
3.6 Intellectual Property. Acquiror and its subsidiaries own or
---------------------
possess sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a material adverse change to the Acquiror. Neither
the Acquiror nor any of its subsidiaries has received any notice of infringement
or conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a material adverse change to the Acquiror.
3.7 Litigation. Except as set forth on Schedule 3.7, there are no
----------
claims, actions, suits, arbitration proceedings, inquiries, hearings,
injunctions or investigations
AGREEMENT AND PLAN OR REORGANIZATION PAGE 17
<PAGE>
("Claims") pending, or to Acquiror's Knowledge, threatened against Acquiror, its
------
operations or its business. Except as set forth on Schedule 3.7, no Claims have
been brought within the last two years against Acquiror, or affecting the
Acquiror's assets, or relating to Acquiror's business or ownership, use or
operation of its assets. To the knowledge of Acquiror ("Acquiror's Knowledge"),
there are no facts or circumstances exist which could reasonably serve as the
valid basis for any Claim against Acquiror, or, by virtue of the execution,
delivery and performance of this Agreement, against the Company.
3.8 Compliance with Decrees and Laws. There is not outstanding or, to
--------------------------------
the best knowledge of Acquiror, threatened, any order, writ, injunction or
decree of any court, governmental agency or arbitration tribunal against or
involving Acquiror or its assets. Acquiror is currently, and has been at all
times, in substantial compliance with all applicable laws, statutes, rules,
regulations, orders and licensing requirements ("Rules") of federal, state,
-----
local and foreign agencies and authorities (including, without limitation, those
relating to antitrust and trade regulation, civil rights, labor and
discrimination, safety and health). To Acquiror's Knowledge, there has been no
allegation of any violation of any such Rules, and to Acquiror's Knowledge, no
investigation or review by any federal, state or local body or agency is
pending, threatened or planned with respect to Acquiror under which Acquiror
believes it will have any material liability.
3.9 Absence of Certain Changes. Except as described in Schedule 3.9,
-------------------------- ------------
since June 30, 1998, Acquiror has conducted the operation of its business only
in the ordinary course, and has not:
(a) Suffered any material damage, destruction or loss to any asset of
the Acquiror, whether or not covered by insurance in an aggregate amount of
$100,000 or more;
(b) Other than the ordinary course of business, sold, transferred,
distributed or otherwise disposed of any assets;
(c) Incurred any obligation or liability (whether absolute, accrued,
contingent or otherwise and whether due or to become due) in an aggregate
amount of $250,000 or more except normal trade or business obligations
incurred in the ordinary course of business;
(d) Suffered any material adverse change in the condition (financial
or otherwise), results of operations or business of the Acquiror, or any
other event or condition of any character that might reasonably be expected
to have a material adverse effect on the Acquiror or its business;
(e) Agreed, whether in writing or otherwise, to take any action
described in this Section.
AGREEMENT AND PLAN OR REORGANIZATION PAGE 18
<PAGE>
3.10 Brokers. Other than the investment banker retained by Acquiror
-------
to review the transactions contemplated hereby with respect to the financial
fairness of the merger consideration paid by the Acquiror to the Shareholders,
Acquiror has retained no finder, broker, agent or other intermediary to act for
or on behalf of Acquiror in connection with the negotiation or consummation of
this Agreement, and no party has made any claims for any brokerage commission,
finder's fee or similar payment due from Acquiror.
3.11 Reports. Acquiror has timely filed all reports and statements,
-------
together with any amendments required to be made with respect thereto, that it
was required to file with (a) the Securities and Exchange Commission ("SEC"),
---
including, but not limited to, registration statements on Form S-1, and reports
on Form 10-Q and Form 8-K, and (b) any applicable state securities (except, in
the case of state securities authorities, failures to file which are not
reasonably likely to have, individually or in the aggregate, a material adverse
effect). As of their respective dates, each of such reports and documents,
including the financial statements, exhibits, and schedules thereto, complied in
all material respects with all applicable laws. As of its respective date, each
such report and document did not, in any material respects, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.12 Names. Other than the change of the Parent's name from SQL
-----
Financials International, Inc. to Clarus Corporation, during the term of its
existence, Acquiror has not been known by or conducted business under any other
name. All assets and rights relating to its business are held by, and all
agreements, obligations, expenses and transactions relating to its business have
been entered into, incurred and conducted by Acquiror.
3.13 Disclosure. No representation, warranty or statement made by
----------
Acquiror in this Agreement or in the Acquiror Agreements contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact necessary to make the statements contained herein or therein,
in light of the circumstances in which they are made, not misleading.
3.14 Fairness Opinion. Acquiror has received a written opinion from
----------------
NationsBanc Montgomery Securities, LLC that the consideration to be paid by
Parent to the Shareholders in connection with the Merger is fair to Parent, from
a financial point of view.
ARTICLE IV
COVENANTS OF COMPANY AND ACQUIROR
A. COVENANTS OF COMPANY
--------------------
Company covenants and agrees with Acquiror as follows:
4.1 Conduct of Business. Except as otherwise provided in this
-------------------
Agreement, between the date of this Agreement and the Closing Date, Company
shall:
AGREEMENT AND PLAN OR REORGANIZATION PAGE 19
<PAGE>
(a) Conduct the Company's operations in the normal and customary
manner in the ordinary course of business and pay (without incurring any
late fees or interest charges) its trade payables and other obligations in
accordance with the Company's payment practices;
(b) Maintain and preserve the confidentiality of its intellectual
property;
(c) Keep in full force and effect the insurance described in Section
2.21;
(d) Perform all of its obligations under all Contracts, the Real
Property Lease, and personal property leases, and not amend, alter, modify
or terminate any provision thereof;
(e) Use its reasonable efforts to preserve Company's organization
intact and maintain its relationships with its employees, suppliers and
customers;
(f) Promptly advise Acquiror of any adverse change in the condition
(financial or otherwise) of the Business or Company;
(g) Promptly advise Acquiror of the occurrence of any event or
circumstance which affects the consummation of the transactions
contemplated by this Agreement or which, if in existence on the date of
this Agreement, would have been required to have been disclosed in a
Schedule to this Agreement;
(h) Maintain and collect the Receivables and extend credit terms to
its customers in the ordinary course of business consistent with past
practices;
(i) Furnish Acquiror with a listing of the Tangible Personal Property
of Company; and
(j) Prior to Closing, Company shall convert the Elekom 401(k) Plan
from a "standardized" prototype plan to a "non-standardized" prototype
plan, with terms that are substantially similar to those of the
"standardized" prototype plan (as adopted by Company).
4.2 Negative Covenants. Between the date of this Agreement and the
------------------
Closing Date, except as otherwise provided in this Agreement Company shall not:
(a) Except as set forth on Schedules 2.24, create or permit to exist any
Lien of any kind or nature, except for the Liens described on Schedule 2.8;
------------
(b) Sell or dispose of any assets or license any assets other than in the
ordinary course of business;
AGREEMENT AND PLAN OR REORGANIZATION PAGE 20
<PAGE>
(c) Enter into or amend any employment or severance agreement or grant
any increase in compensation or benefits to any employees of Company
(including such discretionary increases as may be contemplated by existing
employment agreements), except in accordance with past practice or
previously approved by and reflected in the written minutes of the Board of
Directors of Company;
(d) Make any capital improvement or expenditure individually in excess
of $10,000 or in the aggregate in excess of $50,000 without the written
consent of Acquiror;
(e) Except as set forth on Schedule 2.8 and 2.24, incur any additional
debt obligation or other obligation for borrowed money;
(f) Except pursuant to the exercise of stock options outstanding as of
the date hereof as disclosed on Schedule 2.1(b) hereto and pursuant to the
--------------
terms thereof in existence on the date hereof, issue, sell, pledge,
encumber, authorize the issuance of or enter into any contract to issue,
sell, pledge, encumber, or authorize the issuance of or otherwise permit to
become outstanding, any additional shares of capital stock, or any stock
appreciation rights, or any option, warrant, conversion, or other right to
acquire any such stock, or any security convertible into any such stock;
(g) Amend the Articles of Incorporation, Bylaws or other governing
instruments of Company;
(h) Repurchase, redeem, or otherwise acquire or exchange, directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of Company, or declare or pay any dividend or make any
other distribution in respect of Company, with the exception of the
repurchase of shares pursuant to exercised but unvested options and the
acceleration or termination of options under the Company's Amended and
Restated 1996 Stock Option Plan;
(i) Purchase any securities or make any material investment, either by
purchase of stock or securities, of any person;
(j) Adopt any new employee benefit plan of Company or make any
material change in or to any existing employee benefit plans of Company
other than any such change that is required by law or that, in the opinion
of counsel, is necessary or advisable to maintain the tax qualified status
of any such plan, provided that the Company shall have amended its 401(k)
plan to a nonstandardized prototype plan prior to Closing;
AGREEMENT AND PLAN OR REORGANIZATION PAGE 21
<PAGE>
(k) Make any significant change in any tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in tax laws or regulatory accounting requirements or
GAAP; or
(l) Commence any litigation, settle any litigation involving any
liability of Company for money damages, with the exception of Company's
litigation with Casahl, subject to Section 9.6, or which imposes material
restrictions upon the operations of Company.
4.3 Access and Information. Company shall permit Acquiror and its
----------------------
counsel, accountants and other representatives full access during normal
business hours to all the properties, assets, books, records, agreements and
other documents of Company. Company shall furnish to Acquiror and its
representatives all information concerning the Company or the Business as
Acquiror may reasonably request. Company shall permit and facilitate
communications between Acquiror and Company's suppliers, customers, landlords
and other persons having relationships with the Company.
4.4 Standstill. In the event of termination of this Agreement, for
----------
any reason, prior to the Closing Date, then until the expiration of eighteen
(18) months from the date of such termination, none of Company, its affiliates
(as defined in Rule 405 of the Securities Act of 1977, hereinafter "Affiliates")
----------
or those of Company's representatives to whom confidential information has been
disclosed or who have been made aware of the discussions between the parties
concerning a possible transaction, with the exception of companies in which less
than 50 percent is owned by one of the Preferred Shareholders, shall, without
the prior written consent of the Board of Directors of Acquiror, (i) in any
manner acquire, agree to acquire, or make any proposal to acquire, directly or
indirectly, a material portion of the assets of Acquiror; (ii) propose to enter
into, directly or indirectly, any merger or business combination involving
Acquiror; (iii) make, or in any way participate, directly or indirectly, in any
solicitation of "proxies" (as such term is used in Regulation 14A under the
Securities Exchange Act of 1934, as amended) to vote or seek to advise or
influence any person with respect to the voting of any voting securities of
Acquiror; (iv) form, join or in any way participate in a "group" within the
meaning of Section 13(d) of the Securities Exchange Act of 1934) with respect to
any voting securities of Acquiror; (v) otherwise act, alone or in concert with
others, to seek to control of influence the management, Board of Directors or
polices of Acquiror; or (vi) publicly disclose any intention, plan or
arrangement inconsistent with the foregoing.
4.5 Shareholder Approval. As soon as practicable but in all events
--------------------
within one (1) business day following the filing of the 424(b) prospectus by
Acquiror relating to the Merger, Company will take all steps necessary to duly
call a shareholders meeting and mail a notice of shareholders meeting and joint
shareholder proxy and consent for the purpose of adopting and approving this
Agreement and the Merger and for such other purposes as may be necessary or
desirable in connection with effectuating the transactions contemplated hereby,
and hold such shareholders meeting unless unanimous
AGREEMENT AND PLAN OR REORGANIZATION PAGE 22
<PAGE>
written consent to such transactions is obtained before the scheduled date of
such meeting. Company will use its best efforts to obtain unanimous written
consent in lieu of the meeting of shareholders as soon as practicable after
notice of the shareholders meeting is given. The Board of Directors of Company
will unanimously recommend that the shareholders of Company vote in favor of
such transactions.
B. COVENANTS OF ACQUIROR
---------------------
4.6 Royalty Prepayments. Parent agrees to prepay royalties next
-------------------
accruing pursuant to that certain OEM License Agreement dated April 14, 1998
between Parent and Company (the "OEM Agreement"), to Company to provide working
capital to fund the Company's operations, to the extent needed, in an amount up
to $250,000 for each two-week period beginning on October 1, 1998 through the
Closing Date (or the date on which this Agreement is earlier terminated).
Company understands that Parent's agreement to provide such prepayments is made
in reliance upon Company's representations and undertakings to use its best
efforts and cause its Representatives to use their best efforts to work toward a
filing of the Registration Statement no later than September 4, 1998.
4.7 Registration Rights. Parent will enter into and deliver to
--------------------
Company at Closing a Registration Rights Agreement granting piggyback
registration rights to Mr. Norman Behar and the Preferred Shareholders,
substantially in the form attached as Exhibit 4.7 hereto.
4.8 Nasdaq Listing. Parent shall use its reasonable effort to list,
--------------
prior to the Effective Time, on the Nasdaq National Market the shares of Parent
Common Stock to be issued to the shareholders of Company pursuant to the Merger.
4.9 Board Observation Rights. Acquiror agrees that Mr. Norman Behar
------------------------
shall have the right to receive notice of and to attend each meeting of the
Parent's Board of Directors, and the Acquiror shall reimburse Mr. Behar's
reasonable expenses incurred in attending such meetings (the "Board Observation
Rights"). Subject to the exercise of its fiduciary duties, Parent agrees (i) to
nominate and recommend election of Mr. Behar to its Board of Directors at its
next annual shareholders meeting, to serve in Class II of the Parent's Board of
Directors (which term expires in the year 2000), prior to its next annual
shareholders meeting after the Effective Date. The rights granted to Mr. Behar
hereunder shall expire on June 30, 2000. In the event that Mr. Behar is elected
to the Parent's Board of Directors, then if his board term expires before June
30, 2000, he will maintain the Board Observation Rights until June 30, 2000. The
Acquiror will provide coverage for Mr. Behar under Acquiror's Director and
Officer issuance policy identical to that provided to the other directors and
officers of Acquiror.
4.10 Tax Matters. Newco and Parent intend to continue the Business of
-----------
the Company or use a significant portion of the business assets of the Company
in a manner that satisfies the continuity of business enterprise requirement set
forth in Treasury Regulation 1.368-2(d) and shall take no other action
inconsistent with treatment of the Merger as a reorganization under Section
368(a)(1)(A) and 368(a)(2)(D) of the Code.
4.11 Real Property Lease. Acquiror will use the premises described in
-------------------
the Real Property Lease in a manner consistent with the use of the premises
permitted under the Real
AGREEMENT AND PLAN OR REORGANIZATION PAGE 23
<PAGE>
Property Lease and will guaranty the obligations of the Company or Newco as
successor to the Company as tenant under the Real Property Lease if required by
the landlord.
4.12 Welfare Benefit Plans. (a) Acquiror shall terminate the group
---------------------
medical, dental, vision, life insurance, supplemental life insurance, short-term
disability, long-term disability, accidental death and dismemberment, Section
125 plans and any other employee benefit plan, policy, program, arrangement or
payroll practice sponsored by Company (the "Company Group Plans") effective as
of the close of business of the Company Group Plans on December 31, 1998.
Effective as of January 1, 1999, Continuing Employees (as defined in Section
4.12(e)) and their eligible dependents shall become eligible to participate in
the group medical, dental, life insurance, supplemental life insurance, short-
term disability, long-term disability, accidental death and dismemberment,
Section 125 plans and any other employee benefit, policy, program, arrangement
or payroll practice sponsored by Acquiror or its subsidiaries (the "Acquiror
Group Plans"). Acquiror and its subsidiaries shall waive (or cause to be
waived), with respect to Continuing Employees and their eligible dependents, any
pre-existing condition limitations and eligibility waiting periods under the
Acquiror Group Plans.
(b) Special Provision Relating to Acquiror's Group Health Plan. The
----------------------------------------------------------
amount of the annual premium for which a Continuing Employee is responsible for
paying (the "Annual Employee Premium") for coverage of such Continuing Employee
and his eligible dependents under the Acquiror Medical Plan (as defined below)
shall be determined by Acquiror and the insurer or insurers under the Acquiror
Medical Plan. To the extent that the Annual Employee Premium in effect on
January 1, 1999 charged to a Continuing Employee for coverage of such Continuing
Employee and his dependents under the Acquiror Medical Plan shall exceed the
amount of the Annual Employee Premium in effect on December 31, 1998 charged to
a Continuing Employee for coverage of such Continuing Employee and his
dependents under the Company Medical Plan (as defined below), Acquiror shall
increase the annual salary of such Continuing Employee, effective as of January
1, 1999, in an amount equal to the difference in the Annual Employee Premium.
For example, if the Annual Employee Premium in effect on December 31, 1998
charged to a Continuing Employee for employee and dependent coverage under the
Company Medical Plan is $1,700, and the Annual Employee Premium in effect on
January 1, 1999 charged to such Continuing Employee for employee and dependent
coverage under the Acquiror Medical Plan is $4,300, Acquiror shall increase the
annual salary of such Continuing Employee by $2,600, effective as of January 1,
1999. For purposes of this Section 4.12(b), "Acquiror Medical Plan" shall mean
the group medical plan sponsored by Acquiror in effect on January 1, 1999, and
"Company Medical Plan" shall mean the group medical plan sponsored by Company in
effect as of the date of this Agreement.
(c) Vision Benefits. As of the Effective Time, Acquiror does not
---------------
provide vision care benefits to its employees. Acquiror does not intend to
provide vision care benefits to Continuing Employees.
(d) 401(k) Plan. Acquiror shall merge Company's 401(k) plan into
-----------
Acquiror's 401(k) plan, effective as of the close of business of the plans on
December 31, 1998.
AGREEMENT AND PLAN OR REORGANIZATION PAGE 24
<PAGE>
The account of each Continuing Employee in Company's 401(k) plan who is a
participant in such plan shall become fully vested as of the Effective Time.
Each Continuing Employee who was a participant in Company's 401(k) plan on
December 31, 1998 shall be eligible to participate in Acquiror's 401(k) plan as
of January 1, 1999. For purposes of vesting, each Continuing Employee's service
with Company and its subsidiaries and affiliates prior to the Effective Time
shall be treated as service with Acquiror and its subsidiaries.
(e) Continuing Employees. For purposes of this Section 4.12,
--------------------
"Continuing Employee" means any individual who is employed by Company or any of
its subsidiaries immediately prior to the Effective Time and who becomes
employed by Acquiror or any of its subsidiaries as of the Effective Time or as
the result of the transactions contemplated herein. Any new employee hired by
Newco on or after the Effective Time but prior to January 1, 1999 shall be
eligible to participate in the Acquiror Group Plans and the Acquiror's 401(k)
plan, in accordance with the terms of such plans and shall not be eligible to
participate in the Company Group Plans or the Company's 401(k) plan.
4.13 Employment Agreements. Acquiror will use commercially reasonable
---------------------
best efforts to negotiate and enter into, before Closing, the Employment
Agreements set forth in Section 6.9.
ARTICLE V
MUTUAL COVENANTS
Each of Acquiror and Company covenants and agrees with the other as
follows:
5.1 Best Efforts. Each of Acquiror and Company shall use its best
------------
efforts to make or obtain all consents, approvals, authorizations, registrations
and filings with all federal, state or local judicial or governmental
authorities or administrative agencies as are required in connection with the
consummation of the transactions contemplated by the Acquiror Agreements and the
Company Agreements.
5.2 Confidentiality. In recognition of the confidential nature of
---------------
certain of the information which will be provided to each party by the other,
each of Acquiror and Company agrees to retain in confidence, and to require its
directors, officers, employees, consultants, professional representatives and
agents (collectively, its "Representatives") to retain in confidence all
---------------
confidential information transmitted or disclosed to it by the other, and
further agrees that it will not use for its own benefit and will not use or
disclose to any third party, or permit the use or disclosure to any third party
of, any confidential information obtained from or revealed by the other, except
that each of Acquiror and Company may disclose the information to those of its
Representatives who need the information for the proper performance of their
assigned duties with respect to the consummation of the transactions
contemplated hereby. In making such information available to its
Representatives, each of Acquiror and Company shall take any and all precautions
necessary to ensure that its Representatives use the information only as
permitted hereby. Notwithstanding anything to the contrary in the foregoing
provisions, such information may be disclosed (a) where it is necessary to any
regulatory authorities or
AGREEMENT AND PLAN OR REORGANIZATION PAGE 25
<PAGE>
governmental agencies, (b) if it is required by court order or decree or
applicable law, (c) if it is ascertainable or obtained from public or published
information, (d) if it is received from a third party not known to the recipient
to be under an obligation to keep such information confidential, or (e) if the
recipient can demonstrate that such information was in its possession prior to
disclosure of any such information by operation of law, such disclosing party
shall give the other party prior notice of the making of such disclosure and
shall use all reasonable efforts to afford such other party an opportunity to
contest the making of such disclosure. In the event that the Closing shall not
occur, each of Acquiror and Company shall immediately deliver, or cause to be
delivered, to the other (without retaining any copies thereof) any and all
documents, statements or other written information obtained from the other that
contain confidential information.
5.3 Registration Statement. Parent shall prepare at its expense and
----------------------
file as promptly as practicable hereafter with the SEC a Registration Statement
on Form S-4 (the "Registration Statement") to register the shares of Parent
----------------------
Common Stock issuable to Shareholders hereunder. Parent shall use all reasonable
efforts, consistent with the financial information (including pro-forma
financial statements) presented in the S-4 Registration Statement as originally
filed, to have the Registration Statement declared effective by the SEC as
promptly as practicable; provided, however, that the condition set forth in
Section 6.5 remains and the minority investment set forth in Section 10.3 would
result in the event the condition in Section 6.5 is not met. Company shall
furnish all information concerning Company and the holders of Company's common
stock as may be reasonably requested in connection with the preparation of the
Registration Statement and issuance of the Parent Common Stock as set forth in
this Agreement, all of which Company represents will be true and complete in all
material respects and will not omit any material fact necessary to make the
statements therein not misleading. Acquiror and Company will work together to
cause the Registration Statement to be filed with the SEC no later than
September 4, 1998.
5.4 Approval of Shareholders/Voting Agreements. Company shall cause a
------------------------------------------
meeting of its shareholders to be duly called, and mail a notice of shareholders
meeting and joint shareholder proxy and consent within one business day
following the filing of the 424(b) prospectus by Acquiror relating to the
Merger, for the purpose of approving this Agreement and all actions contemplated
hereby which require the approval of Company's shareholders, and hold such
shareholders meeting unless unanimous written consent to such actions is
obtained before the scheduled date of such meeting. Company will use its best
efforts to obtain unanimous written consent in lieu of the meeting of
shareholders as soon as practicable after notice of the shareholders meeting.
Company will, through its Board of Directors, unanimously recommend to Company's
shareholders, and use its best efforts to obtain approval by the shareholders of
Company of the transactions contemplated by this Agreement. Simultaneously with
the execution of this Agreement, Company has delivered to Acquiror Voting
Agreements duly executed by the holders of forty-nine percent (49%) of the
Company's common stock, one-hundred percent (100%) of the Company's Series A
Preferred Shares and sixty-seven percent (67%) of the Company's Series B
Preferred Shares, outstanding on the date hereof.
AGREEMENT AND PLAN OR REORGANIZATION PAGE 26
<PAGE>
5.5 Agreement as to Efforts to Consummate. Subject to the terms and
-------------------------------------
conditions of this Agreement, each party agrees to use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws, as
promptly as practicable so as to permit consummation of the transactions
contemplated hereby at the earliest possible date and to otherwise enable
consummation of the transactions contemplated hereby and shall cooperate fully
with the other party hereto to that end. Each party shall use its reasonable
efforts to obtain all Required Consents necessary or desirable for the
consummation of the transactions contemplated by this Agreement.
5.6 Third-Party Proposals.
---------------------
5.6.1 Company. (a) In order to induce Acquiror to commit the
-------
resources and to incur the legal, accounting, investment banking,
appraisal, filing and other fees and expenses related thereto to the extent
actually incurred and paid ("Transaction Costs") necessary to properly
estimate and negotiate the terms of the transaction and to consummate the
transaction, except with respect to this Agreement and the transactions
contemplated hereby, neither Company nor any Affiliate or Representative of
Company shall directly or indirectly solicit any Acquisition Proposal (as
defined below) by any person or entity ("Third Party"). For purposes
hereof, an "Acquisition Proposal" shall mean any tender offer or exchange
--------------------
offer or any proposal for a merger, acquisition or control of the stock or
all or substantially all of the assets of, or other business combination
involving Company or the acquisition of a substantial equity interest in,
or a substantial portion of the assets of Company; provided, however, that
nothing contained in this Agreement shall prevent the Board of Directors of
the Company from referring any Third Party to this Section 5.6.1 or from
making a copy of this Section 5 available to any Third Party. Nothing
contained in this Section 5.6.1 shall prevent the Board of Directors of the
Company from considering, negotiating, approving and recommending to the
shareholders of the Company (after complying with subparagraphs (b) and (c)
below, consulting with its financial advisors, and determining after
consulting with counsel that the Board of Directors is required to do so in
order to discharge properly its fiduciary duties) a Superior Proposal. A
"Superior Proposal" shall mean an unsolicited bona fide written Acquisition
Proposal made by a Third Party which provides aggregate consideration to
the Shareholders of at least $5 million more than the value of the
consideration to be paid by Acquiror hereunder and is on terms that a
majority of the members of the Company's Board of Directors determines in
their good faith reasonable judgment (based on the advice of an independent
financial advisor) would be more favorable to the Company's shareholders
than the transactions contemplated by this Agreement and for which any
required financing is committed or which, in the good faith reasonable
judgment of a majority of such members (after consultation with an
independent financial advisor), is reasonably capable of being financed by
such Third Party.
AGREEMENT AND PLAN OR REORGANIZATION PAGE 27
<PAGE>
(b) The Company shall promptly (but in no case later than 24 hours)
notify Acquiror after receipt of any Acquisition Proposal or any request
for nonpublic information relating to the Company in connection with an
Acquisition Proposal or for access to the properties, books or records of
the Company by any Person that informs the Board of Directors of the
Company that it is considering making, or has made, an Acquisition
Proposal. Such notice to Acquiror shall be made orally and in writing and
shall indicate in reasonable detail the identity of the offeror and the
terms and conditions of such proposal, inquiry or contact.
(c) If the Board of Directors of the Company receives a request for
material nonpublic information by a party who makes a bona fide Acquisition
Proposal and the Board of Directors of the Company determines that such
proposal is a Superior Proposal then, and only in such case, the Company
may, subject to the execution of a confidentiality agreement substantially
similar to that then in effect between the Company and Acquiror, provide
such party with access to information regarding the Company. The Company
will promptly (but in no case later than 24 hours) notify Acquiror of any
determination by the Company's Board of Directors that a "Superior
Proposal" has been made.
(d) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Acquiror)
conducted heretofore with respect to any of the foregoing. The Company
agrees not to release any Third Party from any confidentiality or
standstill agreement to which the Company is a party.
(e) The Company shall ensure that the officers, directors and
employees of the Company, and any investment banker or other advisor or
representative retained by the Company, are aware of the restrictions
described in this Section 5.6.1.
(f) In the event that Company's Board of Directors recommends a
Superior Proposal to the Company's Shareholders, then Acquiror has the
right immediately to terminate this Agreement without any liability
whatsoever hereunder, including without limitation, Section 10.3 hereof,
and to receive the termination fee provided in Section 10.4. If Company's
shareholders approve the Superior Proposal, then Company may terminate this
Agreement, provided that Company shall pay to Acquiror a "Break-up Fee," as
Acquiror's exclusive remedy in the amount of (i) $5.0 million dollars, plus
(ii) the amount of Acquiror's Transaction Cost paid by Acquiror, less the
amount of the termination fee provided in Section 10.4. Such Break-up Fee
shall be paid to Acquiror immediately upon the execution of a definitive
agreement between the Third Party or any other party at any time within
nine months after the date of termination of this Agreement by Company for
any reason other than Section 10.1(f), (g) or (h) or failure of the
conditions set forth in Article 6 and Sections 7.5 and 7.6. The
AGREEMENT AND PLAN OR REORGANIZATION PAGE 28
<PAGE>
parties acknowledge that the amount of the Break-Up Fee is reasonable and
is intended to compensate the Acquiror's losses, including, without
limitation, loss of opportunity in the event the Merger is not effected.
5.6.2 Acquiror. Except with respect to this Agreement and
--------
transactions contemplated hereby, neither Acquiror nor any Affiliate or
Representative of Acquiror shall directly or indirectly solicit a Purchase
Proposal (as defined below) by any person. Neither Acquiror nor any
Affiliate or Representative of Acquiror shall negotiate with respect to, or
enter into any contract with respect to, any Purchase Proposal. Acquiror
shall promptly notify Company orally and in writing in the event that it
receives any inquiry or proposal relating to any such transaction. Unless
the prior written consent of Company is obtained, Acquiror shall (i)
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any persons conducted heretofore with
respect to any of the foregoing, and (b) direct and cause all of its
Representatives not to engage in any of the foregoing. For purposes hereof,
a "Purchase Proposal" shall mean any (a) tender offer or exchange offer
-----------------
made by Acquiror or any proposal for a merger, acquisition or control of
the stock or all or substantially all of the assets of, or other business
combination involving the acquisition by Acquiror of a substantial equity
interest in, or a substantial portion of the assets of a third party which
is engaged in the development, marketing, licensing or sale of electronic
procurement software or (b) tender offer or exchange offer made for
Acquiror by a third party or any proposal for a merger, acquisition or
control of the stock or all or substantially all of the assets of, or other
business combination involving the acquisition of Acquiror by a third party
or of a substantial equity interest in, or a substantial portion of the
assets of Acquiror by a third party.
ARTICLE VI.
CONDITIONS PRECEDENT TO ACQUIROR'S OBLIGATIONS
The obligations of Acquiror to consummate the transactions
contemplated by this Agreement are subject to the satisfaction of the following
conditions on or before the Closing Date, unless specifically waived in writing
by Acquiror prior to the Closing Date:
6.1 Representations and Warranties. The representations and
------------------------------
warranties of Company contained in this Agreement or otherwise required hereby
to be made after the date of this Agreement in a writing expressly referred to
herein by or on behalf of the Company pursuant to this Agreement shall be true
and correct as of the date of this Agreement and as of the Closing Date. The
Company shall have delivered a revised Schedule of Exceptions dated three days
prior to the Closing Date, reflecting any changes occurring after the date of
this Agreement that would be required in order to make the representations and
warranties of the Company contained in this Agreement true and correct, on and
as of the Closing Date, with the same force and effect as if made on and as of
the Closing Date, except (a) for changes contemplated by this Agreement and
AGREEMENT AND PLAN OR REORGANIZATION PAGE 29
<PAGE>
(b) that the accuracy of representations and warranties which address matters
only as of a particular date will be determined as of such date. Acquiror shall
have the right to review and approve the Company's revised Schedule of
Exceptions which must be acceptable to Acquiror in its sole discretion; provided
that the inclusion or addition of (i) any immaterial adverse item or (ii) any
item which has a positive effect on the Company could not be the basis of
Acquiror's failure to approve or accept such revised schedules, or to close
based on the condition contained in this Section 6.1. The Company shall notify
Parent of such changes reflected in the revised Schedule of Exceptions as soon
as practicable after Company becomes aware of such changes.
6.2 Compliance with Covenants. Company shall have duly performed and
-------------------------
complied with all covenants, agreements and obligations required by this
Agreement to be performed or complied with by it on or prior to the Closing.
6.3 Absence of Litigation. No action or proceeding shall be pending
---------------------
or, in the reasonable opinion of Acquiror, threatened by or before any court or
other governmental body or agency seeking to restrain, prohibit or invalidate
the transactions contemplated by this Agreement or which would affect the right
of Acquiror in a material adverse manner to own, operate or control the Business
after the Closig Date.
6.4 Consents and Approvals. All Company's Required Consents shall
----------------------
have been made or obtained prior to or at the Closing.
6.5 SEC Approval. The Registration Statement shall have become
------------
effective and no stop order suspending the effectiveness or proceeding for that
purpose shall have been issued and remain in effect. The shares of Parent Common
Stock to be issued pursuant hereto shall have been approved for quotation on the
Nasdaq National Market System.
6.6 Legal Opinion. Acquiror shall have received from Perkins Coie
-------------
LLP, counsel to Company, an opinion, dated the Closing Date, in the form of
Exhibit 6.6.
6.7 Patent Opinion. Acquiror shall have received a signed written
--------------
competent opinion from Isaf, Vaughan & Kerr, for which Acquiror will pay all
such firm's fees and costs without deduction from the purchase price paid to
Shareholders hereunder, regarding a patent identified to Acquiror on the
attached Schedule 2.14, which opinion shall state that the Software does not
infringe such patent. Additionally, Acquiror shall have conducted a patent
search at its sole expense for patents issued in the same category as the
Software and shall be satisfied with the results thereof.
6.8 Affiliate and Market Stand-off Agreements. Parent shall have
-----------------------------------------
received from such of the Affiliates of Company (designated pursuant to Section
5.3 hereof) an Affiliate and Market Stand-off Agreement substantially in the
form attached as Exhibit 6.8 acknowledging the restrictions imposed by the
federal securities laws and regulations thereunder (including but not limited to
SEC Rule 145) on the shares of Parent Common Stock to be received by such
persons, and agreeing to be bound by such restrictions. Acquiror shall be
entitled to place restrictive legends upon certificates for shares of Parent
Common Stock issued to Affiliates of
AGREEMENT AND PLAN OR REORGANIZATION PAGE 30
<PAGE>
Company pursuant to this Agreement to enforce the provisions of this Section
6.8. Acquiror shall not be required to maintain the effectiveness of the
Registration Statement under the 1933 Act for the purposes of resale of Parent
Common Stock by such Affiliates. The Affiliate and Market Stand-off Agreements
of each of the former preferred shareholders of Company and Mr. Norman Behar
will contain a lock-up agreement whereby such party will agree not to sell,
assign, pledge, transfer, encumber or otherwise dispose of any shares of Parent
Common Stock on or before the earlier of (i) October 1, 1999, and (ii) the nine
(9) month anniversary of the Closing Date, and will contain a covenant
preventing such shareholder from engaging in any "short-selling" of the Parent
Common Stock and a release of all claims against the Company.
6.9 Key Employees. Acquiror shall have entered into employment
-------------
agreements with each of the following persons who are currently employed in the
Business: Norman Behar, Wayne Burns, Ona Karasa, and Todd Ostrander.
ARTICLE VII.
CONDITIONS PRECEDENT TO COMPANY'S OBLIGATIONS
The obligations of Company to consummate the transaction(s)
contemplated by this Agreement are subject to the satisfaction of each of the
following conditions on or before the Closing Date, unless specifically waived
in writing by Company prior to the Closing:
7.1 Representations and Warranties. The representations and
------------------------------
warranties of Acquiror contained in this Agreement shall have been true and
correct on the date of this Agreement in a writing expressly referred to herein
by or on behalf of the Acquiror pursuant to this Agreement and shall be true and
correct on the Closing Date as though made on and as of the Closing Date.
Acquiror shall have delivered a revised Schedule of Exceptions dated three days
prior to the Closing Date, reflecting any changes occurring after the date of
this Agreement that would be required in order to make the representations and
warranties of Acquiror contained in this Agreement true and correct, on and as
of the Closing Date, with the same force and effect as if made on and as of the
Closing Date, except (a) for changes contemplated by this Agreement and (b) that
the accuracy of representations and warranties which address matters only as of
a particular date will be determined as of such date. Company shall have the
right to review and approve the revised Schedule of Exceptions which must be
acceptable to Company in its sole discretion; provided that the inclusion or
addition of (i) any immaterial adverse item or (ii) any item which has a
positive effect on Acquiror could not be the basis of Company's failure to
approve or accept such revised schedules, or to close based on the condition
contained in this Section 7.1.
7.2 Compliance with Covenants. Acquiror shall have duly performed
-------------------------
and complied with all covenants, agreements and obligations required by this
Agreement to be performed or complied with by it on or prior to the Closing.
7.3 Absence of Litigation. No action or proceeding shall be
---------------------
pending by or before any court or other governmental body or agency seeking to
restrain, prohibit or invalidate the transactions contemplated by this
Agreement.
AGREEMENT AND PLAN REORGANIZATION PAGE 31
<PAGE>
7.4 Consents and Approvals. All Acquiror's Required Consents shall
----------------------
have been made or obtained prior to or at the Closing.
7.5 Legal Opinion. Company shall have received from Womble Carlyle
-------------
Sandridge & Rice, PLLC, counsel to Acquiror, an opinion, dated the Closing Date,
in the form of Exhibit 7.5.
7.6 SEC Approval. The Registration Statement shall have become
------------
effective and no stop order suspending the effectiveness or proceeding for that
purpose shall have been issued and remain in effect. The shares of Parent Common
Stock to be issued pursuant hereto shall have been approved for quotation on the
Nasdaq National Market System.
7.7 Tax Opinion. Company shall have received an opinion from
-----------
Perkins Coie LLP dated as of the date of filing of the Registration Statement
and filed as an exhibit to the Registration Statement, and dated as of the
Closing Date, in form and substance satisfactory to the Company substantially to
the effect that on the basis of the facts and representations set forth in that
opinion that are consistent with the state of facts in existence at the
Effective Time (a) the Merger will be a reorganization under Section 368(a) of
the Code and (b) no gain or loss will be recognized by the Company or its
shareholders or by Parent or Newco upon the exchange of shares of Company common
stock or preferred stock for Parent Common Stock. The officers of Parent, Newco
and the Company shall provide certificates of Parent, Newco, and the Company,
respectively, to Perkins Coie LLP that Perkins Coie LLP may rely upon to support
the factual basis and assumptions contained in its opinion.
ARTICLE VIII.
CLOSING
8.1 Closing. The closing of the Merger (the "Closing") shall take
------- -------
place at the offices of Womble Carlyle Sandridge & Rice, PLLC, in Atlanta,
Georgia at 10:00 a.m., local time, on October 12, 1998, or such other date as
may be mutually agreed upon by the parties hereto; provided, however: (a) if one
or more conditions to this Agreement is not satisfied by such date, the party
benefiting from such condition may elect, in its sole discretion, to waive such
condition. The date of the Closing is referred to as the "Closing Date". For
------------
the purposes of passage of title and risk of loss, allocation of expenses,
adjustments and other economic or financial effects of the transactions
contemplated hereby, the Closing when completed shall be deemed to have occurred
at 11:59 p.m., local time, on the Closing Date.
8.2 Deliveries by Company. At the Closing, Company shall deliver or
---------------------
cause to be delivered to Acquiror the following:
(a) A certificate of the President of Company confirming the
satisfaction of the conditions set forth in Sections 6.1 and 6.2 hereof as
to representations, warranties and covenants of Company.
AGREEMENT AND PLAN REORGANIZATION PAGE 32
<PAGE>
(b) A copy of all corporate resolutions authorizing the execution,
delivery and performance of the Company Agreements, and the consummation of
the transactions contemplated herein and therein, accompanied by the
certification of the Secretary of the Company to the effect that such
resolutions are in full force and effect and have not been amended,
modified or rescinded.
(c) A certificate of existence from the Secretary of State of the
state of Company's incorporation.
(d) Each of the directors and officers and employees of Company shall
have executed and delivered to Acquiror letters in substantially the form
of Exhibit 8.2 hereto which letters shall be dated and effective as of the
-----------
Effective Time.
(e) The legal opinion referred to in Section 6.6.
(f) Evidence that all Company's Required Consents have been obtained
or satisfied.
(g) The Affiliate and Market Standoff Agreements.
(h) The share certificates representing the Company Shares duly
endorsed in blank with signature guaranteed.
8.3 Deliveries by Acquiror. At the Closing, Acquiror shall deliver
----------------------
or cause to be delivered to Company the following:
(a) A certificate of the President of Acquiror confirming the
satisfaction of the conditions set forth in Sections 7.1 and 7.2 hereof as
to representations, warranties and covenants of Acquiror.
(b) A certificate of the President of Acquiror reaffirming the
covenant set forth in Section 4.10 and furnishing the certificates required
by Section 7.7 as of the Closing.
(c) A copy of all corporate resolutions authorizing the execution,
delivery and performance of the Acquiror Agreements, and the consummation
of the transactions contemplated herein and therein, accompanied by the
certification of the Secretary of Acquiror to the effect that such
resolutions are in full force and effect and have not been amended,
modified or rescinded.
(d) The legal opinion referred to in Section 7.5.
(e) Evidence that all Acquiror's Required Consents have been obtained
or satisfied.
AGREEMENT AND PLAN REORGANIZATION PAGE 33
<PAGE>
(f) Certificates evidencing the Parent Common Stock to be issued to
the Shareholders against receipt of the certificates for the Company
Shares.
(g) The Registration Statement, the 424(b) prospectus, written
confirmation of the effectiveness of the Registration Statement and written
confirmation that no stop order is in place with respect to the
Registration Statement.
(h) The cash portion of the merger consideration.
(i) Receipt from the Escrow Agent under the Escrow and Indemnity
Agreement confirming receipt of $2,500,000 into such escrow.
8.4 Deliveries by Company and Acquiror. Each of Company and Acquiror
----------------------------------
shall execute and deliver, or cause to be executed and delivered, to the other
the following:
(a) The Certificate of Merger.
(b) The Escrow and Indemnity Agreement duly executed by Mr. Norman
Behar and the Preferred Shareholders.
(c) Each of the Employment Agreements duly executed by the Company
and its key executives.
(d) The Registration Rights Agreement.
ARTICLE IX.
INDEMNIFICATION
9.1 Indemnification by Company. Subject to consummation of the
--------------------------
Closing and requirements, limitations, and exclusions and further provisions in
this Article IX, Company shall and shall cause the Preferred Shareholders listed
on Schedule 9.1 hereto, which schedule will be revised on or before Closing in a
------------
manner reasonably satisfactory to Acquiror to reflect changes in the price of
the Parent Common Stock (the Company, together with the Preferred Shareholders,
are "Company Indemnitors"), to, pursuant to the Escrow and Indemnity Agreement,
-------------------
severally in proportion to the percentages set forth on Schedule 9.1, indemnify,
defend and hold harmless Acquiror and its officers, directors and affiliates
(the "Acquiror Indemnitees") from, against, and with respect to any and all
--------------------
action or cause of action, loss, damage, claim, obligation, liability, penalty,
fine, cost and expense (including without limitation reasonable attorneys' and
consultants' fees and costs and expenses incurred in investigating, preparing,
defending against or prosecuting any litigation, claim, proceeding, demand or
request for action by any governmental or administrative entity), of any kind or
character (a "Loss") arising out of or in connection with any of the following:
----
AGREEMENT AND PLAN REORGANIZATION PAGE 34
<PAGE>
(a) any breach of any of the representations or warranties of Company
contained in or made pursuant to this Agreement or any of the
representations and warranties of any Shareholder in any other Company
Agreement;
(b) any failure by Company or Shareholder to perform or observe, or
to have performed or observed, in full, any covenant, agreement or
condition to be performed or observed by it pursuant to this Agreement or
any Company Agreement;
(c) any breach by Company of any representation set forth in Section
2.14 hereof (an "IP Claim"); and
--------
(d) any claim by a Shareholder relating to the allocation by Company
of the cash and stock consideration to be received by each Shareholder in
connection with the Merger; and
(e) any amount that shall have been paid by Acquiror to Shareholders
in respect of shares of the Company with respect to which dissenters'
rights have been perfected that shall be in excess of the amount of the
value, as of the Effective Time, of the consideration such Shareholders
would have received for such shares in the Merger if they had not exercised
dissenters' rights plus any fees and expenses incurred by Acquiror
Indemnitees in connection with defense of such dissenters' rights claim.
9.2 Indemnification by Acquiror. Subject to consummation of the
---------------------------
Closing and requirements, limitations and exclusions and further provisions of
this Article IX, Acquiror shall indemnify, defend and hold harmless Company, its
officers, directors, shareholders, Preferred Shareholders, and affiliates (the
"Company Indemnitees") from, against and with respect to any Loss arising out of
-------------------
or in connection with any of the following:
(a) any breach of any of the representations and warranties of
Acquiror contained in or made pursuant to this Agreement or any Acquiror
Agreement; and
(b) any failure by Acquiror to perform or observe, or to have
performed or observed, in full, any covenant, agreement or condition to be
performed or observed by it pursuant to this Agreement or any Acquiror
Agreement.
Acquiror agrees that the Shareholders and Preferred Shareholders are third-party
beneficiaries of this Agreement, entitled to enforce the respective terms of
this Agreement inuring in favor of such Shareholders and Preferred Shareholders.
9.3 Notice of Claim. Any party seeking to be indemnified hereunder
---------------
(the "Indemnified Party") shall, within fifteen (15) days following discovery
-----------------
of a Loss, (or five (5) days if the Indemnified Party has been served with a
lawsuit or other proceeding) notify the party
AGREEMENT AND PLAN REORGANIZATION PAGE 35
<PAGE>
from whom indemnity is sought (the "Indemnity Obligor") in writing of any claim
-----------------
for recovery, specifying in reasonable detail the nature of the Loss and the
amount of the liability estimated to arise therefrom. The Indemnified Party
shall provide to the Indemnity Obligor as promptly as practicable thereafter all
information and documentation reasonably requested by the Indemnity Obligor to
verify the claim asserted.
9.4 Defense. If the facts pertaining to a Loss arise out of the
-------
claim of any third party, or if there is any claim against a third party
available by virtue of the circumstances of the Loss, the Indemnity Obligor may,
by giving written notice to the Indemnified Party within (i) thirty (30) days
upon receipt of notice of a claim not involving a lawsuit or proceeding, or (ii)
fifteen (15) days following its receipt of the notice of such claim involving a
lawsuit or proceeding, elect to assume the defense or the prosecution thereof,
including the employment of counsel or accountants at its cost and expense;
provided, however, that during the interim the Indemnified Party shall use its
best efforts to take all action (not including settlement) reasonably necessary
to protect against further damage or loss with respect to the Loss and comply
with the terms and conditions of the Escrow and Indemnity Agreement; and,
provided further that the Indemnity Obligor can only assume the defense if (a)
the claim does not exceed the funds placed in escrow under the Escrow and
Indemnity Agreement, or (b) the Indemnity Obligor (i) provides commercially
reasonable evidence that it will have sufficient financial resources to defend
the claim and satisfy its indemnification obligations, and (ii) the Indemnity
Obligor conducts the defense of the claim actively and diligently. The
Indemnified Party shall have the right to employ counsel separate from counsel
employed by the Indemnity Obligor in any such action and to participate therein,
but the fees and expenses of such counsel shall be at the Indemnified Party's
own expense. Whether or not the Indemnity Obligor chooses so to defend or
prosecute such claim, all the parties hereto shall cooperate in the defense or
prosecution thereof and shall furnish such records, information and testimony
and shall attend such conferences, discovery proceedings and trials as may be
reasonably requested in connection therewith. If a claim is based on any suit or
proceeding by a third party for infringement which gives rise to a IP Claim
resulting in Acquiror's use of the Software being enjoined or otherwise
restricted, the Indemnity Obligor, if it elects to assume defense of such
proceeding after receiving notice hereunder, shall be entitled at its sole
expense to do any of the following: (i) procure for Acquiror the unrestricted
right to continue using the Software, (ii) modify the Software so that it
becomes noninfringing, (iii) settle the third party's infringement claim in a
manner that gives Acquiror the unrestricted rights to the software being
enjoined or otherwise restricted, or (iv) pay the indemnified party's claim as
provided in this Article, provided that any settlement under this sentence shall
require Parent's prior written approval which shall not be unreasonably
withheld. Acquiror shall comply with any settlement or court order made in
connection with such proceeding in the foregoing sentence provided that such
compliance by Acquiror shall not limit the Indemnity Obligor's indemnification
obligations hereunder. The Indemnity Obligor shall not be liable for any
settlement of any such claim effected without its prior written consent, which
shall not be unreasonably withheld. Before any claim may be brought against any
of the Company or Company Indemnitors, the funds in escrow established pursuant
to the Escrow and Indemnity Agreement will be used first by the Company and
Company Indemnitors to pay any claims made under this Article IX, and Acquiror
hereby authorizes the Company and Company
AGREEMENT AND PLAN REORGANIZATION PAGE 36
<PAGE>
Indemnitors to settle such claims without consent of the Acquiror to the extent
of the funds in such escrow. Company and Company Indemnitors may also settle any
claim for which they are Indemnity Parties without consent of Acquiror so long
as the payment or performance does not either (y) exhaust the funds escrowed by
the Escrow and Indemnity Agreement or (z) not exceed the maximum liability
amounts set forth below. Settlements requiring performance or payment in excess
of the maximum liability amounts shall require the Acquiror's prior written
consent.
9.5 Limitations. The obligations of an Indemnity Obligor to
-----------
indemnify an Indemnified Party pursuant to this Article IX shall accrue only
after and to the extent the aggregate dollar amount of Losses incurred by an
Indemnified Party for all matters indemnifiable hereunder exceed One Hundred
Thousand Dollars (US $100,000) (the "Basket"), and then the Indemnity Obligor
------
shall be only liable for such Losses in excess of $100,000. In addition, no
single Loss in an amount of less than $10,000 may be applied to the Basket until
such threshold amount is reached, and thereafter, single Claims of less than
$10,000 must be aggregated so that no Claim is made for an amount of less than
$10,000 singly or in the aggregate. The obligations of the Company Indemnitors
to indemnify the Acquiror Indemnitees under this Article IX shall not exceed the
$2,500,000 placed in escrow pursuant to Section 1.5 for claims for
indemnification other than (a) IP Claims, which are addressed below, or (b)
claims for indemnification related to a breach of the representations contained
in Section 2.1 hereof. Notwithstanding anything in this Agreement to the
contrary, the aggregate maximum liability of the Company Indemnitors for IP
Claims shall not exceed Twelve Million Five Hundred Thousand Dollars
($12,500,000) for any IP Claims plus the cash amount remaining in escrow
pursuant to the Escrow and Indemnity Agreement and no IP Claims may be made
after the expiration of the one (1) year period following the Closing Date.
The indemnity provisions in this Article IX shall be the sole and
exclusive remedy of an Indemnified Party for breaches of any representation,
warranty, or covenant under this Agreement absent fraud or securities law
violations.
The maximum liability for claims for breach of the representation and
warranty in Section 2.1 is the purchase price (cash paid by Acquiror to
Company's Shareholders at closing plus the market value of the shares
transferred by Acquiror at Closing to the Company's Shareholders), minus the
amount of the cash transferred to Acquiror from the escrow pursuant to the
Escrow and Indemnity Agreement, further reduced by the aggregate amount paid by
Company and Company Indemnitors in connection with all claims for breach of the
representations and warranties made under Sections 2.14, 2.19, and 2.23(b). The
maximum liability for claims for breach of the representations or warranties in
Sections 2.19, and 2.23(b) is equal to the purchase price (cash paid by Acquiror
to Company's Shareholders at closing plus the market value of the shares
transferred by Acquiror at Closing to the Company's Shareholders), minus the
amount of the cash transferred to Acquiror from the escrow pursuant to the
Escrow Agreement, further reduced by the aggregate amount paid by Company and
Company's Indemnitors in connection with all claims for breach of the
representations and warranties made under Sections 2.1 or 2.14.
AGREEMENT AND PLAN REORGANIZATION PAGE 37
<PAGE>
Notwithstanding anything in this Agreement to the contrary, neither
the Company nor Company's Indemnitors will have any liability for any claim that
the Software infringes the rights of a third party to the extent the claims
arise from modification of the Software by Acquiror after the Closing Date or to
the extent the infringement claim arises out of a combination of the Software
with a program, product or material not transferred to Newco as of the Closing.
In no circumstance (except as specifically provided below) will any Indemnity
Obligor have any liability for indirect, incidental, exemplary, or consequential
damages whatsoever (including, without limitation, damages for loss of profits,
loss of data or other business information) or cover arising under this
Agreement, even if the Indemnity Obligor has been advised of the possibility of
such damages; provided, however, that although this sentence excludes claims for
the Indemnified Party's lost profits, it does not limit the liability of any
Indemnity Obligor under Section 9.1 for indirect, incidental, exemplary or
consequential damages to the extent such damages, including lost profits, are
included in a claim by a third party against the Acquiror or arise as a result
of a third party claim that the Software is infringing or a claim of ownership
rights in the Software (excluding Third Party Software), and to the extent
indemnification under Section 9.1 covers such third party claims.
Notwithstanding the foregoing, an Indemnified Party shall have the right to
recover for direct out-of-pocket expenses, including its direct, demonstrable
internal costs (without overhead) and/or external costs paid by Acquiror to
remediate any Loss, whether or not such Loss arises in connection with a third
party claim.
9.6 Casahl Litigation. Company will endeavor to seek an
-----------------
indemnification of the Acquiror and the Shareholders from Egghead.com, Inc.
("Egghead.com") covering the claims in the litigation commenced by Company and
Egghead Software, Inc. (now known as Egghead.com) under Case No. 987331 pending
in the Superior Court of California for the County of San Francisco (the "Casahl
Litigation"). Before taking any action against the Preferred Shareholders (other
than Egghead.com) with respect to any Loss arising from the Casahl Litigation,
Acqurior agrees to use its reasonable best efforts to enforce the following with
respect to the Casahl Litigation:
(a) The Separation Agreement, dated November 10, 1997, between
Egghead Software, Inc., now know as Egghead.com, Inc. and the Company;
(b) Any reaffirmation by Egghead.com of the obligation in the last
sentence of Section 4.02(a) of the Separation Agreement (in favor of
Company, Newco, or Parent);
(c) Any other agreement with Egghead.com in which it agrees to
defend, indemnify, and hold harmless Company, its past, present and future,
successor and assigns, officers and directors, common shareholders
(specifically excluding past Shareholder Egghead.com and specifically
including future common shareholder Parent), the Preferred Shareholders
(other than Egghead.com), agents, and employees, to the extent the Company,
Newco, or Parent is made a beneficiary of such agreement, from and against
any cost,
AGREEMENT AND PLAN REORGANIZATION PAGE 38
<PAGE>
expense, loss, liability whatsoever arising in connection with the Casahl
Litigation.
If, after notice to Egghead.com by Acquiror, Egghead.com fails or refuses to
honor its indemnity, or other, obligations to Company, its past, present and
future, successors and assigns, officers and directors, , the Preferred
Shareholders (other than Egghead.com), agents, employees, and Parent, then to
the extent the Company or Acquiror suffers a Loss as a result of the Casahl
Litigation notwithstanding any of the above, then in such event each of the
Preferred Shareholders identified on Schedule 9.6 (other than Egghead.com),
severally in proportion which they bear to each other excluding Egghead.com
based on the percentage set forth in Schedule 9.6, agree to defend, indemnify,
and hold harmless the Acquiror from and against any cost, expense, loss or
liability resulting from the Casahl Litigation. The indemnity obligations set
forth in this Section 9.6 are in addition to Section 9.1 and are not subject to
the limitations set forth in Section 9.5. Except as set forth in Section 9.7,
payments made hereunder by a Preferred Shareholder shall not be reimbursed from
the escrow funds nor count toward the maximum liability of a Company Indemnitor.
In the event that a Preferred Shareholder fails to pay any amount due hereunder,
such amount may be withdrawn from the escrow funds by Acquiror to the extent of
that Preferred Shareholder's proportionate share in the escrow funds.
9.7 Fees or Expenses of Preferred Shareholder. After April 30,
-----------------------------------------
2000, all fees, expenses and costs of any kind (including, without limitation,
attorneys' fees and costs) incurred by any Preferred Shareholder in defense of
any claim indemnified hereunder shall be reimbursed from the funds remaining in
the escrow, at the termination of the escrow, established pursuant to the Escrow
and Indemnity Agreement before any such funds are distributed to Shareholders.
ARTICLE X.
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing:
(a) By the mutual written consent of Company and Acquiror;
(b) By Company (if Company is not then in breach of any term of this
Agreement), if Acquiror shall (i) fail to perform its agreements contained
herein required to be performed on or prior to the Closing Date, or (ii)
breach any of its representations or warranties contained herein, which
failure or breach is not cured within ten days after Company has notified
Acquiror of its intent to terminate this Agreement pursuant to this
subparagraph;
(c) By Acquiror (if Acquiror is not then in breach of any term of
this Agreement), if Company shall (i) fail to perform its agreements
contained herein required to be performed on or prior to the Closing Date,
or (ii) breach any of its representations or warranties contained herein,
which failure or breach is not
AGREEMENT AND PLAN REORGANIZATION PAGE 39
<PAGE>
cured within ten days after Acquiror has notified Company of its intent to
terminate this Agreement pursuant to this subparagraph;
(d) By either Company or Acquiror, if there shall be any order, writ,
injunction or decree of any court or governmental or regulatory agency
binding on Company or Acquiror which prohibits or restrains Company or
Acquiror from consummating the transactions contemplated hereby;
(e) By either Company or Acquiror, if the Closing has not occurred by
November 15, 1998, for any reason other than delay or nonperformance of the
party seeking such termination;
(f) By either Acquiror or Company if the average closing sales price
of the Parent Common Stock as reported by Nasdaq for any ten (10)
consecutive trading day period after September 1, 1998 is less than Five
Dollars ($5.00) per share;
(g) By Company if the closing sales price for Parent Common Stock as
reported by Nasdaq for the trading day immediately preceding the Closing
Date is less than $5.75; and
(h) By Acquiror or Company if the closing price of Parent Common
Stock as reported by Nasdaq for the trading day immediately preceding the
Closing Date is less than $5.00.
10.2 Effect on Obligations. Termination of this Agreement pursuant to
---------------------
this Article shall terminate all obligation of the parties hereunder, except for
the obligations under Sections 10.3, 10.4, 11.2 (with respect to expenses), 11.3
(with respect to publicity) and 5.2 (with respect to confidentiality); and,
provided, however, that termination pursuant to subparagraphs (b) or (c) of
Section 10.1 shall not relieve the defaulting or breaching party from any
liability to the other party hereto.
10.3 Minority Investment. Acquiror agrees to establish a segregated
-------------------
account with its depository bank and to place $2,000,000 in escrow pursuant to
the Escrow and Minority Investment Agreement for the purposes of this Section
10.3. In the event that the transactions contemplated by this Agreement are not
consummated by November 15, 1998, due to (i) the failure of the conditions
outlined in Section 6.5 and 6.7 to be fulfilled, (ii) the failure of Acquiror to
fulfill any one of the conditions outlined in Article 7 hereof, other than
Sections 7.3, 7.4 and 7.7, or (iii) termination of this Agreement under Section
10.1(f) or 10.1(h) then the Company will be entitled to receive the $2 million
from escrow in the form of a non-interest bearing bridge loan which will
automatically convert into equity as described below. Acquiror will purchase
from the Company, and the Company will issue to the Acquiror, shares of
preferred stock of the Company for a total purchase price of Two Million Dollars
($2,000,000), which will be paid by the conversion of such bridge loan into
equity, on the same terms and conditions, including price per share and the
rights, preferences and privileges of the shares, as Company's proposed
AGREEMENT AND PLAN REORGANIZATION PAGE 40
<PAGE>
Series C Preferred Stock equity financing involving one or more investors who
are not Shareholders or affiliates of Shareholders of the Company on the date
hereof and in which Company raises a minimum of $4,000,000 in capital, including
the amount invested by Acquiror (the "Series C Financing"). In the event that
------------------
the Company's Series C Financing is not consummated prior to the later of (i)
December 31, 1998, and (ii) ninety (90) days following the date on which
Acquiror fails to fulfill a condition to Closing hereunder, then Acquiror shall
purchase from Company and Company shall sell to Acquiror shares of Company's
Series B Preferred Stock on the same price, terms, rights and preferences as
previously issued. In connection therewith, Acquiror shall be entitled to
designate one person to the Company's Board of Directors as long as it continues
to own such preferred shares. In connection with such equity investment the
Acquiror and the Company will enter into standard documents evidencing such
transactions.
10.4 Termination Fee. In the event that the transactions
---------------
contemplated by this Agreement are not consummated by November 15, 1998, due to
the failure of Company to fulfill any one of the conditions outlined in Article
6 hereof, other than Sections 6.3, 6.4, 6.5, 6.7 and 6.9 (other than the
agreement of Mr. Behar), then the Company will reimburse Parent for two-thirds
(2/3) of the amount of all legal, accounting, investment banking, appraisal,
SEC, Nasdaq and printing costs and expenses incurred and paid by Parent in
connection with the negotiation and preparation of this Agreement and the
documents contemplated hereby and the other actions of the Parent required to be
taken hereunder, up to a maximum reimbursement of $500,000. Such reimbursement
to be made in the form of a credit by Company against future royalties and
license fees owed or to be owed by Acquiror under the OEM Agreement, including
minimum payments due thereunder. Any such credit against future royalties shall
be applied to royalties owing for the 1999 calendar year, in the amount of
twenty-five percent (25%) of the total credit per quarter.
ARTICLE XI.
MISCELLANEOUS
11.1 Survival of Representations. The representations and warranties
---------------------------
in Section 2.14 shall survive for a one (1) year period following the Closing
Date. The representations set forth in Sections 2.1, 2.19 and 2.23(b) shall
survive until the earlier of ten (10) years or the running of the applicable
statute of limitations. All other representations and warranties of the parties
hereto contained in this Agreement or otherwise made in writing in connection
with the transactions contemplated hereby shall survive the execution and
delivery of this Agreement and the Closing hereunder until April 30, 2000.
11.2 Expenses. All costs and expenses incurred in connection with
--------
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense whether or not the Merger is consummated, provided
that the Company shall pay up to $150,000 in expenses prior to Closing, and if
the transactions contemplated hereby are consummated, the fees and expenses of
the Company in excess of $150,000 in the aggregate shall be deducted from the
cash portion of the Merger consideration.
AGREEMENT AND PLAN REORGANIZATION PAGE 41
<PAGE>
11.3 Publicity. Each of Company and Acquiror agrees it will not
---------
make any press releases or other announcements prior to the Closing with respect
to the transactions contemplated hereby, except as required by applicable law,
without the prior approval of the other party, which will not be unreasonably
withheld.
11.4 Best Efforts. Each party hereto agrees to use its best efforts
------------
to satisfy the conditions to the Closing set forth in this Agreement and
otherwise to consummate the transactions contemplated by this Agreement.
11.5 Notices. All notices, demands and other communications
-------
required or permitted hereunder shall be in writing and may be telexed or
telecopied, which shall be followed forthwith by letter, and such notice,
request, demand or other communication shall be deemed to have been received on
the next business day following dispatch and acknowledgment of receipt by the
recipient's telex or telecopy machine. In addition, notices hereunder may be
delivered by hand, in which event the notice shall be deemed effective when
delivered, or by overnight courier, in which event the notice shall be deemed to
have been received on the next business day following delivery to such courier.
Notices, requests, demands and other communications may not be given by regular
or certified mail. All notices and other communications under this Agreement
shall be given to the parties hereto at the following addresses:(or such other
address for a party as shall be specified by like notice):
If to Company:
Elekom Corporation
Pacific First Plaza, Eighth Floor
155 - 108th Avenue
Bellevue, Washington 98004
Attention: Norman Behar, President and CEO
Facsimile: (425) 990-3075
With a copy (which shall not constitute notice) to:
Perkins Coie LLP
411 - 108th Avenue N.E.
Suite 1800
Bellevue, Washington 98004-5584
Attention: Kurt Becker
Facsimile: (425) 453-7350
AGREEMENT AND PLAN REORGANIZATION PAGE 42
<PAGE>
If to Acquiror:
Clarus Corporation, formerly known as SQL Financials
International, Inc.
3950 Johns Creek Court
Suite 100
Suwanee, Georgia 30024
Attention: Stephen P. Jeffery, President and CEO
Facsimile: (770) 291-8573
With a copy (which shall not constitute notice) to:
Womble Carlyle Sandridge & Rice, PLLC
1275 Peachtree Street, N.E.
Suite 700
Atlanta, Georgia 30309
Attention: G. Donald Johnson, Esq.
Facsimile: (404) 888-7490
11.6 Governing Law. This agreement shall be governed by the laws of
-------------
the State of Georgia applicable to agreements made and to be performed entirely
within such state.
11.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.8 Assignment. This Agreement shall be binding upon and inure to
----------
the benefit of the parties hereto and their respective successors and permitted
assigns. Neither this Agreement nor any of the rights, interest or obligations
hereunder shall be assigned by any of the parties hereto without the prior
written consent of all other parties hereto, and any purported assignment
without such consent shall be void.
11.9 Third Party Beneficiaries. None of the provisions of this
-------------------------
Agreement or any document contemplated hereby is intended to grant any right or
benefit to any person or entity (other than the Shareholders and Preferred
Shareholders of the Company) which is not a party to this Agreement.
11.10 Headings. The article and section headings contained in this
--------
Agreement are solely for the purpose of reference, are not part of this
Agreement and shall not in any way affect the meaning or interpretation of this
Agreement.
11.11 Amendments. Any waiver, amendment, modification or supplement
----------
of or to any term or condition of this Agreement shall be effective only if in
writing and signed by all parties hereto, and the parties hereto waive the right
to amend the provisions of this Section orally.
AGREEMENT AND PLAN REORGANIZATION PAGE 43
<PAGE>
11.12 Specific Performance. The Company acknowledges that the
--------------------
Business of the Acquiror is unique and that if the Company fails to consummate
the transactions contemplated by this Agreement such failure will cause
irreparable harm to Acquiror for which there will be no adequate remedy at law.
The Acquiror shall be entitled, in addition to its other remedies at law or at
equity, to specific performance of this Agreement if the Company shall, without
cause, refuse to consummate the transactions contemplated by this Agreement.
Acquiror acknowledges that the Business of the Company is unique and that if
Acquiror fails to consummate the transactions contemplated by this Agreement
such failure will cause irreparable harm to the Company for which there will be
no adequate remedy at law. The Company shall be entitled, in addition to its
other remedies at law or at equity, to specific performance of this Agreement if
Acquiror shall, without cause, refuse to consummate the transactions
contemplated by this Agreement.
11.13 Construction. The parties acknowledge that this Agreement and
------------
the documents to be entered into in connection herewith have been jointly
prepared by both Acquiror and Company and the rule of strict construction
against the drafter shall not apply to this Agreement and the documents to be
entered into in connection herewith.
11.14 Severability. In the event that any provision in this
------------
Agreement shall be determined to be invalid, illegal or unenforceable in any
respect, the remaining provisions of this Agreement shall not be in any way
impaired, and the illegal, invalid or unenforceable provision shall be fully
severed from this Agreement and there shall be automatically added in lieu
thereof a provision as similar in term sand intent to such severed provision as
may be legal, valid and enforceable.
11.15 Entire Agreement. This Agreement and the Schedules and
----------------
Exhibits hereto constitute the entire contract between the parties hereto
pertaining to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings between the parties with respect
to such subject matter.
11.16 Further Assurances. Company shall, at any time on or after the
------------------
Closing Date, take any and all steps requested by Acquiror to place Acquiror in
possession and operating control of the Business, and will do, execute,
acknowledge and deliver all such further reasonable acts, deeds, assignments,
transfers, conveyances, powers of attorney and assurances as may be required for
the more effective transfer to and reduction to possession of Acquiror, or its
successors or assigns, of any of the Company's assets.
AGREEMENT AND PLAN REORGANIZATION PAGE 44
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be signed by its duly authorized officer as of the date first above
written.
ELEKOM CORPORATION
By: /s/ Norman Behar
-----------------------------------------
NORMAN BEHAR, President and CEO
CLARUS CORPORATION, formerly known as SQL
Financials International, Inc.
By: /s/ Stephen P. Jeffery
-----------------------------------------
STEPHEN P. JEFFERY, President and CEO
CLARUS CSA, INC.
By: /s/ Stephen P. Jeffery
-----------------------------------------
STEPHEN P. JEFFERY, President and CEO
AGREEMENT AND PLAN REORGANIZATION PAGE 45
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated By-Laws of the Company (the "By-Laws") and the Restated
Certificate of Incorporation (the "Restated Certificate") of the Company
provide that the directors and officers of the Company shall be indemnified by
the Company to the fullest extent authorized by Delaware law, as it now exists
or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of the
Company. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Company pursuant to the
Restated By-Laws, 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. The Company has obtained insurance which
insures the directors and officers of the Company against certain losses and
which insures the Company against certain of its obligations to indemnify such
directors and officers. In addition, the Restated Certificate of the Company
provides that the directors of the Company will not be personally liable for
monetary damages to the Company for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to the Company or its
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors. Such limitations of personal liability
under the Delaware Business Corporation Law do not apply to liabilities
arising out of certain violations of the federal securities laws. While non-
monetary relief such as injunctive relief, specific performance and other
equitable remedies may be available to the Company, such relief may be
difficult to obtain or, if obtained, may not adequately compensate the Company
for its damages.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification by the Company
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
Certain provisions of the Underwriting Agreement filed as Exhibit 1.1 to the
Registrant's Form S-1 Registration Statement (File No. 333-46685) also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of exhibits filed as part of the
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 --Agreement and Plan of Reorganization dated August 31, 1998 by
and between the Registrant and ELEKOM Corporation. (Included as
Appendix A to this Registration Statement).
2.2* --Escrow and Minority Investment Agreement by and between the
Registrant and ELEKOM Corporation and US Bank Trust National
Association.
3.1 --Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference from Exhibit 3.3 of the
Registrant's Form S-1 Registration Statement (File No. 333-
46685)).
3.2 --Amended and Restated Bylaws of the Registrant (Incorporated by
reference from Exhibit 3.4 of the Registrant's Form S-1 (File
No. 333-46685)).
4.1 --See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Common Stock of the Registrant.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.2* --Specimen Stock Certificate.
4.3* --Form of Voting Agreement by and among the Registrant and
certain shareholders of ELEKOM Corporation.
4.4* --Form of Registration Rights Agreement by and between the
Registrant and certain shareholders of ELEKOM Corporation.
4.5* --Form of Escrow and Indemnity Agreement by and among the
Registrant, ELEKOM Corporation and certain shareholders of
ELEKOM Corporation.
4.6* --Form of Market Standoff and Affiliate Agreement.
5.1* --Opinion of Womble Carlyle Sandridge & Rice, PLLC, as to the
legality of the shares being registered.
8.1* --Opinion of Perkins Coie LLP, as to tax matters.
10.1 --Amended and Restated Shareholders' Voting Agreement dated
September 1, 1995 (Incorporated by reference from Exhibit 10.1
of the Registrant's Form S-1 (File No. 333-46685)).
10.2 --Restated Shareholders Agreement dated September 1, 1995, as
amended (Incorporated by reference from Exhibit 10.2 of the
Registrant's Form S-1 (File No. 333-46685)).
10.3 --Stock Purchase Agreement dated February 15, 1996 (Series E)
(Incorporated by reference from Exhibit 10.3 of the
Registrant's Form S-1 (File No. 333-46685)).
10.4 --Stock Purchase Agreement dated September 26, 1997 (Series F)
(Incorporated by reference from Exhibit 10.4 of the
Registrant's Form S-1 (File No. 333-46685)).
10.5 --SQL 1992 Stock Option Plan, effective November 22, 1992
(Incorporated by reference from Exhibit 10.5 of the
Registrant's Form S-1 Registration Statement (File No.
333-46685)).
10.6 --1998 Stock Incentive Plan, effective February 5, 1998 (with
form option agreement) (Incorporated by reference from Exhibit
10.6 of the Registrant's Form S-1 (File No. 333-46685)).
10.7 --Lease Agreement between the Registrant and Technology
Park/Atlanta, Inc. dated March 20, 1997 (Incorporated by
reference from Exhibit 10.7 of the Registrant's Form S-1 (File
No. 333-46685)).
10.8 --License and Private Label Agreement between the Registrant and
Personnel Data Systems, Inc. dated March 1, 1996 (with
addendum) (Incorporated by reference from Exhibit 10.8 of the
Registrant's Form S-1 Registration Statement (File No. 333-
46685)).
10.9 --Loan and Security Agreement with Silicon Valley Bank dated
March 28, 1997 (Incorporated by reference from Exhibit 10.9 of
the Registrant's Form S-1 Registration Statement (File No. 333-
46685).
10.10 --Leasing Technologies International, Inc. Master Lease
Agreement dated March 13, 1997 (Incorporated by reference from
Exhibit 10.10 of the Registrant's Form S-1 Registration
Statement (File No. 333-46685)).
10.11 --Leasing Technologies International, Inc. Master Note and
Security Agreement dated March 20, 1997 (Incorporated by
reference from Exhibit 10.11 of the Registrant's Form S-1
Registration Statement (File No. 333-46685)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.12 --Software License and Support Agreement between the Registrant
and McCall Consulting Group dated February 5, 1998
(Incorporated by reference from Exhibit 10.12 of the
Registrant's Form S-1 Registration Statement (File No. 333-
46685)).
10.13 --Agreement between the Registrant and Joseph S. McCall dated
February 5, 1998 (Incorporated by reference from Exhibit 10.13
of the Registrant's Form S-1 Registration Statement (File No.
333-46685)).
10.14 --Independent Contractor Agreement between the Registrant and
McCall Consulting Group, Inc. dated February 5, 1998
(Incorporated by reference from Exhibit 10.14 of the
Registrant's Form S-1 Registration Statement (File No. 333-
46685)).
10.15 --Independent Contractor Agreement between Registrant and Joseph
S. McCall dated February 5, 1998 (Incorporated by reference
from Exhibit 10.15 of the Registrant's Form S-1 Registration
Statement (File No. 333-46685)).
10.16 --Letter Agreement regarding Joseph McCall 1998 Compensation
Plan dated February 5, 1998 (Incorporated by reference from
Exhibit 10.16 of the Registrant's Form S-1 Registration
Statement (File No. 333-46685)).
10.17 --Loan and Security Agreement between the Company, SQL Financial
Services, L.L.C. and Silicon Valley Bank (Incorporated by
reference from Exhibit 10.17 of the Registrant's Form S-1
Registration Statement (File No. 333-46685)).
10.18* --Lease Agreement between the Registrant and Technology
Park/Atlanta, Inc. dated July 24, 1998.
10.19* --Assignment and Assumption of Leases between Technology
Park/Atlanta, Inc. and Metropolitan Life Insurance Company
dated July 24, 1998.
10.20 --Acquisition Agreement between the Registrant and Technology
Ventures, LLC dated February 5, 1998, (Incorporated by
reference from Exhibit 2.1 of the Registrant's Form S-1
Registration Statement (File No. 333-46685)).
10.21 --Non-Negotiable Subordinated Promissory Note to Technology
Ventures, LLC dated February 5, 1998, (Incorporated by
reference from Exhibit 2.2 of the Registrant's Form S-1
Registration Statement (File No. 333-46685)).
10.22 --Warrant for purchase of 200,000 shares issued to Technology
Ventures, LLC dated February 5, 1998, (Incorporated by
reference from Exhibit 2.3 of the Registrant's Form S-1
Registration Statement (File No. 333-46685)).
10.23* --OEM Software License Agreement by and between the Registrant
and ELEKOM Corporation.
10.24* --Amendment OEM Software License Agreement by and between the
Registrant and ELEKOM Corporation.
21.1* --List of Subsidiaries.
23.1 --Consent of Arthur Andersen LLP.
23.2 --Consent of PricewaterhouseCoopers LLP
23.3* --Consent of Womble Carlyle Sandridge & Rice, PLLC (included in
Exhibit 5.1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.4* --Consent of NationsBanc Montgomery Securities LLC (included in
Appendix B)
23.5* --Consent of Perkins Coie LLP (included in Exhibit 8.1)
24.1 --Powers of Attorney (included on signature page).
99.1* --Report of Independent Public Accountants on Financial
Statement Schedule.
99.2* --Proxy and Consent ELEKOM Corporation.
99.3* --Form of Cash/Stock Election Form for ELEKOM Shareholders.
99.4 --Articles of Incorporation of ELEKOM Corporation
</TABLE>
- --------
* Previously filed in connection with this Registration Statement.
(b) Schedule II--Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or event arising after
the Effective Time of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
SUWANEE, STATE OF GEORGIA, ON THE DAY OF OCTOBER, 1998.
Clarus Corporation
By: _________________________________
Stephen P. Jeffery, Chairman,
Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
BELOW ON THE DATE OF OCTOBER, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
Chairman, Chief Executive
____________________________________ Officer (Principal
Stephen P. Jeffery Executive Officer);
President and Director
Chief Financial Officer
____________________________________ (Principal Financial and
William A. Fielder III Accounting Officer)
/s/ * Director
____________________________________
William S. Kaiser
/s/ * Director
____________________________________
Donald L. House
/s/ * Director
____________________________________
Tench Coxe
/s/ * Director
____________________________________
Said Mohammadioun
/s/ * Director
____________________________________
Mark A. Johnson
*By: _______________________________
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 14, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Clarus Corporation of our report dated
August 17, 1998 relating to the financial statements of ELEKOM Corporation,
which appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared or
certified such "Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
October 13, 1998
<PAGE>
EXHIBIT 99.4
RESTATED ARTICLES OF INCORPORATION
OF
ELEKOM CORPORATION
ARTICLE I
NAME
The name of this corporation is Elekom Corporation.
ARTICLE II
SHARES
A. Authorized Capital. This corporation is authorized to issue two
------------------
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that this corporation is authorized to issue
is Fifteen Million (15,000,000) shares. Nine Million Six Hundred Ninety-Two
Thousand Eight Hundred Twenty-Six (9,692,826) shares shall be Common Stock and
Five Million Three Hundred Seven Thousand One Hundred Seventy-Four (5,307,174)
shares shall be Preferred Stock, each with a par value of $0.01 per share.
B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by these Restated Articles of Incorporation may be issued from
time to time in one or more series. The rights, preferences, privileges and
restrictions granted to and imposed on the Series A Preferred Stock, which
series shall consist of Nine Hundred Seventeen Thousand Two Hundred Twenty-Nine
(917,229) shares (the "Series A Preferred Stock") and the Series B Preferred
Stock, which series shall consist of Four Million Three Hundred Eighty-Nine
Thousand Nine Hundred Forty-Five (4,389,945) shares (the "Series B Preferred
Stock"), are as set forth below in this Article II (B).
1. Dividend Provisions.
-------------------
(a) Subject to the rights of any series of Preferred Stock that may
from time to time come into existence, the holders of record of the outstanding
shares of Series A Preferred Stock and Series B Preferred Stock shall be
entitled to receive dividends, out of any assets of the Corporation legally
available therefor, prior and in preference to any declaration or payment of any
dividend (payable other than in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock of this corporation) on the Common
Stock of this corporation, at the rate of $0.055 per share per annum for the
Series A Preferred Stock and Series B Preferred Stock (as adjusted for any stock
splits, stock dividends, recapitalizations or the like) payable when, as, and if
declared by the Board of Directors. Such dividends shall not be cumulative.
The holders of the outstanding Series A Preferred Stock and Series B Preferred
Stock can waive any dividend preference that such holders shall be entitled to
receive under this Section 1 upon the affirmative vote or written consent of the
holders of at least a majority of the Series A Preferred Stock and Series B
<PAGE>
Preferred Stock then outstanding, voting together as a single class on an as-
converted basis.
(b) After payment of any such dividends, any additional dividends or
distributions shall be distributed among all holders of Common Stock and all
holders of Series A Preferred Stock and Series B Preferred Stock in proportion
to the number of shares of Common Stock which would be held by each such holder
if all shares of Series A Preferred Stock and Series B Preferred Stock were
converted to Common Stock at the then effective conversion rate.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of this
corporation, either voluntary or involuntary, subject to the rights of any
series of Preferred Stock that may from time to time come into existence, the
holders of Series B Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of this corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to $0.6814 for each outstanding share of Series B Preferred Stock
(the "Original Series B Issue Price") plus declared but unpaid dividends on such
share (subject to adjustment of such fixed dollar amounts for any stock splits,
stock dividends, combinations, recapitalizations or the like). If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series B Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then,
subject to the rights of any series of Preferred Stock that may from time to
time come into existence, the entire assets and funds of this corporation
legally available for distribution shall be distributed ratably among the
holders of the Series B Preferred Stock in proportion to the amount of such
stock owned by each such holder.
(b) Upon the completion of the distribution required by subsection (a)
of this Section 2 and any other distribution that may be required with respect
to any series of Preferred Stock that may from time to time come into existence,
if assets remain in this corporation the holders of the Series A Preferred Stock
of this corporation shall be entitled to receive 17.28% of the assets
distributed, and the holders of the Series B Preferred Stock and Common Stock
shall be entitled to receive 82.72% of the assets distributed (with such 82.72%
distributed between the holders of the Series B Preferred Stock and Common Stock
pro rata based on the number of shares of Common Stock held by each (assuming
full conversion of all such Series B Preferred Stock), until each holder of
Series A Preferred Stock has received an amount per share equal to $7.2092 for
each outstanding share of Series A Preferred Stock (the "Original Series A Issue
Price") held by such holder, plus declared but unpaid dividends on such share
(subject to adjustment of such fixed dollar amounts for any stock splits, stock
dividends, combinations, recapitalizations or the like).
(c) Upon completion of the distributions required by subsections (a)
and (b) of this Section 2 and any other distribution that may be required with
respect to any series of Preferred Stock that may from time to time come into
existence, all of the remaining assets of this corporation available for
distribution to stockholders shall be distributed among the holders of Series A
Preferred Stock, Series B Preferred Stock and Common Stock pro rata based on the
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number of shares of Common Stock held by each (assuming full conversion of all
such Series A Preferred Stock and Series B Preferred Stock).
(d) (i) For purposes of this Section 2, a liquidation, dissolution
or winding up of this corporation shall be deemed to be occasioned by, or to
include (unless the holders of at least two-thirds of the Preferred Stock then
outstanding shall determine otherwise), (A) the acquisition of this corporation
by another entity by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
that results in the transfer of fifty percent (50%) or more of the outstanding
voting power of this corporation; or (B) a sale of all or substantially all of
the assets of this corporation.
(ii) In any of such events, if the consideration received by this
corporation is other than cash, its value will be deemed its fair market value.
Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange or system over the thirty (30) day
period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by this corporation and the
holders of at least a majority of the voting power of all then outstanding
shares of Preferred Stock.
(B) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market value
determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by this corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this subsection 2(c) are not
complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such time as the
requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights, preferences
and privileges of the holders of the Series A Preferred Stock and Series B
Preferred Stock shall revert to and be the same as such rights, preferences and
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privileges existing immediately prior to the date of the first notice referred
to in subsection 2(c)(iv) hereof.
(iv) This corporation shall give each holder of record of Series A
Preferred Stock and Series B Preferred Stock written notice of such impending
transaction not later than twenty (20) days prior to the shareholders' meeting
called to approve such transaction, or twenty (20) days prior to the closing of
such transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction. The first of such notices
shall describe the material terms and conditions of the impending transaction
and the provisions of this Section 2, and this corporation shall thereafter give
such holders prompt notice of any material changes. The transaction shall in no
event take place sooner than twenty (20) days after this corporation has given
the first notice provided for herein or sooner than ten (10) days after this
corporation has given notice of any material changes provided for herein;
provided, however, that such periods may be shortened upon the written consent
of the holders of Preferred Stock that are entitled to such notice rights or
similar notice rights and that represent at least a majority of the voting power
of all then outstanding shares of such Preferred Stock.
3. Conversion. The holders of the Series A Preferred Stock and
----------
Series B Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock and
----------------
Series B Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share at the office of
this corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
$7.2092 (the "Original Series A Issue Price") or the Original Series B Issue
Price, as the case may be, by the Conversion Price applicable to such share,
determined as hereafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Conversion Price per share for shares
of Series A Preferred Stock shall be the Original Series A Issue Price or
Original Series B Issue Price, as the case may be, provided, however, that the
Conversion Price for the Series A Preferred Stock and Series B Preferred Stock
shall be subject to adjustment as set forth in subsection 3(d).
(b) Automatic Conversion. Each share of Series A Preferred Stock
--------------------
and Series B Preferred Stock shall automatically be converted into shares of
Common Stock at the Conversion Price at the time in effect for such Series A
Preferred Stock or Series B Preferred Stock immediately upon the earlier of (i)
this corporation's sale of its Common Stock in a firm commitment underwritten
public offering pursuant to a registration statement on Form S-1 or Form SB-2
under the Securities Act of 1933, as amended, the public offering price of which
was not less than $3.40 per share (as adjusted for any stock splits, stock
dividends, recapitalizations or the like) and $10,000,000 in the aggregate or
(ii) the date specified by written consent or agreement of the holders of a two-
thirds of the then outstanding shares of Series B Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series A
-----------------------
Preferred Stock or Series B Preferred Stock shall be entitled to convert the
same into shares of Common Stock, he or she shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this corporation or of
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any transfer agent for the Series A Preferred Stock or Series B Preferred Stock,
and shall give written notice to this corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock or Series B
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred Stock or Series B Preferred Stock to be converted,
and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder tendering Series A Preferred Stock or Series B
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the persons entitled to receive the Common Stock upon conversion of the Series A
Preferred Stock or Series B Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock or Series B Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
A Preferred Stock and Series B Preferred Stock shall be subject to adjustment
from time to time as follows:
(i) In the event this corporation should at any time or from time
to time after the issuance of the Series A Preferred Stock and Series B
Preferred Stock (the "Purchase Date") fix a record date for the effectuation of
a split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock and Series B Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and issuable
upon conversion of outstanding securities convertible or exchangeable into
Common Stock.
(ii) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock and Series B Preferred Stock
shall be appropriately increased so that the number of shares of Common Stock
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<PAGE>
issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event this corporation shall declare
-------------------
a distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 3(d)(iii), then, in each such
case for the purpose of this subsection 3(e), the holders of the Series A
Preferred Stock and Series B Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of this corporation into which their shares
of Series A Preferred Stock and Series B Preferred Stock are convertible as of
the record date fixed for the determination of the holders of Common Stock of
this corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock and Series B Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series A Preferred Stock or Series B
Preferred Stock the number of shares of stock or other securities or property of
the corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 3 with respect to the rights of the holders of the Series A
Preferred Stock and Series B Preferred Stock after the recapitalization to the
end that the provisions of this Section 3 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock or Series B Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
(g) No Impairment. This corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 3 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock and Series B Preferred Stock against
impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion of
any share or shares of the Series A Preferred Stock or Series B Preferred Stock,
and the number of shares of Common Stock to be issued shall be rounded to the
nearest whole share. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock or Series B Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
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<PAGE>
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series A Preferred Stock or Series B Preferred Stock
pursuant to this Section 3, this corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A Preferred Stock or Series B
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
This corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock or Series B Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for such series of Preferred Stock at
the time in effect, and (C) the number of shares of Common Stock and the amount,
if any, of other property that at the time would be received upon the conversion
of a share of Series A Preferred Stock or Series B Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock or Series B
Preferred Stock, at least twenty (20) days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. This corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock or Series B Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred Stock
or Series B Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock or Series B
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Preferred Stock, this corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite shareholder approval of any necessary amendment
to these Restated Articles of Incorporation.
(k) Notices. Any notice required by the provisions of this Section 3
-------
to be given to the holders of shares of Series A Preferred Stock or Series B
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this corporation.
4. Voting Rights.
-------------
(a) General Voting Rights. Except as otherwise provided herein or as
---------------------
required under the Washington Business Corporations Act, the holder of each
share of Series A Preferred Stock and Series B Preferred Stock shall have the
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<PAGE>
right to one vote for each share of Common Stock into which such Series A
Preferred Stock and Series B Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any shareholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote. Fractional votes
shall not, however, be permitted and any fractional voting rights available on
an as-converted basis (after aggregating all shares into which shares of Series
A Preferred Stock and Series B Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
(b) As long as at least a majority of the shares of Series A Preferred
Stock originally issued remain outstanding, the holders of such shares of Series
A Preferred Stock shall be entitled to elect one (1) director of this
corporation at each annual election of directors. The holders of Series A
Preferred Stock, Series B Preferred Stock and Common Stock (voting together as a
single class and not as separate series, and on an as-converted basis) shall be
entitled to elect any remaining directors of this corporation.
(c) In the case of any vacancy (other than a vacancy caused by
removal) in the office of a director occurring among the directors elected by
the holders of a class or series of stock pursuant to Section 4(b), the
remaining directors so elected by that class or series may by affirmative vote
of a majority thereof (or the remaining director so elected if there be but one,
or if there are not such directors remaining, by the affirmative vote of the
holders of a majority of the shares of that class or series), elect a successor
or successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a class or series of stock or by any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by and only by, the
affirmative vote of the holders of the shares of the class or series of stock
entitled to elect such director or directors, given either at a special meeting
of such shareholders duly called for that purpose or pursuant to a written
consent of shareholders, and any vacancy thereby created may be filled by the
holders of that class or series of stock represented at the meeting or pursuant
to unanimous written consent.
5. Protective Provisions. Subject to the rights of any series of
---------------------
Preferred Stock that may from time to time come into existence, so long as any
shares of Series B Preferred Stock are outstanding, this corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock:
(a) sell, convey, or otherwise dispose of all or substantially all of
its property or business or merge into or consolidate with any other corporation
(other than a wholly-owned subsidiary corporation) or effect any transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of this corporation is disposed of;
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<PAGE>
(b) alter or change the rights, preferences or privileges of the
shares of Series B Preferred Stock so as to affect adversely the shares;
(c) increase or decrease (other than by redemption or conversion) the
total number of authorized shares of Series B Preferred Stock;
(d) authorize or issue, or obligate itself to issue, any other equity
security, including any other security convertible into or exercisable for any
equity security having a preference over, or being on a parity with, the Series
B Preferred Stock with respect to dividends, liquidation, redemption or voting;
(e) redeem, purchase or otherwise acquire (or pay into or set aside
for a sinking fund for such purpose) any share or shares of Preferred Stock or
Common Stock; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for this corporation or any
subsidiary pursuant to agreements under which this corporation has the option to
repurchase such shares at cost or at cost upon the occurrence of certain events,
such as the termination of employment;
(f) change the authorized number of directors of this corporation; or
(g) declare or pay dividends on any share or shares of Common Stock.
6. Status of Converted Stock. In the event any shares of Series A
-------------------------
Preferred Stock or Series B Preferred Stock shall be converted pursuant to
Section 3 hereof, the shares so converted shall be cancelled and shall not be
issuable by this corporation. The Restated Articles of Incorporation of this
corporation shall be appropriately amended to effect the corresponding reduction
in this corporation's authorized capital stock.
C. Common Stock. The rights, preferences, privileges and restrictions
------------
granted to and imposed on the Common Stock are as set forth below in this
Article II(C).
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of this corporation, the assets of this corporation shall be distributed as
provided in Section 2 of Division (B) of Article II hereof.
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote for each such share, and shall be entitled to notice
of any stockholders' meeting in accordance with the bylaws of this corporation,
and shall be entitled to vote upon such matters and in such manner as may be
provided by the Washington Business Corporations Act.
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ARTICLE III
BYLAWS
Except as otherwise provided in these Articles of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of this corporation, subject to the power of the
shareholders to amend and repeal such Bylaws.
ARTICLE IV
PREEMPTIVE RIGHTS
Except for contractual agreements which may be entered into by the Company
with its shareholders from time to time no preemptive rights shall exist with
respect to shares of stock or securities convertible into shares of stock of
this corporation.
ARTICLE V
CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
ARTICLE VI
DIRECTORS
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and, subject to the limitations expressed herein
or therein, may be increased or decreased from time to time in the manner
provided therein.
ARTICLE VII
AMENDMENTS TO ARTICLES OF INCORPORATION
Subject to the shareholder voting rights contained herein or in the Bylaws,
this corporation reserves the right to amend or repeal any of the provisions
contained in these Articles of Incorporation in any manner now or hereafter
permitted by law, and the rights of the shareholders of this corporation are
granted subject to this reservation.
ARTICLE VIII
LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors, a Director of this corporation shall
not be liable to this corporation or its shareholders for monetary damages for
conduct as a Director. Any amendments to or repeal of this Article VIII shall
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<PAGE>
not adversely affect any right or protection of a Director of this corporation
for or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
ARTICLE IX
SHAREHOLDER ACTION
Any action required or permitted to be taken at a shareholders' meeting may
be taken without a meeting or a vote if either:
(i) The action (a "Unanimous Consent") is taken by all shareholders
entitled to vote on the action; or
(ii) So long as this corporation is not a public company, the action
(a "Majority Consent") is taken by shareholders holding of record, or otherwise
entitled to vote, in the aggregate not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote on the action were present and voted.
To the extent prior notice is required by law, any advance notice required
by statute to be given to nonconsenting shareholders shall be made at least one
business day prior to the effectiveness of the action, or such longer period as
required by law. The form of this notice shall be sufficient to appraise the
nonconsenting shareholder of the nature of the action to be effected, in a
manner approved by the directors of this corporation or by the committee or
officers to whom the board has delegated that responsibility.
DATED: May 1, 1998.
ELEKOM CORPORATION
By /s/ Wayne D. Burns
-----------------------------------
Wayne D. Burns, Secretary
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ARTICLES OF AMENDMENT
OF
ELEKOM CORPORATION
Pursuant to the provisions of RCW 23B.06.020, RCW 23B.10.020, and RCW
23B.10.060 of the Washington Business Corporation Act, the following Articles of
Amendment are executed by the undersigned, a Washington corporation:
1. The name of the corporation is Elekom Corporation.
2. Effective upon the filing of these Articles of Amendment with the
Secretary of State of the state of Washington, the corporation's Articles of
Incorporation, as amended and restated (the "Articles of Incorporation"), are
amended as follows:
Article II, Paragraphs A and B of the Articles of Incorporation
shall be amended and restated to provide as follows:
A. Authorized Capital. This corporation is authorized to issue two
------------------
classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares that this corporation
is authorized to issue is Fifteen Million Forty Thousand (15,040,000)
shares. Nine Million Seven Hundred Twelve Thousand Eight Hundred
Twenty-Six (9,712,826) shares shall be Common Stock and Five Million
Three Hundred Twenty-Two Thousand One Hundred Seventy-Four (5,322,174)
shares shall be Preferred Stock, each with a par value of $0.01 per
share.
B. Rights, Preferences and Restrictions on Preferred Stock. The
-------------------------------------------------------
Preferred Stock authorized by these Restated Articles of Incorporation
may be issued from time to time in one or more series. The rights,
preferences, privileges and restrictions granted to and imposed on the
Series A Preferred Stock, which series shall consist of Nine Hundred
Seventeen Thousand Two Hundred Twenty-Nine (917,229) shares (the
"Series A Preferred Stock") and the Series B Preferred Stock,
which series shall consist of Four Million Four Hundred Nine Thousand
Nine Hundred Forty-Five (4,409,945) shares (the "Series B Preferred
Stock"), are as set forth in this Article II(B).
<PAGE>
3. The date of the adoption of the amendments by the Board of Directors of
the corporation is July 10, 1998.
4. The amendments were duly adopted by the corporation's Board of
Directors. Pursuant to the provisions of RCW 23B.06.020 and the corporation's
Articles of Incorporation, shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment this 10th day of July, 1998.
ELEKOM CORPORATION
By /s/ Wayne Burns
----------------------------------------
Wayne Burns, Secretary and Treasurer
2
