<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
REGISTRATION NO. 333-22231
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XCELLENET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 57-1749705
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER
5 CONCOURSE PARKWAY
SUITE 850
ATLANTA, GEORGIA 30328
(770) 804-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DENNIS M. CRUMPLER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
XCELLENET, INC.
5 CONCOURSE PARKWAY
SUITE 850
ATLANTA, GEORGIA 30328
(770) 804-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
WILLIAM H. AVERY ALSTON & BIRD LLP CARLA S. NEWELL GUNDERSON DETTMER
ONE ATLANTIC CENTER 1201 WEST STOUGHVILLENEUVE FRANKLIN &
PEACHTREE STREET ATLANTA, GEORGIA HACHIGIAN, LLP 155 CONSTITUTION
30309-3424 (404) 881-7000 DRIVE MENLO PARK, CALIFORNIA 94025
(415) 321-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF SHARES MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE (1)(2) REGISTRATION FEE(3)
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<S> <C> <C>
Common Stock, par value $.01 per
share .............................. $29,217,187.50 $8,853.69
</TABLE>
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(1) Based on 1,725,000 shares (including 225,000 shares subject to the
Underwriters' over-allotment option) offered at a price equal to 16.9375
per share, the average of the high and low prices reported for XcelleNet,
Inc. Common Stock on the Nasdaq National Market on Friday, February 21,
1997.
(2) Estimated solely for the purpose of determining the registration fee.
(3) Previously paid.
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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 COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1997
[LOGO OF XCELLENET APPEARS HERE]
1,500,000 SHARES
COMMON STOCK
Of the 1,500,000 shares of Common Stock offered hereby, 655,953 shares are
being sold by XcelleNet, Inc. ("XcelleNet" or the "Company"), and 844,047
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Shareholders. The Common Stock is traded under the
Nasdaq National Market symbol "XNET." On February 27, 1997, the last reported
sale price for the Common Stock, as reported on the Nasdaq National Market, was
$18.75 per share.
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
----------
THESE SECURITIES 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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS(1)
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total (2)....................... $ $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company and the Selling
Shareholders, estimated at $287,460 and $112,540, respectively.
(2) The Company has granted to the Underwriters a 30-day option to purchase an
aggregate of up to an additional 225,000 shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively.
----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that the delivery of the shares of Common
Stock will be made through the offices of Robertson, Stephens & Company LLC
("Robertson, Stephens & Company"), San Francisco, California, on or about ,
1997.
ROBERTSON, STEPHENS & COMPANY
ALEX. BROWN & SONS
INCORPORATED
PUNK, ZIEGEL & KNOELL
The date of this Prospectus is , 1997
<PAGE>
The following text and graphic is contained in a border
The Company's RemoteWare products make many popular
applications work more efficiently for remote users who
routinely work offline and connect intermittently.
RemoteWare for
Windows NT
The central element of the graphic is a set six horizontal bars stacked
vertically. The bottom bar is slightly larger than the top five bars and is
labeled "Queued Event Architecture (QEA) and Session Automation." The bar is
marked with a footnote the text of which reads "XcelleNet QEA and session
automation technology are the foundation of the RemoteWare products." The top
five bars are labeled "Messaging," "Groupware Transactions," "Database
Transactions," "Content Delivery" and "System and Application Management."
To the left of the central element is a graphical depiction of a corporate
intranet including a System Management Console, Groupware and E-mail Server,
Database, Intranet Server, a globe labeled WWW and a RemoteWare NT Server.
To the right of the central element is a graphical depiction of a notebook
computer and the names of five types of applications that are supported by the
RemoteWare product. These names are "E-Mail","Groupware Applications","Database
Applications","Browsers"' and "Software Distribution". Each name is connected to
one of the five bars of the central element by a line.
Beneath the central element is a depiction of telephone poles and lines with the
words "28.8 Kbps Dial-Up Connections."
Beneath the depiction of the telephone poles and lines is a graphical depiction
of the Internet with a 28.8 Kbps line connecting the notebook computer to the
Internet and a line labeled T1 connecting the Internet to the depiction of the
corporate intranet.
Side by side at the bottom of the graphic are copies of screens of the
RemoteWare NT product as seen on the RemoteWare NT server and on the notebook
computer. The screens are connected by a line to the graphical depiction of the
respective computers on which the screens would be seen.
The caption beneath the RemoteWare NT server screen reads "The RemoteWare
server, through its session automation services, provides a variety of flexible
scheduling options. The caption beneath the notebook screen reads "RemoteWare
Subscriber, using "push" and "pull" methods, enables users to select and
automatically receive multiple types of content for offline viewing."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK FO
THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BY ANY SELLING SHAREHOLDER OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 28
Management................................................................ 42
Principal and Selling Shareholders........................................ 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 52
Incorporation of Certain Documents by Reference........................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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XCELLENET, THE COMPANY'S LOGO, REMOTEWARE AND REMOTECARE ARE REGISTERED
TRADEMARKS OF THE COMPANY. REMOTEWARE DISCOVERY SYSTEM, NETESSENTIALS, QUEUED
EVENT ARCHITECTURE, SESSIONXPRESS, SESSIONXPRESS BASIC, SUBSCRIBER, WORKSHOP,
REPLICATION AGENT AND ESSENTIALS ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS ALSO CONTAINS THE FOLLOWING TRADEMARKS AND TRADE NAMES OF OTHER
ORGANIZATIONS: OS/2(R) AND IBM(R) ARE TRADEMARKS OF INTERNATIONAL BUSINESS
MACHINES CORPORATION ("IBM"); SYBASE(R) AND SQL ANYWHERE(R) ARE TRADEMARKS OF
SYBASE, INC. ("SYBASE"), LOTUS NOTES(R) IS A TRADEMARK OF LOTUS DEVELOPMENT
CORPORATION, A WHOLLY OWNED SUBSIDIARY OF IBM ("LOTUS"); WINDOWS NT(R), BACK
OFFICE(R), SQL SERVER(R), EXCHANGE SERVER(R), ACTIVEX(R), AND INTERNET
EXPLORER(R) ARE TRADEMARKS OF MICROSOFT CORPORATION ("MICROSOFT"); AND VANTIVE
ON-THE-GO(R) IS A TRADEMARK OF THE VANTIVE CORPORATION ("VANTIVE"). ALL OTHER
TRADEMARKS AND TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE OWNERS.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Consolidated Financial Statements and
Notes thereto, appearing elsewhere or incorporated by reference in this
Prospectus.
THE COMPANY
XcelleNet develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information. These intermittently connected users have
traditionally included field sales and service workers and remote users in
branch offices or retail locations. The number of these users has grown
significantly as the ability to quickly and easily share information throughout
the enterprise has become a key asset. Increasingly, these users may also
include a broader constituency of both internal and external users who access
corporate intranets.
The Company's products make many popular messaging, groupware, database and
web-based applications work more effectively for remote users who routinely
work offline and connect intermittently. The foundation of the Company's
products is its Queued Event Architecture ("QEA") and its session automation
technology. QEA's three-tier, client/agent/server design facilitates the
automated staging of various types of user- and system-initiated events that
are executed whenever communication sessions occur. Session automation
technology provides secure, fast and reliable file transfers and advanced
session scripting to control which tasks occur before, during and after a
communication session. Session scripting and automation hide many of the
technical complexities of remote access computing from the user and provide
scheduling capabilities for the system administrator. The Company believes that
its products can reduce its customers' operating and support costs by
increasing user productivity and improving system management for many remote
users whose corporate information needs are not adequately addressed by
existing mainframe, client/server and internet technologies.
The Company's original RemoteWare product family was introduced in 1989. The
first generation of RemoteWare products was developed to operate on the OS/2
server platform and was marketed to corporations designing customized solutions
for remote sites and users. From its introduction, RemoteWare was designed to
provide a scalable, secure and user-friendly environment for the remote site
automation of business processes such as sales order entry, inventory query,
field activity reporting and catalog delivery. Consequently, the Company's
early marketing efforts were focused on industries with large numbers of remote
sites engaged in these activities. As of December 31, 1996, the Company had
licensed, directly or through its independent channel partners, RemoteWare for
the IBM OS/2 platform ("RemoteWare for OS/2") to approximately 1,300
organizations supporting approximately 470,000 users.
In 1995, the Company recognized the growing popularity of Windows NT as an
enterprise computing platform and the increased deployment of third-party and
customized applications based on industry standards. As a result, in early 1995
XcelleNet began committing significant resources to develop RemoteWare products
that (i) operate on Microsoft Windows NT servers and are integrated with
Microsoft Back Office products, (ii) embrace widely used Microsoft standards,
such as MAPI, ODBC and ActiveX, (iii) support popular products with large
installed bases of remote users such as IBM's Lotus Notes and Sybase's SQL
AnyWhere, and (iv) support internet standards and browser and server offerings
from Microsoft and Netscape Communications Corporation ("Netscape").
In March 1996, the Company introduced RemoteWare for the Windows NT platform
("RemoteWare for NT"), which the Company believes will expand the potential
market for RemoteWare and the number of its potential marketing partners.
Software license fees from RemoteWare for NT products accounted for 17% and 41%
of the Company's total software license fees in the third and fourth quarters
of 1996, respectively.
The Company believes that the widespread adoption of internet technologies by
organizations with enterprise information networks and the emergence of
corporate intranets will create significant opportunities for the Company to
expand the applicability of its core technologies. The Company intends to
aggressively pursue these opportunities by developing and marketing a new
family of intranet system and application management utilities to be offered
upon their release under the NetEssentials name.
The Company was incorporated in Georgia in 1986. The Company's mailing
address is 5 Concourse Parkway, Suite 850, Atlanta, Georgia 30328, and its
telephone number is (770) 804-8100.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company................... 655,953 shares
Common Stock Offered by the
Selling Shareholders....... 844,047 shares
Common Stock Outstanding
after the Offering......... 8,130,325 shares(1)
Use of Proceeds............ For working capital and general corporate purposes,
including potential acquisitions.
Nasdaq National Market
symbol..................... XNET
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996(2) 1995 1994
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<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues...................................... $42,651 $34,099 $26,889
Operating income (loss)............................. (934) 4,768 5,182
Other income, net................................... 934 1,264 748
Net income.......................................... -- 3,802 3,555
Net income per share................................ $ -- $ 0.45 $ 0.45
Weighted average shares outstanding(3).............. 7,915 8,480 7,833
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $10,587 $21,907
Working capital......................................... 23,198 34,518
Total assets............................................ 36,683 48,003
Long-term debt.......................................... -- --
Shareholders' equity.................................... 31,130 42,450
</TABLE>
- --------
(1) Based on shares issued and outstanding as of January 31, 1997. Excludes as
of January 31, 1997, 1,278,392 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1987 Stock Option Plan
(the "1987 Plan"), 240,000 shares of Common Stock issuable upon exercise of
options outstanding under the Company's 1994 Stock Option Plan for Outside
Directors (the "Director Plan"), 578,075 shares of Common Stock issuable
upon exercise of options outstanding under the Company's 1996 Long-Term
Incentive Plan (the "Long-Term Incentive Plan") and 101,172 shares of
Common Stock issuable upon exercise of other outstanding stock options. The
weighted average exercise price of such options is $10.55 per share. Also
excludes up to 2,576,353 additional shares of Common Stock reserved for
issuance pursuant to the 1987 Plan, the Director Plan and the Long-Term
Incentive Plan and 256,665 additional shares of Common Stock that could be
issued pursuant to the Company's 1995 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan").
(2) Operating income (loss), net income and net income per share include
nonrecurring charges of approximately $3.0 million related to the
acquisition of the WorldLink product line from The NetPlex Group, Inc. and
$459,000 primarily representing severance and hiring costs associated with
certain key employees.
(3) See Note 1 of Notes to Consolidated Financial Statements.
(4) Adjusted to give effect to the estimated net proceeds of this offering
based upon the sale of 655,953 shares of Common Stock offered by the
Company hereby at an assumed offering price of $18.75 per share.
Unless otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." This Prospectus contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Prospectus
that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including without
limitation statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including without limitation statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this Prospectus.
In evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information set forth
in this Prospectus.
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING
INDUSTRY STANDARDS
The market for the Company's products is characterized by rapid change in
computer hardware and software technology, evolving industry standards and
changing customer requirements, and is highly competitive with respect to
timely product innovation. The introduction of competitive products embodying
new technologies, the emergence of new industry standards and the acceptance of
new communications and data delivery channels, such as the Internet, may render
the Company's existing products or underlying technologies obsolete or
unmarketable. For example, the Company may be required to change and improve
its products in response to changes in operating systems, application and
networking software, computer and communications hardware, programming tools
and computer language technology. Announced and unannounced changes or errors
in operating and other systems with which the Company's products are used may
adversely affect the performance of the Company's products and require the
Company to modify its products to compensate for such changes or errors. As a
result, the Company's future success will depend in large part upon its ability
to enhance its current products and services and develop new products and
services that maintain technological leadership, address the increasingly
sophisticated needs of customers, keep pace with new competitive product
offerings and emerging industry standards, and achieve broad market acceptance.
There can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new products or product enhancements, or
that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance.
In order to introduce and market new or enhanced products successfully with
minimal disruption in customer purchasing patterns, the Company must
effectively manage the transition from existing products. Announcements by the
Company or its competitors of new products, capabilities or technologies that
have the potential to replace or shorten the life cycles of the Company's
existing products may cause customers to defer purchases of existing Company
products. Furthermore, software products as complex as those offered by the
Company may contain undetected errors or compatibility issues following their
introduction or as new versions are released, which may result in reduced
orders, delays in collecting accounts receivable and additional service costs.
The Company has previously experienced delays in software development,
including delays in the commercial release of RemoteWare for NT , and has
discovered software errors in new products after commercial release. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of potential new products or product enhancements. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services on a timely basis that are
compatible with industry standards, to respond to technological advances by
others and satisfy changing customer requirements, to successfully manage
product transitions, and to minimize the impact of errors in new
6
<PAGE>
products would have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Products," "--
Products Under Development" and "--Product Development."
RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NT SERVER-BASED
PRODUCTS; IMPACT ON INSTALLED BASE OF OS/2 CUSTOMERS
In 1989, the Company released its original version of RemoteWare for OS/2.
In March 1996, the Company released its first version of RemoteWare for NT,
designated as the 3.x family. The most recent version of the 3.x family is
RemoteWare 3.1. The Company is currently investing significant product
development resources to produce version 3.2 of RemoteWare for NT, which is
scheduled to be released in the second quarter of 1997. Due to the complexity
of remote access computing software in general, and the NT operating system
environment in particular, the develoment of RemoteWare 3.2 is subject to
significant technical risks. Furthermore, software products as complex as
those currently under development by the Company are subject to frequent
delays and undetected errors or compatibility issues following their
introduction or as new versions are released. Because RemoteWare 3.1 was first
released commercially in September 1996, many customers licensing this version
have not yet fully deployed the product and there may remain undetected errors
or compatibility issues in this version. The existence of any such errors or
compatibility issues may delay the release of RemoteWare 3.2 and adversely
affect the acceptance of RemoteWare 3.1, as well as other future products,
either of which could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the Company will not encounter difficulties that could delay or prevent
the successful and timely development, introduction and marketing of future
versions of RemoteWare for NT. Moreover, even if such future versions are
developed and introduced, there can be no assurance that they will achieve any
significant degree of market acceptance. Failure to release these new
versions of RemoteWare for NT on a timely basis, or the failure of these new
versions, if and when released, to achieve any significant degree of market
acceptance, would have a material adverse effect upon the Company's business,
operating results and financial condition.
As the Company focuses on RemoteWare for NT, it must manage the impact on
the approximately 1,300 organizations that have licensed RemoteWare for OS/2.
These customers accounted for a substantial majority of the Company's software
license fees in 1996. A substantial portion of RemoteWare for OS/2 customers
participate in the Company's software maintenance program, which accounted for
substantially all of the Company's service revenue in 1996. There can be no
assurance that updates to and enhancements for the Company's OS/2 products
will be sufficient to encourage its OS/2 customers to continue participation
in the Company's software maintenance program, that they will continue to
purchase additional products from the Company, that the Company will provide
an economically reasonable and technologically feasible migration path from
the OS/2 products to the NT products, or that any significant portion of the
Company's current OS/2 customers will migrate to its NT products. The failure
of the Company, for any reason, to provide sufficient updates to and
enhancements for its OS/2 products, or to provide an economically reasonable
and technologically feasible migration path from OS/2 to NT, or the failure of
OS/2 customers to migrate to the Company's NT products, would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Products" and "--Products Under
Development."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience
significant fluctuations in quarterly operating results that may be caused by
many factors including, among others, the number, timing and significance of
product enhancements and new product announcements by the Company or its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of the Company's products on a timely basis, the length
of the Company's sales cycle, market acceptance of and demand for the
Company's products, the growth rate of the market for remote access products,
the mix of the Company's
7
<PAGE>
products sold, the mix between revenues generated from software license fees
and services, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, renewal rates for service
agreements, software defects and other product quality problems, the Company's
ability to attract and retain key personnel, the extent of international
sales, changes in the level of costs and expenses, trends in the computer
industry, general economic conditions, extraordinary events such as
acquisitions or litigation and the occurrence of unexpected events. The
Company has recently acquired Electronic Commerce, Inc., a systems integration
company. To the extent revenues from the Company's systems integration
business increase as a percentage of services revenues, costs of services are
expected to increase as a percentage of services revenues. Historically, the
Company's software support and maintenance revenues have accounted for a
significant portion of the Company's total revenues. However, there can be no
assurance that such rates will not decline in the future and any such decline
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company's revenues are largely dependent on software license fees, which
are difficult to predict. Historically, the Company has operated with
virtually no order backlog because its software products are shipped as orders
are received. Moreover, the Company has in the past recognized and expects to
continue to recognize a substantial portion of its software license fee
revenues in the last month of a quarter, with these revenues frequently
concentrated in the last two weeks of a quarter. As a result, software license
fee revenues in any quarter are dependent on orders booked and shipped in that
quarter, and the revenues for any quarter may not be predictable until the end
of the quarter.
Sales of the Company's software products generally involve a significant
commitment of management attention and resources by prospective customers.
Accordingly, the Company's sales process is often lengthy and subject to
delays associated with the long approval process that accompanies significant
customer initiatives or capital expenditures. The Company's sales cycle, from
initial trial to complete installation, varies substantially from customer to
customer as a result of the foregoing factors. Because the Company's staffing
and operating expenses are based on anticipated revenue levels and a high
percentage of the Company's costs are fixed in the short term, small
variations between anticipated order dates and actual order dates, as well as
nonrecurring or unanticipated large orders, can cause significant variations
in the Company's operating results from quarter to quarter. In addition, the
Company's expenditures for product development are treated differently under
applicable accounting standards depending upon the stage of product
development. Certain of the Company's development expenditures may be expensed
as incurred, while others are capitalized subject to amortization over the
expected useful lives of the products, causing significant variations in the
Company's operating results. For example, capitalized software development
costs increased significantly in 1996 as a result of reaching technological
feasibility for RemoteWare for NT. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company has experienced, and may continue to experience, significant
seasonality in its business in the future. In previous years, the Company has
experienced a significant decline in revenues, and correspondingly, net
income, in the quarter ended September 30 compared to the quarter ended June
30. Revenues may be lower in the summer months when many businesses defer
purchase decisions. In addition, the September 30 quarter is the first quarter
of the Company's annual quota-based sales compensation plan and may be
affected by the efforts of direct sales representatives to accelerate
prospects' buying decisions into the quarter ended June 30, which is the final
quarter of their preceding annual plan. In addition, revenues have in the past
been relatively flat from the quarter ended December 31 to the quarter ended
March 31 primarily as a result of customers' year-end purchasing patterns.
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Due to all of the foregoing factors, it is likely that in some future
quarter or quarters the Company's operating results may be below the
expectations of securities analysts and investors. The Company has previously
failed to meet the expectations of securities analysts and investors, and
there can be no assurance that the Company will meet such expectations in the
future. Failure of the Company to meet such expectations would have a material
adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Discussion" and "Risk Factors--Volatility of Stock Price."
RISK OF INCLUSION OF REMOTE ACCESS UTILITY FUNCTIONALITY IN NETWORK OPERATING
SYSTEMS, NETWORK MANAGEMENT SOFTWARE OR INTRANET SERVER SOFTWARE
In the future, vendors of network operating systems, network management
software or intranet server software, such as Microsoft, IBM, Novell, Inc.,
and Netscape, may enhance their products to include some or all of the
functionality currently provided by the Company's remote access software
utilities. For example, in the past Microsoft incorporated an anti-virus
utility in its release of DOS 6.0. The inclusion of the functionality of the
Company's products as a standard feature of network operating systems, network
management software or intranet server software could, particularly if the
quality of such functionality were comparable to that of the Company's
products, render the Company's products obsolete and unmarketable.
Additionally, the announcement by a vendor of network operating systems,
network management software or intranet server software that it intends to
include in a future product or version some or all of the functionality that
is currently provided by the Company's remote access software utilities, or
the rumor of such an intention absent an announcement by the vendor involved,
could materially adversely affect the marketability of the Company's products.
Furthermore, even if the remote access software utilities provided as standard
features in network operating systems, network management software or intranet
server software were more limited than that of the Company's products, there
can be no assurance that a significant number of customers would not elect to
accept such limited functionality in lieu of purchasing additional software
from another vendor such as the Company. If any of the foregoing events were
to occur, they would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITION
The market for remote access software, including the Company's specific area
of remote access utilities, is highly competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Many
software vendors offer products that are competitive with the products offered
by the Company. These competitors vary in size and in the scope and breadth of
the products and services offered. Within specific ranges of functionality,
the Company encounters competition from a number of sources including:
(i) enterprise system management tool vendors such as Microsoft, Tivoli
Systems, Inc. ("Tivoli"), a wholly owned subsidiary of IBM, and Computer
Associates International, Inc. ("Computer Associates"); (ii) messaging-enabled
application vendors such as Lotus and Microsoft; (iii) groupware vendors such
as Lotus; (iv) database application vendors such as Oracle Corporation
("Oracle"); (v) internet software vendors such as Netscape and Microsoft; (vi)
content distribution software vendors such as Microsoft, Pointcast Network
Corporation ("Pointcast") and BackWeb Technologies, Inc. ("BackWeb"); (vii)
remote access software and hardware vendors such as Microsoft, Shiva
Corporation ("Shiva") and Citrix Systems, Inc. ("Citrix"); (viii) vendors of
applications software who incorporate remote access utilities in their
software such as Lotus; and (ix) custom software-based solutions developed by
internal management information systems personnel or third-party professional
service organizations. As the Company offers new products in the future, it
expects that in addition to facing competition from existing competitors it
will have additional competitors. Many of the Company's current competitors
are broadening the functionality of their product offerings. Because there are
relatively low barriers to entry in the software market, the Company also
expects additional competition from other established and emerging companies.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes competition will continue to intensify as the market
for its products and services develops and competitors focus more clearly on
that market's specific requirements. There can be no
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assurance that other companies will not develop experience, products and
marketing approaches that will be more successful than those of the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the remote
computing needs of the Company's prospective customers. Accordingly, it is
possible that new competitors, alliances among competitors or alliances between
competitors and third parties may emerge and rapidly acquire significant market
share. If this were to occur, it would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company believes that the principal competitive factors affecting the
market it serves include vendor and product reputation, product architecture,
functionality and features, scalability, ease of use, quality of product and
support, performance, price, brand name recognition and effectiveness of sales
and marketing efforts. There can be no assurance that the Company can maintain
its competitive position against current and potential competitors, especially
those with significantly greater financial, marketing, service, support,
technical and other competitive resources, or that competitive pressures faced
by the Company would not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Pricing"
and "--Competition."
RISKS ASSOCIATED WITH THE DEVELOPMENT AND INTRODUCTION OF THE NETESSENTIALS
PRODUCTS; IMPACT ON REMOTEWARE MARKET
The Company is currently investing significant product development resources
in developing its NetEssentials family of products, which the Company currently
anticipates will consist of several products that are being derived from
RemoteWare and are being targeted at companies implementing corporate
intranets. The Company currently plans to release the first of such products,
SessionXpress Basic, in the second quarter of 1997, and currently plans to
release the other NetEssentials products at various times throughout 1997. Due
to the complexity of remote access computing software in general, and the NT
operating system and internet standards in particular, and the difficulty in
gauging the engineering effort required to develop these planned products, the
NetEssentials family of potential products is subject to significant technical
risks. Furthermore, software products as complex as those currently under
development by the Company are subject to frequent delays and undetected errors
or compatibility issues following their introduction or as new versions are
released. There can be no assurance that the Company will not encounter
difficulties that could delay or prevent the successful and timely development,
introduction and marketing of these planned products. Moreover, even if such
planned products are developed and introduced, the Company believes that the
market for intranet system management products in general, and the market for
the planned NetEssentials product line in particular, is highly uncertain and
there can be no assurance that the planned NetEssentials products will achieve
any significant degree of market acceptance. Failure to release these planned
products on a timely basis, or failure of these planned products, if and when
released, to achieve any significant degree of market acceptance, would have a
material adverse effect on the Company's business, operating results and
financial condition.
Each of the NetEssentials products is being designed to provide a tailored
subset of RemoteWare's functionality, and accordingly the NetEssentials product
line is being developed to include many capabilities similar to those found in
the Company's RemoteWare products. The Company intends to offer the planned
NetEssentials products at prices substantially less than those charged for its
RemoteWare products. There can be no assurance that the similarities between
the Company's RemoteWare products and its planned NetEssentials products will
not lead to confusion between the two product families. Accordingly, there can
be no assurance that customers will not purchase one or more of the function-
specific, lower-priced NetEssentials products in preference to the more fully
functional RemoteWare products, or that such confusion will not lead to delays
in customer purchasing decisions or cause customers not to purchase the
Company's products at all. Furthermore, there can no assurance that the Company
will not be forced to lower its prices for the RemoteWare family of products in
response to such reaction. The failure of the Company to
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effectively manage the introduction of the planned NetEssentials products to
avoid any such confusion would have a material adverse effect on the Company's
business, operating results and financial condition.
The Company anticipates that, assuming it is successful in developing and
introducing the NetEssentials products, it may market the NetEssentials
products through different marketing channels than the Company uses in
marketing its RemoteWare products. In particular, the Company expects to
market the NetEssentials products through its newly created telesales function
and through the World Wide Web (the "Web"). The Company has no prior
experience in marketing its products through such channels. Failure of the
Company to successfully market the NetEssentials products through such
channels could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--
Products Under Development" and "--Sales and Marketing."
DEPENDENCE ON EMERGING REMOTE ACCESS COMPUTING MARKET AND INTRANET EXPANSION
The market for products that address the needs of remote access computing
for users intermittently connected to a corporate network or intranet is
relatively new and rapidly evolving. There can be no assurance that such a
market will continue to expand, or if it does, that the Company's products
will receive widespread acceptance. The continued growth of this market will
depend, in large part, upon the continued growth in portable computing devices
and communications hardware and software, expansion of internet usage and the
number of organizations adopting or expanding intranets, the ability of
enterprise computing and communications infrastructures to support an
increasing number of remote users, and the continued development of new and
improved applications addressing the work requirements of remote users who can
better perform their jobs when able to use their applications offline. If the
remote access computing market fails to grow, or grows more slowly than the
Company currently anticipates, or if the use of intranets fails to expand,
there would be a material adverse effect on the Company's business, operating
results and financial condition.
In addition, as the remote access computing market continues to evolve, the
Company faces competition from companies that seek to provide remote access
computing solutions based upon approaches different from that employed by the
Company. Some of the vendors providing remote access computing solutions
through alternative approaches have significantly greater financial,
marketing, technical and other resources than the Company. As a result, they
may be able to create a market perception that their approaches are more
appropriate for a potential customer's remote computing solutions. There can
be no assurance that the market for remote computing solutions will not
ultimately be dominated by approaches other than the approach marketed by the
Company. See "Business--Industry Background" and "--Competition."
DEPENDENCE UPON CERTAIN LICENSES
The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, a spell checker and X.400 gateway API libraries,
some of which perform key functions within the Company's products. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or attempt to internally develop a
replacement for the function of the licensed software. The loss of or
inability to maintain any of these technology licenses could result in
interruptions in the availability of the Company's existing products and
delays in the introduction of new products and services until equivalent
technology, if available, is identified, licensed or developed, and
integrated. There can be no assurance that an alternative source of a suitable
product would be available or that the Company would be able to develop an
alternative product in sufficient time or at a reasonable cost. The failure of
the Company to obtain or develop an alternative product on a timely basis and
at a reasonable cost would have a material adverse effect
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on the Company's business, operating results and financial condition. See
"Business--Product Development" and "--Intellectual Property and Third Party
Licenses."
PRODUCT CONCENTRATION
The Company has derived substantially all of its revenues since inception
from the licensing of its RemoteWare software products and the provision of
related services, and expects that revenues from these products and services
to both new and existing customers will continue to account for a substantial
majority of revenues for the foreseeable future. As a result, the Company's
future financial performance will depend in large part on the continued market
acceptance of its RemoteWare software and services, as well as the Company's
ability to adapt and modify this software to meet the evolving needs of its
customers. The life cycles of the Company's products are difficult to estimate
due in large measure to the recent emergence of the remote access market, the
future effect of product enhancements, including developments in the hardware
and software environments in which the RemoteWare products operate, and future
competition. Declines in demand for the Company's products or the failure of
the RemoteWare products to gain widespread market acceptance, whether as a
result of competition, technological change or otherwise, would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Products."
DEPENDENCE ON KEY EMPLOYEES
The Company's success is dependent to a significant extent upon a number of
key technical and management employees and technical contractors, the loss of
one or more of whom could have a material adverse effect upon the Company's
business, operating results and financial condition. The future success of the
Company will depend in large part on its ability to attract and retain
talented and qualified personnel, particularly managerial and technical
personnel. Competition for highly qualified personnel in the computer software
industry is intense. There can be no assurance that the Company can retain its
key employees or that it can attract, assimilate and retain qualified
personnel in the future. The failure of the Company to retain its key
employees and technical contractors or to hire key personnel in the future
would have a material adverse effect upon the Company's business, operating
results and financial condition. See "Management."
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION; IMPACT OF CHANGES IN SOLUTION
PROVIDER PROGRAM
An integral part of the Company's strategy is to continue to develop both
its internal direct sales force and its telesales function, as well as to
expand the role of third-party channels in the marketing and distribution of
the Company's products. The Company's ability to achieve revenue growth in the
future will depend in large part upon its success in recruiting, training and
retaining sufficient direct sales and telesales personnel and in establishing
and maintaining relationships with indirect channel partners such as systems
integrators, software and hardware vendors and other third parties. Although
the Company is presently committing significant resources to expand its sales
force and to develop distribution relationships with indirect channel
partners, the Company may at times experience difficulty in recruiting
qualified sales personnel and in establishing necessary third-party alliances.
In addition, as the Company hires new sales personnel, it is anticipated that
there will be a delay before such personnel become productive. Any failure by
the Company to expand its direct sales and telesales force and other
distribution channels, or the failure by the Company to increase revenues
commensurate with such expansion, would have a material adverse effect upon
the Company's business, operating results and financial condition.
Although the Company intends to focus on increasing its direct sales
efforts, it will continue to be dependent upon indirect channel partners.
Certain indirect channel partners also offer competing products or systems
produced either by third parties or by themselves. In addition, software
reseller marketing and distribution channels historically have experienced
rapid change, consolidations and financial difficulties. There can be no
assurance that the Company's existing or future indirect channel partners will
continue to or be able to provide the level of services and technical support
required by the Company's customers, that the
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Company will be able to effectively manage potential conflicts between its
direct sales efforts and its indirect channel partners, or among these
partners, or that these partners will not emphasize their own or third-party
products to the detriment of the Company's products. The loss of indirect
channel partners, the failure of such parties to perform under agreements with
the Company, or the inability of the Company to attract and retain new
indirect channel partners with the technical, industry and application
expertise required for the Company's purposes in the future, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Business Strategy," "--
Sales and Marketing" and "--Services."
During the second half of 1996, the Company implemented changes to its
program for the indirect channel partners on which it relies to provide
application development and systems integration services to RemoteWare
customers and prospects ("Solution Providers"). These changes placed greater
emphasis on Solution Providers who offer substantial RemoteWare integration
services and required that all Solution Providers be NT-qualified. These
changes, and additional program changes that became effective January 1, 1997,
have resulted in fewer Solution Providers authorized to remarket RemoteWare
and remarketing discount rates that range from 20% to 30%, compared to 30% to
40% in prior years. As a result, the Company expects that license fees
generated from Solution Providers as a percentage of total license fees will
decrease. There can be no assurance that the Company will be able to attract
or retain a sufficient number of NT-qualified Solution Providers to adequately
fill the Company's needs. Failure of the Company to attract or retain a
sufficient number of such Solution Providers could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Sales and Marketing."
RISKS ASSOCIATED WITH FAILURE TO MANAGE GROWTH; POTENTIAL FUTURE ACQUISITIONS
The Company has recently experienced a period of significant growth that has
placed, and could continue to place, a significant strain on its management
and operations, including its sales, marketing, customer support, research and
development, finance and administrative operations. The Company's ability to
manage future growth, if any, will require the Company to continually enhance
its operational and financial control systems, implement new systems as
necessary, and will depend on its ability to attract, assimilate and retain
additional qualified personnel. The failure of the Company's management to
respond effectively to future growth, if any, would have a material adverse
effect upon the Company's business, operating results and financial condition.
The Company may in the future undertake acquisitions that could present
challenges to the Company's management. Acquisitions involve numerous risks,
including difficulties assimilating new operations and personnel, implementing
new business processes, the need to manage geographically remote business
units and the diversion of management attention from other business concerns.
Any acquisition, depending on its size, could result in the use of a
significant portion of the Company's cash, or if such acquisition is made
utilizing the Company's securities, could result in significant dilution to
the Company's shareholders. Furthermore, there can be no assurance that any
acquired products or service capacity will gain acceptance in the Company's
markets. Should the Company's management fail to respond effectively to these
challenges, it is possible that a future acquisition could have a materially
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT CLAIMS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and generally requires licensees to sign license
agreements that impose certain restrictions on licensees' right to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets, including but not limited to, generally requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
code.
The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. In addition, the Company has applied for patents in the United
States and certain other countries with respect to certain aspects of its
software. None of these patents have been granted and there can be no
assurance that a patent will be issued pursuant to any of these
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applications or that, if granted, such patent would survive a legal challenge
to its validity or provide significant protection to the Company.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
For certain of its client products and the RemoteWare Discovery System, the
Company uses "shrinkwrap" licenses that are not signed by licensees to protect
its copyrights and trade secrets in those products. The Company also uses an
electronic version of a shrinkwrap license for all users of the trial version
of its SessionXpress Basic product distributed electronically through the
Company's web site. In addition, the Company expects to use a shrinkwrap
license agreement, or an electronic version of such agreement, for its
NetEssentials products when commercially released. Since these shrinkwrap
licenses are not signed by the licensee, many authorities believe that they
may not be enforceable under many state laws and the laws of many foreign
jurisdictions. The laws of the State of Georgia, which govern these licenses
for the Company's products, continue to be unclear on this subject. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
In 1995, the Company received a claim that its products infringe upon a
third party's intellectual property rights, and there can be no assurance that
other third parties will not in the future claim infringement by the Company
with respect to current or future products, trademarks or other proprietary
rights. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or available at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Business--Intellectual Property and Third Party
Licenses."
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been subject to
significant fluctuations in the past. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations, particularly
among software companies, which often have been unrelated to the operating
performance of particular companies. Any announcement with respect to any
variance in revenue or earnings from levels generally expected by securities
analysts or investors for a given period would have an immediate and
significant effect on the trading price of the Common Stock. In addition,
factors such as announcements of technological innovations or new products by
the Company, its competitors or other third parties, rumors of such
innovations or new products, changing market conditions in the computer
software or hardware industries, changes in estimates by securities analysts,
announcements of extraordinary events, such as acquisitions or litigation, or
general economic conditions may have a significant impact on the market price
of the Common Stock. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against such companies. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Price Range of Common Stock."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 9% of the Company's 1996 revenues were attributable to
revenues from outside of North America. The Company anticipates that over the
next several years it will increase its investment in international operations
and that an increasing percentage of its revenues may be generated outside of
North America. There can be no assurance, however, that the Company will be
able to maintain or increase
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international market demand for the Company's products. International
operations generally are subject to certain risks, including difficulties in
staffing and managing foreign operations, fluctuations in foreign currency
exchange rates, compliance with foreign regulatory and market requirements,
longer receivables collection periods and greater difficulty in accounts
receivable collection, reduced protection for intellectual property rights in
some countries, potentially adverse tax consequences, variability of foreign
political and economic conditions and changing restrictions imposed by United
States export laws. There can be no assurance that the Company or its indirect
channel partners will be able to sustain or increase international revenues,
or that the foregoing factors will not have a material adverse effect on the
Company's future international revenues and, consequently, on the Company's
business, operating results and financial condition.
CONTROL BY MANAGEMENT
Upon completion of this offering, the Company's executive officers,
directors and their affiliates as a group, will beneficially own approximately
24.1%, of the Company's outstanding Common Stock (23.5% if the Underwriters'
over-allotment option is exercised in full). As a result, these shareholders
will be able to exercise significant influence over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. See "Management" and "Principal and
Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for
sale in the public market is limited by restrictions under the Securities Act
of 1933, as amended (the "Securities Act"), and lock-up agreements under which
the officers and directors of the Company have agreed not to sell or otherwise
dispose of any of their shares for a period of 90 days after the effective
date of this offering without the prior written consent of Robertson, Stephens
& Company. However, Robertson, Stephens & Company may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. As a result of these restrictions, based on
shares outstanding and options granted as of January 31, 1997, the following
shares of Common Stock will be eligible for future sale. On the date of this
Prospectus, in addition to the 1,500,000 shares offered hereby, 4,874,048
shares of outstanding Common Stock will be eligible for sale and, to the
extent vested, an additional 1,867,075 shares subject to outstanding stock
options as of January 31, 1997. An additional 1,706,277 shares and, to the
extent vested, an additional 330,564 shares subject to outstanding stock
options as of January 31, 1997, will be eligible for sale 90 days after the
effective date of this offering upon expiration of the lock-up agreements and
in compliance with certain limitations set forth in the Securities Act. The
holders of certain shares of the Company's Common Stock are entitled to
include such shares in any registered offerings of the Company's Common Stock
including this offering. The Company is currently seeking waivers of such
rights, but there can be no assurance that such waivers will be obtained. See
"Shares Eligible for Future Sale" and "Description of Capital Stock--
Registration Rights."
ANTI-TAKEOVER PROVISIONS
The Board of Directors has authority to issue up to 10,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the Preferred Stock without further
vote or action by the Company's shareholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. While
the Company has no present intention to issue shares of Preferred Stock, such
issuance, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. In addition, the Company's Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws contain provisions
that may discourage proposals or bids to acquire the Company. This could limit
the price that certain acquirors might be willing to pay for shares of the
Company's Common Stock and there can be no assurance that such provisions will
not have an adverse effect on the future market value of the Company's Common
Stock. See "Description of Capital Stock--Preferred Stock" and "--Certain
Charter and Bylaw Provisions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 655,953 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$11.3 million (approximately $15.3 million if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
commissions and estimated offering expenses. The Company will not receive any
of the proceeds from the sale of shares by the Selling Shareholders. The
Company expects to use the net proceeds of this offering for general corporate
purposes, including working capital. A portion of the net proceeds may also be
used for the acquisition of businesses, products and technologies that are
complementary to those of the Company. The Company has no present plans,
agreements or commitments and is not currently engaged in any negotiations
with respect to any such transaction. Pending such uses, the net proceeds of
this offering will be invested in investment grade, interest-bearing
securities.
PRICE RANGE OF COMMON STOCK
The Common Stock of XcelleNet has been traded on the Nasdaq National Market
under the symbol "XNET" since XcelleNet's initial public offering in April
1994. The following table sets forth the range of quarterly high and low sale
prices of the Common Stock of XcelleNet on the Nasdaq National Market since
the Company's initial public offering.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Second Quarter (from April 14, 1994)......................... $ 14 $ 8
Third Quarter................................................ 15 3/4 6 3/4
Fourth Quarter............................................... 17 5/8 12 3/4
YEAR ENDED DECEMBER 31, 1995
First Quarter................................................ 31 3/4 14 3/4
Second Quarter............................................... 33 1/4 18 1/4
Third Quarter................................................ 23 3/4 16 1/4
Fourth Quarter............................................... 22 13 1/4
YEAR ENDED DECEMBER 31, 1996
First Quarter................................................ 15 1/4 8 3/4
Second Quarter............................................... 15 1/2 9 1/2
Third Quarter................................................ 14 1/2 8 3/4
Fourth Quarter............................................... 20 13 1/2
YEAR ENDED DECEMBER 31, 1997
First Quarter (through February 27, 1997).................... 23 1/4 15 3/4
</TABLE>
On February 27, 1997, the closing price of XcelleNet's Common Stock as
reported on the Nasdaq National Market was $18.75 per share. As of January 31,
1997, there were approximately 245 holders of record of the Company's
7,474,372 shares of outstanding Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying cash dividends
in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996: (i) on an actual basis, and (ii) as adjusted to reflect the
sale by the Company of 655,953 shares of Common Stock offered hereby at an
assumed offering price of $18.75 per share (157,539 of which were reflected as
treasury stock as of December 31, 1996). This table should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
Shareholders' equity:
<S> <C> <C>
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued
and outstanding actual or as adjusted.................. $ -- $ --
Common Stock, $.01 par value; 30,000,000 shares
authorized; 7,537,876 shares issued and 7,380,337
shares outstanding; 8,036,290 shares issued and
outstanding as adjusted(1)............................. 75 81
Additional paid-in capital.............................. 24,211 33,137
Retained earnings....................................... 9,232 9,232
Treasury stock at cost, 157,539 shares; none as
adjusted............................................... (2,388) --
------- -------
Total shareholders' equity............................... $31,130 $42,450
------- -------
Total capitalization.................................... $31,130 $42,450
======= =======
</TABLE>
- --------
(1) Assumes no exercise of options after December 31, 1996. Excludes as of
December 31, 1996, 1,327,756 shares of Common Stock issuable upon exercise
of options outstanding under the 1987 Plan, 240,000 shares of Common Stock
issuable upon exercise of options outstanding under the Director Plan,
437,950 shares of Common Stock issuable upon exercise of options
outstanding under the Long-Term Incentive Plan and 101,172 shares of
Common Stock issuable upon exercise of other outstanding stock options.
The weighted average exercise price of such options is $9.90 per share.
Also excludes up to 2,713,149 additional shares of Common Stock that could
be issued upon exercise of additional options available for grant under
the 1987 Plan, the Director Plan and the Long-Term Incentive Plan and
256,665 additional shares of Common Stock that could be issued pursuant to
the Employee Stock Purchase Plan.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the years ended December
31, 1994, 1995 and 1996, and the consolidated balance sheet data at December
31, 1995 and 1996 are derived from the audited consolidated financial
statements included elsewhere in this Prospectus and should be read in
conjunction with those consolidated financial statements and notes thereto.
The consolidated statement of operations data for the years ended December 31,
1992 and 1993, and the consolidated balance sheet data at December 31, 1992,
1993 and 1994, are derived from audited consolidated financial statements not
included herein. The selected consolidated financial data set forth below
should also be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software license fees............... $30,703 $25,612 $21,399 $14,222 $8,932
Services............................ 11,948 8,487 5,490 3,191 1,425
------- ------- ------- ------- ------
Total revenues..................... 42,651 34,099 26,889 17,413 10,357
Costs and expenses................... 43,585 29,331 21,707 14,484 9,514
------- ------- ------- ------- ------
Operating income (loss).............. (934) 4,768 5,182 2,929 843
Other income, net.................... 934 1,264 748 162 96
------- ------- ------- ------- ------
Income before income taxes........... -- 6,032 5,930 3,091 939
Provision for income taxes........... -- 2,230 2,375 1,149 100
------- ------- ------- ------- ------
Net income........................... $ -- $ 3,802 $ 3,555 $ 1,942 $ 839
======= ======= ======= ======= ======
Net income per share................. $ -- $ 0.45 $ 0.45 $ 0.30 $ 0.15
======= ======= ======= ======= ======
Weighted average shares outstanding.. 7,915 8,480 7,833 6,450 5,824
======= ======= ======= ======= ======
<CAPTION>
DECEMBER 31,
---------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $10,587 $ 9,304 $12,375 $ 4,381 $4,120
Working capital...................... 23,198 24,968 28,815 7,689 6,810
Total assets......................... 36,683 33,461 36,144 12,208 9,489
Long-term debt....................... -- -- -- -- --
Total shareholders' equity........... 31,130 29,849 32,473 9,869 7,465
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below, under "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company develops, markets and supports software utilities that improve
the manageability and enhance the performance of remote access computing for
users who routinely work offline and periodically dial in to enterprise
information systems to exchange or synchronize information. The Company was
incorporated in 1986 and began shipping its first product, RemoteWare for
OS/2, in 1989. In 1995, the Company began to develop RemoteWare for NT and
introduced its first such product, RemoteWare 3.0, in March 1996. In September
1996, the Company released RemoteWare 3.1, and is currently investing a
majority of its software development resources to develop RemoteWare 3.2.
The Company's revenues are derived from software license fees and services
related to its RemoteWare products. All of the Company's software license fees
currently result from noncancelable license agreements, including agreements
obtained directly by the Company and agreements obtained through Solution
Providers. Historically, services revenues have been derived substantially
from the Company's RemoteCare Assurance Plan ("RCAP") program, which bundles
software maintenance and help desk support for customers and Solution
Providers. In December 1996, the Company began offering separate plans for
software maintenance and help desk support. The Company's future financial
performance will depend in large part on the continued market acceptance of
its RemoteWare software and services, as well as the Company's ability to
adapt and modify this software to meet the evolving needs of its customers.
See "Risk Factors--Product Concentration."
The Company's revenues are largely dependent on software license fees, which
are difficult to predict. Historically, the Company has operated with
virtually no order backlog because its software products are shipped as orders
are received. Moreover, the Company has often recognized a substantial portion
of its software license fees in the last month of a quarter, with these
revenues frequently concentrated in the last two weeks of a quarter.
Additionally, the Company has experienced, and may continue to experience,
significant seasonality in its business and the Company's results of
operations may be affected by such trends in the future. See "--Quarterly
Discussion" and "Risk Factors--Fluctuations in Quarterly Operating Results;
Seasonality."
License fees from the RemoteWare for NT products accounted for 17% and 41%
of total license fees in the third and fourth quarters of 1996, respectively.
The Company believes that Microsoft's Windows NT environment is emerging as
the predominant enterprise computing platform, and that its RemoteWare for NT
products will be applicable to a broader range of customers than its
RemoteWare for OS/2 products. While the Company intends to continue to offer
and support its RemoteWare for OS/2 products, the Company anticipates that
sales of the RemoteWare for NT products will constitute an increasing
proportion of total license fees. Because a significant portion of the
Company's installed base is composed of customers (including those who license
RemoteWare through Solution Providers) of the RemoteWare for OS/2 products,
the software maintenance revenue that may be received from those customers in
the future will depend in large part on the Company's ability to introduce
updates to or migration paths for its OS/2 products that encourage these
customers to participate in the Company's software maintenance program. See
"Risk Factors--Risks Associated with Development and Introduction of NT
Server-based Products; Impact on Installed Base of OS/2 Customers."
19
<PAGE>
The Company relies primarily on its direct sales force to qualify and sell
to prospective customers. The Company also has a network of Solution Providers
who provide remarketing and/or integration services to RemoteWare customers.
During the second half of 1996, the Company began modifying its Solution
Provider channel model to place greater emphasis on Solution Providers who
offer substantial RemoteWare integration services. These and other program
changes that became effective January 1, 1997 have resulted in fewer Solution
Providers that are authorized to remarket RemoteWare and remarketing discount
rates that range from 20% to 30%, compared to 30% to 40% in prior years. As a
result, the Company expects that license fees generated from Solution
Providers as a percentage of total license fees will decrease. See "Risk
Factors--Risks Associated with Expanding Distribution; Impact of Changes in
Solution Provider Program."
In accordance with generally accepted accounting principles, the Company
capitalizes certain costs incurred in developing computer software products.
Capitalized software development costs were $786,000, $319,000 and $2.1
million in 1994, 1995 and 1996, respectively. Capitalized software costs
increased in 1996 primarily due to the development of RemoteWare for NT.
The Company is currently investing significant product development resources
in developing its NetEssentials family of products, which the Company
currently anticipates will consist of several products that are being derived
from RemoteWare and that are being targeted at companies implementing
corporate intranets. These products are planned for release throughout 1997,
beginning with the first product in the second quarter. The Company believes
that the market for intranet system management products in general, and for
the planned NetEssentials products in particular, is highly uncertain and the
development of these new products is subject to significant technical risks.
As a result, the Company does not anticipate that the software license fees
generated from the NetEssentials products in 1997 will be material compared to
its total revenues. Furthermore, there can be no assurance that any customer
confusion over the similar capabilities of the NetEssentials and RemoteWare
products will not result in price erosion or reduced sales of the RemoteWare
products. See "Risk Factors--Risks Associated with the Development and
Introduction of the NetEssentials Products; Impact on RemoteWare Market."
In the fourth quarter of 1996, the Company purchased the WorldLink product
line from The NetPlex Group, Inc. for approximately $3.0 million in cash. The
purchase price of the WorldLink technology was allocated to goodwill as of the
acquisition date and written off as a nonrecurring charge in the fourth
quarter due to uncertainties regarding its recoverability. In January 1997,
the Company acquired all of the outstanding shares of Electronic Commerce,
Inc. ("E-Comm"), a systems integration company that had been one of the
Company's Solution Providers, for stock and cash valued at approximately $2.7
million. As a result of the E-Comm acquisition, the Company anticipates that
revenues from the Company's systems integration business will increase as a
percentage of services revenues in 1997, and that costs of services will
increase as a percentage of services revenues. See "Risk Factors--Fluctuations
in Quarterly Operating Results; Seasonality."
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues of the line items in the Company's Consolidated Statements of
Operations and the percentage changes from the preceding periods:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES YEAR-TO-YEAR CHANGES
---------------- ---------------------------
1994 1995 1996 1995 VS. 1994 1996 VS. 1995
---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees............... 80% 75% 72% 20% 20%
Services............................ 20 25 28 55 41
--- --- --- --- ----
Total revenues..................... 100 100 100 27 25
--- --- --- --- ----
Costs and expenses:
Costs of license fees............... 4 5 5 48 9
Costs of services................... 7 7 9 31 63
Sales and marketing................. 43 43 51 25 49
Product development................. 9 15 15 116 26
General and administrative.......... 18 16 14 18 12
Nonrecurring charges................ -- -- 8 -- --
--- --- --- --- ----
Total costs and expenses........... 81 86 102 35 49
--- --- --- --- ----
Operating income (loss).............. 19 14 (2) (8) (120)
Other income, net.................... 3 4 2 69 (26)
--- --- --- --- ----
Income before income taxes........... 22 18 -- 2 (100)
Provision for income taxes........... 9 7 -- (6) (100)
--- --- --- --- ----
Net income........................... 13% 11% --% 7% (100)%
=== === === === ====
</TABLE>
Revenues
Total revenues were $26.9 million, $34.1 million and $42.7 million in 1994,
1995 and 1996, respectively, representing increases of 27% from 1994 to 1995
and 25% from 1995 to 1996. These increases in total revenues were due to
increases in both license fees and service revenues.
The Company recognizes revenue in accordance with the Statement of Position
91-1 on "Software Revenue Recognition" issued by the American Institute of
Certified Public Accountants. Software license fees are recognized when a
noncancelable license agreement has been signed, the product has been shipped
and all significant contractual obligations have been satisfied. The Company
licenses its products directly to licensees and through Solution Providers.
All licensees, whether licensed directly or through Solution Providers, are
referred to throughout this Prospectus as the Company's customers. Software
licensed to a customer through a Solution Provider is recognized net of the
discount to the Solution Provider. Services revenues are primarily derived
from the RCAP program, which includes help desk support and maintenance for
customers and Solution Providers, and to a lesser extent from training and
systems integration services. Revenues from the RCAP program are recognized
proportionately over the term of the 12-month agreement, while revenues for
training and systems integration services are recognized as services are
performed. Starting in December 1996, the Company began offering separate
plans for software maintenance and help desk support to all new customers and
to existing customers as their RCAP agreements expired. Software maintenance
revenues under these new agreements will be recognized over their 12-month
terms.
Software License Fees. The Company currently derives all of its software
license fees from noncancelable license agreements for its RemoteWare
products. Software license fees were $21.4 million, $25.6 million and $30.7
million in 1994, 1995 and 1996, respectively, representing increases of 20%
from 1994 to 1995 and from 1995 to 1996. The increases in software license
fees reflect increased market acceptance by new customers and additional sales
to the Company's installed base. Software license fees as a percentage of
total revenues were 80%, 75% and 72% in 1994, 1995 and 1996, respectively,
reflecting the effect of the growth of services revenues associated with the
Company's larger installed base and the high rate of participation of
RemoteWare customers in the RCAP program.
21
<PAGE>
In March 1996, the Company released its first version of RemoteWare for NT,
and the most recent version was released in September 1996. Software license
fees from the RemoteWare for NT products accounted for 17% and 41% of total
software license fees in the third and fourth quarters of 1996, respectively.
The Company believes that Microsoft's Windows NT environment is emerging as
the predominant enterprise computing platform, and that its RemoteWare for NT
products will be applicable to a broader range of customers than its
RemoteWare for OS/2 products. While the Company intends to continue to offer
and support its RemoteWare for OS/2 products, the Company anticipates that
sales of the RemoteWare for NT products will constitute an increasing
proportion of total software license fees.
Software license fees from new customers were $11.6 million, $11.1 million
and $13.3 million in 1994, 1995 and 1996, respectively, representing 54%, 43%
and 43% of total software license fees in those years, respectively. The
decline in the percentage of software license fees from new customers is
related to the growth of the Company's installed base and the additional
software purchased by this installed base of customers. The Company added 247,
301 and 296 new customers in 1994, 1995 and 1996, respectively. The average
revenues received by the Company from initial RemoteWare purchases by these
new customers was $46,000, $36,000 and $45,000 during the same three years.
Average revenues received by the Company from initial purchases vary as a
function of the number of clients and servers included in the sale, whether
the sale was direct or through a Solution Provider, and the specific products
and options licensed.
Software license fees from existing customers were $9.8 million, $14.5
million and $17.4 million in 1994, 1995 and 1996, respectively, representing
46%, 57% and 57% of total software license fees in those years, respectively.
Software license fees from existing customers increased 48% from 1994 to 1995
and 20% from 1995 to 1996. Existing customers that purchase additional
RemoteWare products do so to complete deployment of an initial pilot or
limited production implementation and to extend RemoteWare to additional
clients and projects within the enterprise. The vast majority of the Company's
existing installed base is composed of customers who purchased RemoteWare for
OS/2. See "Risk Factors--Risks Associated with Development and Introduction of
NT Server-based Products; Impact on Installed Base of OS/2 Customers."
Software license fees generated by Solution Providers represented 40%, 48%
and 38% of total software license fees in 1994, 1995 and 1996, respectively.
During the second half of 1996, the Company implemented changes to its
Solution Provider channel to place greater emphasis on Solution Providers who
offer substantial RemoteWare integration services. These changes, and
additional program changes that became effective January 1, 1997, have
resulted in fewer Solution Providers authorized to remarket RemoteWare and
remarketing discount rates that range from 20% to 30%, compared to 30% to 40%
in prior years. As a result, the Company expects that software license fees
generated from Solution Providers as a percentage of total software license
fees will decrease. See "Business--Sales and Marketing" and "Risk Factors--
Risks Associated with Expanding Distribution; Impact of Changes in Solution
Provider Program."
The Company is currently investing significant product development resources
in developing its NetEssentials family of products, which the Company
currently anticipates will consist of several products that are being derived
from RemoteWare and are being targeted to companies implementing corporate
intranets. The Company currently plans to release the first of such products,
SessionXpress Basic, in the second quarter of 1997 and currently plans to
release the other NetEssentials products at various times throughout 1997. The
Company believes that the market for intranet system management products in
general, and the market for the planned NetEssentials product line in
particular, is highly uncertain. Furthermore, the development of these new
products is subject to significant technical risks. As a result, the Company
does not anticipate that the software license fees generated from the
NetEssentials products in 1997 will be material compared to its total
revenues. See "Risk Factors--Risks Associated with the Development and
Introduction of the NetEssentials Products; Impact on RemoteWare Market."
Services. Services revenues have historically been derived substantially
from the Company's RCAP program, which bundles help desk support and software
maintenance for customers and Solution Providers. Services revenues were $5.5
million, $8.5 million and $11.9 million for 1994, 1995 and 1996, respectively,
representing increases of 55% from 1994 to 1995 and 41% from 1995 to 1996. The
percentage of total revenues derived from services increased from 20% in 1994
to 25% in 1995 and to 28% in 1996. The growth in services revenues, and the
relative significance of such revenues to total revenues, is primarily due to
the Company's growing customer base and their significant rate of
participation in the RCAP program. Because a significant portion of the
Company's installed base is composed of customers of the RemoteWare for OS/2
products, the software maintenance revenue that may be received from those
customers in the future will depend in large part on the Company's ability to
introduce updates to or migration paths for its OS/2 products
22
<PAGE>
that encourage these customers to continue their participation in the
Company's software maintenance program. There can be no assurance that such
services revenues will not decline in the future. See "Risk Factors--Risks
Associated with Development and Introduction of NT Server-based Products;
Impact on Installed Base of OS/2 Customers."
Services revenues also include field engineering and systems integration
services that are focused on selected RemoteWare customer implementations and
that facilitate Solution Provider development, certification and quality
assurance. The revenue generated from these activities totaled $152,000,
$343,000 and $438,000 in 1994, 1995 and 1996, respectively. In January 1997,
the Company acquired Electronic Commerce, Inc., a 14-person privately owned
systems integration company to provide project management and systems
expertise. Consequently, the Company anticipates that its revenues from
systems integration services will increase as a percentage of services
revenues in 1997, and that costs of services will increase as a percentage of
services revenues. See Note 7 of Notes to Consolidated Financial Statements.
Costs and Expenses
Costs of license fees. Costs of license fees consist of amortization of
capitalized software development costs, packaging and documentation materials,
royalties and personnel costs for shipping. Costs of license fees were $1.2
million, $1.8 million and $2.0 million in 1994, 1995 and 1996, respectively,
representing 6%, 7% and 6% of software license fees for those years,
respectively. The increases reflect the higher volume of products shipped in
each year, as well as increased amortization of capitalized software
development costs in 1996 associated with the development of RemoteWare for
NT. As a result of the higher level of capitalization of software development
costs in 1996, the Company anticipates an increase in amortization of
capitalized software development costs in 1997. This increase in amortization
may increase costs of license fees as a percentage of software license fees.
Costs of services. Costs of services consist primarily of personnel costs
for field services, customer support and training. In addition, a portion of
packaging and documentation materials and personnel costs for shipping are
allocated to costs of services for upgrades and enhancements shipped to
customers participating in the maintenance program. Costs of services were
$1.8 million, $2.3 million and $3.8 million in 1994, 1995 and 1996,
respectively, representing 33%, 28% and 32% of service revenues in those
years, respectively. These increases were primarily due to increased personnel
costs for field engineers, systems integration personnel and trainers. The
Company believes that costs of services will continue to increase as a
percentage of service revenues as a result of the Company's planned expansion
of its systems integration business.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and commissions of direct sales and marketing personnel and marketing
program costs. These expenses were $11.6 million, $14.5 million and $21.6
million in 1994, 1995 and 1996, respectively, representing 43%, 43% and 51% of
total revenues in those years, respectively. The increase in sales and
marketing expenses, in absolute dollars and as a percentage of total revenues,
in 1996 was due primarily to a new advertising campaign initiated in 1996,
personnel additions and investments in Europe. Advertising expenses were
$707,000, $194,000 and $2.0 million in 1994, 1995 and 1996, respectively. The
Company expects that sales and marketing expenses will increase in dollar
amount in 1997, but may decrease as a percentage of total revenues.
Product development. The table below summarizes product development
expenditures:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
1994 1995 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Product development expenditures.................. $3,163 $5,447 $8,559
Less: capitalized software development costs...... (786) (319) (2,108)
------ ------ ------
Net product development expenses.................. $2,377 $5,128 $6,451
====== ====== ======
As a percentage of total revenues:
Product development expenditures.................. 12 % 16 % 20 %
Less: capitalized software development costs...... (3)% (1)% (5)%
------ ------ ------
Net product development expenses.................. 9 % 15 % 15 %
====== ====== ======
Capitalized product development rate............... 25% 6% 25%
====== ====== ======
</TABLE>
23
<PAGE>
Most product development costs are personnel related. Product development
expenditures (expenses plus capitalized software development costs) were $3.2
million, $5.4 million and $8.6 million in 1994, 1995 and 1996, respectively,
representing increases of 72% from 1994 to 1995 and 57% from 1995 to 1996.
These increases were primarily due to additional personnel costs (including
outside contractor costs) for development of RemoteWare for NT.
In accordance with Statement of Financial Accounting Standards No. 86 ("SFAS
86"), "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", the Company capitalizes certain costs incurred in
developing computer software products. These rules require capitalization of
certain product development expenditures from the time technological
feasibility is established for a new product or significant enhancement of an
existing product until it is generally available for all customers. The
Company defines technological feasibility as the release of product to
selected customers for beta testing. Thus, capitalization levels each year
depend on product development cycles. The Company amortizes capitalized
software development costs on a product-by-product basis over periods not
exceeding three years, with such amortization included in costs of license
fees.
Capitalized software development costs were $786,000, $319,000 and $2.1
million in 1994, 1995 and 1996, respectively. Capitalized software development
costs in 1994 related to RemoteWare for OS/2. The substantial majority of the
capitalized software development costs in 1995 and 1996 related to the
development of RemoteWare for NT.
General and administrative. General and administrative expenses consist
primarily of personnel costs for general management, finance and
administration, information systems and human resources. General and
administrative expenses were $4.7 million, $5.5 million and $6.2 million in
1994, 1995 and 1996, respectively, representing increases of 18% from 1994 to
1995 and 12% from 1995 to 1996. General and administrative expenses as a
percentage of revenues were 18%, 16% and 14% in 1994, 1995 and 1996,
respectively. The Company expects that general and administrative expenses
will increase in absolute dollars, but may fluctuate as a percentage of
revenues.
Nonrecurring charges. In November 1996, the Company purchased the WorldLink
product line from The NetPlex Group, Inc. for approximately $3.0 million in
cash. The purchase price of the WorldLink technology was allocated to goodwill
as of the acquisition date and written off as a nonrecurring charge in the
fourth quarter due to uncertainties regarding its recoverability. In addition,
the Company recorded nonrecurring charges of $459,000 primarily representing
severance and hiring costs associated with certain key employees. See Note 6
to the Consolidated Financial Statements.
Provision for Income Taxes
The effective tax rate was 40%, 37% and 0% in 1994, 1995 and 1996,
respectively. The 1994 rate exceeded the statutory rate primarily due to
losses in the Company's U.K. operations. Such losses will not provide a tax
benefit until those operations are profitable. The 1995 tax rate declined as a
result of increases in tax-exempt interest income and research and development
tax credits and a decrease in losses from the U.K. operation. Since the
Company reported no taxable income in 1996, no provision was made for income
taxes in 1996.
24
<PAGE>
QUARTERLY RESULTS
The following tables set forth consolidated statement of operations data for
each of the eight quarters beginning January 1, 1995 and ending December 31,
1996, and the percentage of the Company's total revenues represented by each
item. This information has been derived from unaudited consolidated quarterly
financial statements of the Company, which include all adjustments, consisting
only of normal recurring adjustments, that the Company considers necessary for
a fair presentation of the information when read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The results of operations for any quarter are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands,except per share data)
CONSOLIDATED STATEMENTS OF
OPERATIONS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.... $6,851 $7,002 $4,918 $6,841 $6,931 $ 7,381 $6,133 $10,258
Services................. 1,822 2,037 2,195 2,433 2,519 2,745 3,227 3,457
------ ------ ------ ------ ------ ------- ------ -------
Total revenues:......... 8,673 9,039 7,113 9,274 9,450 10,126 9,360 13,715
------ ------ ------ ------ ------ ------- ------ -------
Costs and expenses:
Costs of license fees.... 484 440 417 476 477 524 387 598
Costs of services........ 591 529 581 638 731 856 938 1,281
Sales and marketing...... 3,501 3,759 3,281 3,959 4,368 5,471 5,384 6,405
Product development...... 1,189 1,315 1,251 1,373 1,341 1,561 1,500 2,049
General and
administrative.......... 1,369 1,562 1,200 1,416 1,489 1,393 1,506 1,830
Nonrecurring charges..... -- -- -- -- -- -- 384 3,112
------ ------ ------ ------ ------ ------- ------ -------
Total costs and
expenses............... 7,134 7,605 6,730 7,862 8,406 9,805 10,099 15,275
------ ------ ------ ------ ------ ------- ------ -------
Operating income (loss)... 1,539 1,434 383 1,412 1,044 321 (739) (1,560)
Other income, net......... 304 334 330 296 288 265 204 177
------ ------ ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes............. 1,843 1,768 713 1,708 1,332 586 (535) (1,383)
Provision for (benefit
from) income taxes....... 715 654 264 597 466 223 (160) (529)
------ ------ ------ ------ ------ ------- ------ -------
Net income (loss)......... $1,128 $1,114 $ 449 $1,111 $ 866 $ 363 $ (375) $ (854)
====== ====== ====== ====== ====== ======= ====== =======
Net income (loss) per
share.................... $ 0.13 $ 0.13 $ 0.05 $ 0.14 $ 0.11 $ 0.05 $(0.05) $ (0.12)
====== ====== ====== ====== ====== ======= ====== =======
Weighted average shares
outstanding.............. 8,624 8,602 8,502 8,160 7,852 7,883 7,238 7,345
====== ====== ====== ====== ====== ======= ====== =======
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Software license fees.... 79% 77% 69% 74% 73% 73% 66% 75%
Services................. 21 23 31 26 27 27 34 25
------ ------ ------ ------ ------ ------- ------ -------
Total revenues:.......... 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Costs of license fees.... 5 5 6 5 5 5 4 4
Costs of services........ 7 6 8 7 8 9 10 9
Sales and marketing...... 40 42 46 43 46 54 58 47
Product development...... 14 14 18 15 14 15 16 15
General and
administrative.......... 16 17 17 15 16 14 16 13
Nonrecurring charges..... -- -- -- -- -- -- 4 23
------ ------ ------ ------ ------ ------- ------ -------
Total costs and
expenses............... 82 84 95 85 89 97 108 111
------ ------ ------ ------ ------ ------- ------ -------
Operating income (loss)... 18 16 5 15 11 3 (8) (11)
Other income, net......... 3 3 5 3 3 3 2 1
------ ------ ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes............. 21 19 10 18 14 6 (6) (10)
Provision for (benefit
from) income taxes....... 8 7 4 6 5 2 (2) (4)
------ ------ ------ ------ ------ ------- ------ -------
Net income (loss)......... 13% 12% 6% 12% 9% 4% (4)% (6)%
====== ====== ====== ====== ====== ======= ====== =======
</TABLE>
25
<PAGE>
QUARTERLY DISCUSSION
License fees in the first half of 1995 increased 34% compared to the first
half of 1994 and 6% in the second half of 1995 compared to the same period in
1994. The slower growth rate experienced in the second half of 1995 continued
through the first half of 1996, with license fees increasing only 3% compared
to the first half of 1995. The Company believes that this 12-month period of
lower growth rates partly reflects purchasing delays of networking and remote
access systems as corporate information system departments evaluated the
applicability of internet technology to enterprise information systems and
purchasing delays as potential customers considered the Company's RemoteWare
for NT products, which were initially released in March 1996.
The Company has experienced, and may continue to experience, significant
seasonality in its business and the Company's results of operations may be
affected by such trends in the future. In previous years, the Company has
experienced a significant decline in revenues, and correspondingly, net
income, in the quarter ended September 30 compared to the quarter ended June
30. Revenues may be lower in the summer months when many businesses defer
purchase decisions. In addition, the September 30 quarter is the first quarter
of the Company's annual quota-based sales compensation plan and may be
affected by the efforts of direct sales representatives to accelerate
prospects' buying decisions into the quarter ended June 30, which is the final
quarter of their preceding annual plan. In addition, revenues have in the past
been relatively flat from the quarter ended December 31 to the quarter ended
March 31 primarily as a result of customers' year-end purchasing patterns.
The Company has experienced and expects to continue to experience
significant fluctuations in quarterly operating results that may be caused by
many factors including, among others, the number, timing and significance of
product enhancements and new product announcements by the Company or its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of the Company's products on a timely basis, the length
of the Company's sales cycle, market acceptance of and demand for the
Company's products, the growth rate of the market for remote access products,
the mix of the Company's products sold, the mix between revenues generated
from software license fees and services, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, renewal rates for service agreements, software defects and other
product quality problems, the Company's ability to attract and retain key
personnel, the extent of international sales, changes in the level of costs
and expenses, trends in the computer industry, general economic conditions,
extraordinary events such as acquisitions or litigation and the occurrence of
unexpected events. Historically, the Company's software support and
maintenance revenues have accounted for a significant portion of the Company's
total revenues. However, there can be no assurance that such rates will not
decline in the future.
The Company's revenues are largely dependent on software license fees, which
are difficult to predict. Historically, the Company has operated with
virtually no order backlog because its software products are shipped as orders
are received. Moreover, the Company has in the past recognized and expects to
continue to recognize a substantial portion of its software license fee
revenues in the last month of a quarter, with these revenues frequently
concentrated in the last two weeks of a quarter. As a result, software license
fee revenues in any quarter are dependent on orders booked and shipped in that
quarter, and the revenues for any quarter may not be predictable until the end
of the quarter.
Sales of the Company's software products generally involve a significant
commitment of management attention and resources by prospective customers.
Accordingly, the Company's sales process is often lengthy and subject to
delays associated with the long approval process that accompanies significant
customer initiatives or capital expenditures. The Company's sales cycle, from
initial trial to complete installation, varies substantially from customer to
customer as a result of the foregoing factors. Because the Company's staffing
and operating expenses are based on anticipated revenue levels and a high
percentage of the Company's costs are fixed in the short term, small
variations between anticipated order dates and actual order dates, as well as
nonrecurring or unanticipated large orders, can cause significant variations
in the Company's operating results from quarter to quarter. In addition, the
Company's expenditures for product development are treated differently under
applicable accounting standards depending upon the stage of product
development. Certain
26
<PAGE>
of the Company's development expenditures may be expensed as incurred, while
others are capitalized subject to amortization over the expected useful lives
of the products, causing significant variations in the Company's operating
results. For example, capitalized software development costs increased
significantly in 1996 as a result of reaching technological feasibility for
RemoteWare for NT. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is likely that in some future
quarter or quarters the Company's operating results may be below the
expectations of securities analysts and investors. The Company has previously
failed to meet the expectations of securities analysts and investors, and
there can be no assurance that the Company will meet such expectations in the
future. Failure of the Company to meet such expectations would have a material
adverse effect on the price of the Company's Common Stock. See "Risk Factors--
Fluctuations in Quarterly Operating Results; Seasonality" and "--Volatility of
Stock Price."
LIQUIDITY AND CAPITAL RESOURCES
Since 1994, the Company has financed its operations primarily through the
public sale of its Common Stock in its initial public offering, and through
cash generated from operations. At December 31, 1996, the Company had $10.6
million in cash and cash equivalents, $23.2 million in working capital and no
debt.
Net cash provided by operating activities was $3.5 million, $4.9 million,
and $1.6 million in 1994, 1995, and 1996, respectively. In 1994 and 1995, net
cash provided by operating activities consisted primarily of net income plus
depreciation and amortization, offset primarily by increases in trade
receivables. In 1996, net cash provided by operating activities resulted
primarily from depreciation and amortization, the write-off of the WorldLink
product line, and an increase in liabilities, offset primarily by an increase
in trade receivables.
Net cash used in investing activities was $14.0 million, $1.9 million, and
$1.4 million in 1994, 1995 and 1996, respectively. In 1994, net cash used in
investing activities resulted primarily from the purchase of short-term
investments, fixed asset additions, and capitalized software development
costs. In 1995, the net cash used in investing activities resulted primarily
from the fixed asset additions offset by a decrease in short-term investments.
In 1996, net cash used in investing activities resulted primarily from the
purchase of the WorldLink product line from The NetPlex Group, Inc., fixed
asset additions, and capitalized software development costs, offset by a
decrease in short-term investments. The Company expects that its capital
expenditures, primarily for computer workstations and file servers, will
remain approximately the same or increase as the Company's employee base
grows.
Net cash provided by financing activities was $18.9 million and $1.1 million
in 1994 and 1996, respectively. Net cash used in financing activities in 1995
was $6.4 million. Net cash provided by financing activities in 1994 consisted
primarily of net proceeds from issuance of common stock and in 1996 consisted
of the proceeds from, and income tax benefits associated with, the exercise of
stock options. Net cash used in financing activities in 1995 resulted
primarily from the Company's purchase of treasury stock.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current
requirements, if any, will be invested in investment grade, interest-bearing
securities. The Company's principal commitments consist primarily of leases on
its headquarters facilities. See Note 4 of Notes to Consolidated Financial
Statements.
The Company believes that the net proceeds from the sale of Common Stock
offered by the Company hereby, together with its current cash balances and
cash flows from operations will be sufficient to meet its working capital and
capital expenditure requirements through 1997. There can be no assurance that,
in the event additional financing is required, the Company will be able to
raise such additional financing on acceptable terms or at all.
27
<PAGE>
BUSINESS
XcelleNet develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information. These intermittently connected users have
traditionally included field sales and service workers and remote users in
branch offices or retail locations. The number of these users has grown
significantly as the ability to quickly and easily share information
throughout the enterprise has become a key asset. Increasingly, these users
may also include a broader constituency of both internal and external users
who access corporate intranets.
The Company's products make many popular messaging, groupware, database and
web-based applications work more effectively for remote users who routinely
work offline and connect intermittently. The foundation of the Company's
products is its Queued Event Architecture ("QEA") and its session automation
technology. QEA's three-tier, client/agent/server design facilitates the
automated staging of various types of user- and system-initiated events that
are executed whenever communication sessions occur. Session automation
technology provides secure, fast and reliable file transfers and advanced
session scripting to control which tasks occur before, during and after a
communication session. Session scripting and automation hide many of the
technical complexities of remote access computing from the user and provide
scheduling capabilities for the system administrator. The Company believes
that its products can reduce its customers' operating and support costs by
increasing user productivity and improving system management for many remote
users whose corporate information needs are not adequately addressed by
existing mainframe, client/server and internet technologies.
The Company's original RemoteWare product family was introduced in 1989. The
first generation of RemoteWare products was developed to operate on the OS/2
server platform and was marketed to corporations designing customized
solutions for remote sites and users. From its introduction, RemoteWare was
designed to provide a scalable, secure and user-friendly environment for the
remote site automation of business processes such as sales order entry,
inventory query, field activity reporting and catalog delivery. Consequently,
the Company's early marketing efforts were focused on industries with large
numbers of remote sites engaged in these activities. As of December 31, 1996,
the Company had licensed, directly or through its Solution Providers,
RemoteWare for the IBM OS/2 platform ("RemoteWare for OS/2") to approximately
1,300 organizations supporting approximately 470,000 users.
In 1995, the Company recognized the growing popularity of Windows NT as an
enterprise computing platform and the increased deployment of third-party and
customized applications based on industry standards. As a result, in early
1995 XcelleNet began committing significant resources to develop RemoteWare
products that (i) operate on Microsoft Windows NT servers and are integrated
with Microsoft Back Office products, (ii) embrace widely used Microsoft
standards, such as MAPI, ODBC and ActiveX, (iii) support popular products with
large installed bases of remote users such as IBM's Lotus Notes and Sybase's
SQL AnyWhere, and (iv) support internet standards and browser and server
offerings from Microsoft and Netscape.
In March 1996, the Company introduced RemoteWare for the Windows NT platform
("RemoteWare for NT"), which the Company believes will expand the potential
market for RemoteWare and the number of its potential marketing partners.
Software license fees from RemoteWare for NT products accounted for 17% and
41% of the Company's total software license fees in the third and fourth
quarters of 1996, respectively.
The Company believes that the widespread adoption of internet technologies
by organizations with enterprise information networks and the emergence of
corporate intranets will create significant opportunities for the Company to
expand the applicability of its core technologies. The Company intends to
aggressively pursue these opportunities by developing and marketing a new
family of intranet system and application management utilities to be offered
upon their release under the NetEssentials name.
28
<PAGE>
INDUSTRY BACKGROUND
The ability to quickly and easily share information throughout the
enterprise has become a key asset in today's increasingly competitive business
environment. Accordingly, enterprise information systems have expanded to
include not only users who are local to central systems, but also those who
are remote. These remote users include branch office workers, mobile
professionals and telecommuters, and with the growing deployment of corporate
intranets, increasingly may include suppliers, distributors, customers and
sales prospects. The need to disseminate information to these remote users,
whether by electronic mail or more complex groupware or database applications,
is accelerating the deployment of remote access technology.
The needs of remote users can be classified by the nature of their
connection to a central system and the nature of the software applications
they use remotely. Connection methods can either be intermittent (e.g., dial-
up lines) or continuous (e.g., leased lines). Software applications can be
classified as offline or interactive, depending upon the degree of network
interaction required between the user and the network while the application is
in use.
Many dial-up users employ remote access software (generally known as "remote
node" software) to dial in to a network and function as a slow-speed,
interactive LAN user. This software provides transparent access to a network
and is a popular solution for interactive applications. Increasingly, many
client/server applications, such as electronic mail, workgroup software, and
databases, have been designed to allow users to download, review and modify
centrally stored data, and to synchronize any changes with the central data at
a later time. These applications are especially valuable for remote users who
need to work offline but also need access to the latest corporate information.
Such users need remote access utilities that can work over various
intermittent connections such as traditional dial-up lines and internet or
cellular services. They also need remote access utilities that can support and
coordinate multiple applications during a single, highly efficient connection.
Finally, they need remote access that is easy to use, secure, fast and
reliable.
Dial-up users also pose a challenge to the system administrator since
monitoring and maintaining remote users' hardware, software and data files is
inherently difficult if the user is not continuously connected to the
enterprise network. As the number of remote dial-up users grows, system
administrators need efficient and reliable tools to manage and support them.
The Company believes that as the Internet and corporate intranets become
popular tools for disseminating corporate information, remote system
management for dial-up users will become increasingly important to intranet
managers.
29
<PAGE>
THE XCELLENET SOLUTION
XcelleNet develops, markets and supports software utilities that address the
remote user's needs and the system management issues associated with
intermittently connected users who routinely work offline. RemoteWare provides
advanced system management capabilities and performance enhancements for many
popular messaging, groupware, database and web-based applications. For many
remote users, RemoteWare can make remote computing easier and more reliable
while reducing connect time and increasing the remote user's productivity.
RemoteWare also provides remote system management features and is typically
marketed to system administrators within large enterprises.
The following diagram illustrates the target market for the RemoteWare
family of products.
GRAPHIC: A set of horizontal and vertical axes is the basis for the graphic. The
vertical axis is labelled "Intermittent Connections (e.g., dial-up lines)" on
the top and "Continuous Connections (e.g., leased lines,)" on the bottom. The
horizontal axis is labelled "Interactive Applications" on the left and "Offline
Applications" on the right. Superimposed on the axes is a circle that is located
primarily in the "Northeast" quadrant but edges of which fall within the
"Northwest" and "Southeast" quadrants.
The word "RemoteWare" is centered in the circle.
The foundation of the Company's products is its Queued Event Architecture
and its session automation technology. QEA's three-tier, client/agent/server
design facilitates the automated staging of various types of user- and system-
initiated events that are executed whenever communication sessions occur.
Automated staging increases remote user efficiency by queuing user-initiated
network transactions, thereby allowing the user to work productively offline.
Session automation technology provides secure, fast and reliable file
transfers and advanced session scripting to control which tasks occur before,
during and after a communication session. The combination of QEA and session
automation allows the RemoteWare server to "push" applications and various
types of content to individual dial-up users based on pre-defined user
profiles. Similarly, the RemoteWare client may "pull" content from the server
by requesting or subscribing to specified content. The Company's products
provide advanced system management capabilities that allow system
administrators to manage user sessions, and to deploy user-specific
implementations of software and data files based on individual user profiles.
Remote users sometimes require access to both interactive and offline
applications. For these users, RemoteWare can be used in conjunction with
remote node software to allow the user to work interactively in an application
during a communication session, while RemoteWare concurrently services the
offline applications and performs system management tasks in the background.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of software
utilities that improve the manageability and enhance the performance of remote
access computing for users who routinely work offline, but periodically need
to exchange and synchronize information with enterprise application resources.
30
<PAGE>
Important features of the Company's strategy are to:
Enhance Functionality and Extend Applicability of RemoteWare for NT. The
Company intends to continue to enhance RemoteWare for NT by including more
robust software distribution and asset management capabilities and other
features. The Company also intends to pursue opportunities to adapt its system
management capabilities to work with other vendors' system management
products. The Company plans additional feature and performance improvements
that embrace industry standards and support popular messaging, groupware,
database and web-based applications. The Company also intends to focus its
RemoteWare development and marketing efforts on complementing and enhancing
third-party products that are designed for offline use and have large and
growing installed bases, such as Lotus Notes, SQL AnyWhere and Vantive On-the-
Go. Specifically, the Company has recently introduced products to improve the
replication efficiency of Lotus Notes for remote users. To further extend the
applicability of RemoteWare, the Company plans to pursue technology alliances
and OEM relationships with vendors of complementary hardware and software
products.
Leverage Microsoft Technologies. The Company believes that Microsoft's
Windows NT environment is emerging as the predominant enterprise computing
platform. By leveraging Microsoft's enterprise platform, the Company believes
that its RemoteWare for NT products will be applicable to a broader range of
customers than its OS/2-based products. The Company intends to expand its
support for Microsoft technologies, including further integration with
Microsoft Back Office products such as Exchange Server, and to leverage the
Microsoft Solution Provider channel for complementary sales and support
services.
Pursue Intranet System Management Opportunities. As corporate intranets are
increasingly used to disseminate information and software to remote users, the
Company is seeking to leverage its core technologies to address intranet
system management. The Company intends to aggressively pursue these
opportunities by developing and marketing a new family of intranet system
management and application enhancement utilities called NetEssentials. This
line of products, which is currently under development, is being designed to
support internet standards and browser and server offerings from Microsoft and
Netscape, and is derived from RemoteWare's QEA and session automation
technology. A trial version of SessionXpress Basic, the first of these
products, was released on the Company's web site in February 1997.
Expand Distribution and Marketing Channels. The Company relies on its direct
sales force as its primary distribution channel and intends to increase the
number of its direct sales personnel in the future. In addition, the Company
is developing new distribution and marketing channels for its RemoteWare
product family and the NetEssentials product line. These new channels will
include a telesales function, indirect sales through OEM and bundling
arrangements, and web-based marketing. The Company's objectives for these new
channels are to facilitate product trials, generate qualified leads, and
generally increase market awareness and sales of the Company's products.
PRODUCTS
The Company's products improve the manageability and enhance the performance
of remote access computing for users who routinely work offline and
periodically dial in to enterprise systems to exchange or synchronize
information.
The foundation of the Company's products is its Queued Event Architecture
and its session automation technology. QEA's three-tier, client/agent/server
design facilitates the automated staging of various types of user- and system-
initiated events that are executed whenever communications sessions occur.
Automated staging increases remote user efficiency by queuing user-initiated
network transactions, thereby allowing the user to work productively offline.
These events may include database transactions (such as the entry of sales
orders), the sending and receiving of electronic mail, the replication of
Lotus Notes databases or the request for web pages to be viewed offline.
Similarly, system-initiated transactions tailored to each remote user are
queued at the central site server. These events typically include software
upgrades and updates to standard
31
<PAGE>
corporate data such as product catalogs, price lists, sales reports and
administrative manuals. Whenever a connection takes place, whether initiated by
the user or the system, the events queued at the user site and the events
queued at the central site are executed automatically.
The Company's session automation technology provides secure, fast, and
reliable file transfers and advanced session scripting to control which tasks
occur before, during and after communication sessions. XcelleNet's products can
reduce online connection time by performing pre-connection processing, using
compression algorithms and employing automated checkpoint restart and recovery
to avoid duplicate processing when a session is terminated prematurely.
The combination of QEA and session automation allows the RemoteWare server to
"push" applications and various types of content to individual dial-up users
based on pre-defined user profiles. Similarly, the RemoteWare client may "pull"
content from the server by requesting or subscribing to specified content.
RemoteWare Products
In 1989, XcelleNet released its original version of RemoteWare for OS/2. The
Company designates its RemoteWare for OS/2 products as the 2.x family and the
most recently released version is RemoteWare 2.5. In March 1996, the Company
released its first version of RemoteWare for NT, designated as the 3.x family.
The most recent version of the 3.x family is RemoteWare 3.1. The Company
intends to continue to offer and support its RemoteWare 2.x family, but
believes that sales of RemoteWare for NT products will constitute an increasing
proportion of the Company's RemoteWare sales. "See Risk Factors--Risks
Associated with Development and Introduction of NT Server-based Products;
Impact on Installed Base of OS/2 Customers."
RemoteWare consists of two components: the RemoteWare server software
installed at the central site and the RemoteWare client software installed on
each user's personal computer. The RemoteWare server software provides
integrated facilities for:
. Session automation services providing a variety of flexible scheduling
options through advanced session scripting; secure, fast, and reliable
file transfers; checkpoint restart and recovery; and compression
algorithms.
. System management services, enabling remote client systems to be managed
through electronic software distribution and version management,
providing disk and memory monitoring and offering problem logging and
reporting capabilities.
. Communications services, providing support for multiple transports and
protocols, such as asynchronous serial communications, TCP/IP, IPX/SPX
and NetBios.
. Messaging services, providing support for Microsoft Messaging API
("MAPI"), which permits MAPI-enabled applications to benefit from the
speed and reliability of RemoteWare's session automation services.
. Subscription and publishing services, enabling RemoteWare Subscriber
users to select and automatically receive multiple types of content for
offline viewing using "push" and "pull" methods (Extended Client only).
. User environment management services, allowing administrators to
centrally create, manage and distribute password-protected graphical
application menus to insulate RemoteWare Workshop users from the
complexities of the client operating system (Extended Client only).
RemoteWare servers support up to 32 simultaneous communication sessions per
server and are designed to support clustering of up to five servers. To date,
the largest installation of RemoteWare is on an OS/2 system that supports
approximately 13,000 licensed clients. The cluster feature for RemoteWare for
NT has
32
<PAGE>
been made available only to a limited number of customers in RemoteWare 3.1.
Because RemoteWare 3.1 was first released commercially in September 1996, many
customers licensing this version have not yet fully deployed the product and
there may remain undetected errors or compatibility issues in this version.
See "Risk Factors--Risks Associated with Development and Introduction of NT
Server-based Products; Impact on Installed Base of OS/2 Customers."
The RemoteWare client provides an easy-to-use interface that simplifies
communication sessions with the RemoteWare server and takes advantage of the
server's integrated services. Options available as add-ons to extend the
functionality of the RemoteWare client are:
. RemoteWare Extended Client, which includes both RemoteWare Subscriber
and Workshop, allowing the client to utilize subscription and publishing
services and user environment management services, respectively.
. RemoteWare Replication Agent for Lotus Notes, which reduces replication
time by up to approximately 80% for remote Lotus Notes users through the
intelligent preprocessing and compression of records.
The replication capabilities of RemoteWare can also be purchased as a
standalone product, RemoteWare ESSENTIALS for Lotus Notes. This product
consists of a limited-function RemoteWare for NT server that performs only
Lotus Notes replication and a client component.
PRODUCTS UNDER DEVELOPMENT
The Company's product development efforts are currently focused on
increasing the functionality of RemoteWare for NT and developing the
NetEssentials product line.
RemoteWare for NT
The Company is currently investing significant product development resources
to produce RemoteWare 3.2, which is scheduled to be released in the second
quarter of 1997. The Company currently plans for this version to include
facilities for central management and distribution of web content to
RemoteWare users and integration of RemoteWare's messaging services with
Microsoft's Exchange Server. There can be no assurance that the Company will
not encounter difficulties that could delay or prevent the successful and
timely development, introduction and marketing of future versions of
RemoteWare for NT. Moreover, even if such future versions are developed and
introduced, there can be no assurance that they will achieve any significant
degree of market acceptance. See "Risk Factors--Dependence upon Product
Development; Risks of Technological Change and Evolving Industry Standards"
and "--Risks Associated with Development and Introduction of NT Server-based
Products; Impact on Installed Base of OS/2 Customers."
NetEssentials
The Company is currently developing the NetEssentials product line, a new
family of software utilities being designed to provide a tailored subset of
RemoteWare functionality to companies that are implementing intranets. The
NetEssentials products are derived from the Company's QEA and session
automation technology and will run on Microsoft Windows NT servers. It is
anticipated that these products would be sold individually or as a suite to
address specific customer needs. One of these planned products, SessionXpress,
is being developed to provide efficient "push" and "pull" delivery of content
and to include integrated capabilities for remote disk, file and directory
management. SessionXpress is expected to be offered in two versions,
SessionXpress and SessionXpress Basic, with SessionXpress Basic to have a more
limited set of features. A trial version of SessionXpress Basic was released
on the Company's web site in February 1997, and commercial availability of
SessionXpress Basic is scheduled for the second quarter of 1997.
Due to the complexity of remote access computing software in general, and
the NT operating system and internet standards in particular, and the
difficulty in gauging the engineering effort required to develop these planned
products, the development of RemoteWare 3.2 and the NetEssentials family of
potential products, is subject to significant technical risks. Furthermore,
software products as complex as those currently under development by the
Company are subject to frequent delays and undetected errors or compatibility
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issues following their introduction or as new versions are released. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of these planned products. Moreover, even if such planned products
are developed and introduced, there can be no assurance that there will be a
significant market for such products, that RemoteWare 3.2 or the planned
NetEssentials products will achieve any significant degree of market
acceptance, or that the NetEssentials products will not result in price
erosion or reduced sales of the RemoteWare products. Failure to release these
planned products on a timely basis, failure of these planned products, if and
when released, to achieve any significant degree of market acceptance, or
failure to effectively manage the introduction of the planned NetEssentials
products without eroding the sales or sales prices of RemoteWare products,
would have a material adverse effect upon the Company's business, operating
results and financial condition. See "Risk Factors--Dependence upon Product
Development; Risks of Technological Change and Evolving Industry Standards,"
"--Risks Associated with Development and Introduction of NT Server-based
Products; Impact on Installed Base of OS/2 Customers," and "--Risks Associated
with the Development and Introduction of the NetEssentials Products; Impact on
RemoteWare Market."
SERVICES
In addition to its product offerings, the Company provides systems
integration services, a software maintenance program, help desk support and
training programs.
Through 1996, the Company relied primarily upon Solution Providers to
provide application development and systems integration services to RemoteWare
customers and prospects. In mid-1996, the Company established its own
integration services group to offer a range of consulting and integration
services required by large customers. In January 1997, the Company acquired
Electronic Commerce, Inc., a 14-person systems integrator that had been one of
the Company's Solution Providers. This acquisition significantly expanded the
Company's ability to provide integration services directly. The Company
intends to focus its integration services on new, large accounts as well as on
customers migrating from RemoteWare for OS/2 to RemoteWare for NT.
The Company offers help desk support and software maintenance together under
its RCAP program to customers and Solution Providers. In December 1996, the
Company began offering separate plans for software maintenance and help desk
support to all new customers and to existing customers as their RCAP
agreements expired. Software maintenance offered under a RemoteWare
Maintenance Agreement ("RMA") provides an extension of the Company's software
warranty and the right to receive upgrades during the 12-month, renewable term
of the agreement. A customer's annual fee under RCAP and RMA is based on the
cumulative software license fees paid by the customer. Separately, help desk
support is available on an annual fee or per-incident fee basis.
PRODUCT DEVELOPMENT
All of the Company's products have been developed by its internal product
development staff, which has from time to time included a number of
independent development contractors. The Company's product development staff
consisted of 81 full-time employees and nine independent contractors as of
December 31, 1996. The Company's total product development expenditures were
$3.2 million, $5.4 million and $8.6 million in fiscal 1994, 1995 and 1996,
respectively, substantially all of which were attributable to the development
of RemoteWare products. Beginning in 1995, the Company substantially increased
its product development expenditures in order to develop its RemoteWare for NT
products and to increase the functionality of its existing RemoteWare for OS/2
products. In accordance with SFAS 86, the Company capitalizes software
development expenditures once a product has established technological
feasibility until such time as the resulting software product is available for
commercial sale. See "Risk Factors--Fluctuations in Quarterly Operating
Results; Seasonality," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Costs and Expenses" and Note 1 of Notes
to Consolidated Financial Statements.
The market for the Company's products is characterized by rapid change in
computer hardware and software technology, evolving industry standards and
changing customer requirements, and is highly competitive with respect to
timely product innovation. The introduction of competitive products embodying
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new technologies, the emergence of new industry standards and the acceptance
of new communications and data delivery channels, such as the Internet, may
render the Company's existing products or underlying technologies obsolete or
unmarketable. For example, the Company may be required to change and improve
its products in response to changes in operating systems, application and
networking software, computer and communications hardware, programming tools
and computer language technology. Announced and unannounced changes or errors
in operating and other systems with which the Company's products are used may
adversely affect the performance of the Company's products and require the
Company to modify its products to compensate for such changes or errors. As a
result, the Company's future success will depend in large part upon its
ability to enhance its current products and services and develop new products
and services that maintain technological leadership, address the increasingly
sophisticated needs of customers, keep pace with new competitive product
offerings and emerging industry standards, and achieve broad market
acceptance. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products or product
enhancements, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.
In order to introduce and market new or enhanced products successfully with
minimal disruption in customer purchasing patterns, the Company must
effectively manage the transition from existing products. Announcements by the
Company or its competitors of new products, capabilities or technologies that
have the potential to replace or shorten the life cycles of the Company's
existing products may cause customers to defer purchases of existing Company
products. Furthermore, software products as complex as those offered by the
Company may contain undetected errors or compatibility issues following their
introduction or as new versions are released, which may result in reduced
orders, delays in collecting accounts receivable and additional service costs.
The Company has previously experienced delays in software development,
including delays in the commercial release of RemoteWare for NT, and has
discovered software errors in new products after commercial release. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of potential new products or product enhancements. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services on a timely basis that are
compatible with industry standards, to respond to technological advances by
others and satisfy changing customer requirements, to successfully manage
product transitions, and to minimize the impact of errors in new products
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Dependence upon Product
Development; Risks of Technological Change and Evolving Industry Standards."
The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, a spell checker and X.400 gateway API libraries,
some of which perform key functions within the Company's products. In the
future, the Company may license or acquire other such products or may acquire
products that expand the functionality of the Company's existing or potential
future products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or attempt to internally develop a
replacement for the function of the licensed software. The loss of or
inability to maintain any of these technology licenses could result in
interruptions in the availability of the Company's existing products and
delays in the introduction of new products and services until equivalent
technology, if available, is identified, licensed or developed, and
integrated. There can be no assurance that an alternative source of a suitable
product would be available or that the Company would be able to develop an
alternative product in sufficient time or at a reasonable cost. The failure of
the Company to obtain or
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develop an alternative product on a timely basis and at a reasonable cost
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Dependence upon Certain
Licenses."
PRICING
The Company generally grants non-exclusive, perpetual licenses for the
RemoteWare products at license fees based upon the server and client
components licensed. List prices for RemoteWare licenses in North America
range from $5,000 to $30,000 for each server, depending on the number of ports
and clients supported. List prices for RemoteWare client licenses in North
America range from $200 to $550 per seat, depending upon the options selected.
Volume pricing discounts are also available for purchases of 100 clients or
more. A RemoteWare installation of approximately 300 clients licensed directly
by the Company would typically represent license fees ranging from $66,000 to
$110,000, depending on the options selected.
RemoteWare licenses include a six-month warranty period. A customer may
obtain software maintenance for a 12-month renewable term through RCAP or RMA,
which are generally effective as of the date of the license agreement. For
RemoteWare for OS/2 customers only, RCAP and RMAs also provide the right to
migrate to a RemoteWare for NT license without incurring additional license
fees. The annual cost of a subscription to either RCAP or RMA is 15% of
cumulative license fees.
In 1996, the Company began to offer the RemoteWare Discovery System, which
allows customers to evaluate the full RemoteWare product suite for a maximum
of 20 clients. The RemoteWare Discovery System is priced at $3,750 for a ten-
client system and $3,750 for an additional ten-client pack. The purchase price
of the RemoteWare Discovery System can be credited against license fees due
for a full production RemoteWare system. No maintenance plan is available for
the RemoteWare Discovery System.
The Company intends to price each of the planned NetEssentials products on a
per server basis, with separate prices for unlimited and limited concurrent
session capacity. The Company intends to price SessionXpress at $4,995 for
eight concurrent sessions and at $9,995 for unlimited concurrent sessions. The
Company also intends to offer SessionXpress Basic, a version of SessionXpress
with a limited set of features, at a lower price.
The market for the Company's products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from current or future competitors. In addition, annual fees for
software support and maintenance have been a material part of the Company's
revenues in the past. These agreements are optional for the Company's
licensees and there can be no assurance that licensees who are currently
parties to RCAP or RMAs will renew those agreements or that new customers will
elect to enter into RMAs in the same numbers. See "Risk Factors--Competition"
and "--Risks Associated with Development and Introduction of NT Server-based
Products; Impact on Installed Base of OS/2 Customers."
SALES AND MARKETING
The Company's sales and marketing efforts typically target Fortune 1000
companies with large numbers of remote and mobile users as potential customers
for the RemoteWare product line. XcelleNet relies primarily on its direct
sales force to qualify and sell to prospective customers. The Company also has
a network of Solution Providers who provide remarketing and integration
services to RemoteWare customers. In addition, XcelleNet has recently created
a telesales function to augment its direct sales force. The Company conducts
comprehensive targeted marketing programs to generate sales leads, which
include advertising, direct mail, public relations, user and partner
conferences, seminars, trade shows and telemarketing.
The Company has established informal marketing relationships with remote
access, database and sales force automation vendors, as well as with Microsoft
and IBM. These relationships are intended to promote awareness of the
Company's products among potential customers and to provide leads for the
Company's direct sales force.
The Company is in the early stages of developing its sales and marketing
channels for its planned NetEssentials products. The Company is expanding its
recently created telesales function and intends to
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leverage the Web for building market awareness, as well as for selling the
planned NetEssentials products. The Company also intends to pursue OEM and
bundling opportunities with software and hardware vendors. The planned
NetEssentials product line will also be offered by the Company's direct sales
force.
The Company's direct sales, Solution Provider and telesales sales efforts are
described in more detail below.
The Company's direct sales force is divided into: (i) four regional "area
teams" in North America; (ii) a team responsible for Europe, the Middle East
and Africa; and (iii) a team responsible for Australia and New Zealand. The
Company intends to strengthen its direct selling efforts by increasing its
direct sales force in 1997. In 1996, 62% of the Company's software license fee
revenues were attributable to sales made by the Company's direct sales force.
The primary function of Solution Providers is to assist the Company's
customers in implementing RemoteWare by providing application development and
systems integration services. Certain Solution Providers are authorized to
remarket the Company's products in connection with providing their services.
The Company is changing its network of Solution Providers in two respects.
First, in order to increase the Microsoft support capability of the Company's
Solution Provider network, the Company is requiring that all Solution Providers
be Windows NT-qualified in order for their agreements with the Company to be
renewed. Second, the Company's experience has been that most of the sales
produced by the Company's Solution Provider network have been generated by a
small number of effective Solution Providers; therefore, the Company is
renewing the agreements of only some of its Solution Providers. As a result,
the Company expects that license fees generated from Solution Providers as a
percentage of total license fees will decrease. There can be no assurance that
the Company will be able to attract or retain a sufficient number of NT-
qualified Solution Providers to adequately fill the Company's needs. See "Risk
Factors--Risks Associated with Expanding Distribution; Impact of Changes in
Solution Provider Program."
The Company's telesales effort focuses on sales of services, including
training and integration services, and RemoteWare ESSENTIALS for Lotus Notes.
The telesales effort was initiated in January 1997.
Any failure by the Company to expand its direct sales and telesales force and
other distribution channels, or the failure by the Company to increase revenues
commensurate with such expansion, would have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Risks Associated with Expanding Distribution; Impact of Changes in
Solution Provider Program."
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CUSTOMERS
As of December 31, 1996, XcelleNet, either directly or through its Solution
Providers, had licensed RemoteWare systems to over 1,400 organizations
supporting approximately 500,000 users. The Company receives license fees and
service revenues from end-user customers and in some cases through Solution
Partners. In 1996, no Solution Provider accounted for more than 8% of the
Company's total revenues and no customer licensed directly by the Company
accounted for more than 2% of the Company's revenues.
The Company's products are predominantly used by field sales and service
workers and remote users in branch offices or retail locations spanning a
range of industries. The following is a representative list as of December 31,
1996 of end-user customers in the indicated industries:
HEALTHCARE/PHARMACEUTICAL SERVICES
Coulter Corporation ADP, Inc.
Manor Care, Inc.
Minnesota Mining and Manufacturing CompanyHBO & Company
Jenny Craig, Inc.
Sandoz Corporation Mail Boxes, Etc.
Schering-Plough Corporation Securities Industry Automation
Corporation
RESTAURANTS (FOOD CHAINS) Vanstar Corporation
Black-Eyed Pea Management Corp.
Brinker International, Inc. MANUFACTURING
Chick-Fil-A, Inc. Coors Brewing Company
Cracker Barrel Old Country Store, Inc. Holophane Company, Inc.
Denny's, Inc. Lanier Worldwide, Inc.
Whataburger, Inc. Liebert Corporation
Siemens Industrial Automation, Inc.
SPECIALTY RETAIL
General Nutrition Corporation
Kits Cameras, Inc.
Mrs. Fields, Inc.
Sharper Image Corp.
The Southland Corporation
Victoria's Secret Stores, Inc.
Wilson's House of Suede, Inc.
COMPETITION
The market for remote access software, including the Company's specific area
of remote access utilities, is highly competitive, highly fragmented and
characterized by rapidly changing technology and evolving standards. Many
software vendors offer products that are competitive with the products offered
by the Company. These competitors vary in size and in the scope and breadth of
the products and services offered. Within specific ranges of functionality,
the Company encounters competition from a number of sources including: (i)
enterprise system management tool vendors such as Microsoft, Tivoli and
Computer Associates; (ii) messaging-enabled application vendors such as Lotus
and Microsoft; (iii) groupware vendors such as Lotus; (iv) database
application vendors such as Oracle; (v) internet software vendors such as
Netscape and Microsoft; (vi) content distribution software vendors such as
Microsoft, Pointcast and BackWeb; (vii) remote access software and hardware
vendors such as Microsoft, Shiva and Citrix; (viii) vendors of applications
software who incorporate remote access utilities in their software such as
Lotus; and (ix) custom software-based solutions developed by internal
management information systems personnel or third-party professional service
organizations.
As the Company offers new products in the future, it expects that in
addition to facing competition from existing competitors it will have
additional competitors. Many of the Company's current competitors are
broadening the functionality of their product offerings. In addition, vendors
of network operating systems,
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network management software or intranet server software, such as Microsoft,
IBM, Novell and Netscape, may enhance their products to include some or all of
the functionality currently provided by the Company's products, which would
render the Company's products obsolete or unmarketable. Because there are
relatively low barriers to entry in the software market, the Company also
expects additional competition from other established and emerging companies.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results or financial condition.
See "Risk Factors--Risk of Inclusion of Remote Access Utility Functionality in
Network Operating Systems, Network Management Software or Intranet Server
Software."
The Company believes its principal competitive advantages are its focus on,
and experience with, the requirements of remote access computing for users who
intermittently dial in to enterprise information systems, its product
architecture, and its extensive customer base. The Company believes
competition will continue to intensify as the market for its products and
services develops and competitors focus more clearly on that market's specific
requirements. There can be no assurance that other companies will not develop
experience, products and marketing approaches that will be more successful
than those of the Company. Many of the Company's current and potential
competitors have significantly greater financial, technical, marketing and
other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion,
sale and support of their products than the Company. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability
of their products to address the remote computing needs of the Company's
prospective customers. Accordingly, it is possible that new competitors,
alliances among competitors, or alliances between competitors and third
parties may emerge and rapidly acquire significant market share. If this were
to occur, it would have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that the principal competitive factors affecting the
market it serves include vendor and product reputation, product architecture,
functionality and features, scalability, ease of use, quality of product and
support, performance, price, brand name recognition and effectiveness of sales
and marketing efforts. Although the Company believes that its products
currently compete favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources, or that competitive pressures faced by the Company would not have a
material adverse effect on the Company's business, operating results or
financial condition. See "Risk Factors--Competition."
In the future, vendors of network operating systems, network management
software or intranet server software, such as Microsoft, IBM, Novell, Inc.,
and Netscape, may enhance their products to include some or all of the
functionality currently provided by the Company's remote access software
utilities. For example, in the past Microsoft incorporated an anti-virus
utility in its release of DOS 6.0. The inclusion of the functionality of the
Company's products as a standard feature of network operating systems, network
management software or intranet server software could, particularly if the
quality of such functionality were comparable to that of the Company's
products, render the Company's products obsolete and unmarketable.
Additionally, the announcement by a vendor of network operating systems,
network management software or intranet server software that it intends to
include in a future product or version some or all of the functionality that
is currently provided by the Company's remote access software utilities, or
the rumor of such an intention absent an announcement by the vendor involved,
could materially adversely affect the marketability of the Company's products.
Furthermore, even if the remote access software utilities provided as standard
features in network operating systems, network management software or intranet
server software were more limited than that of the Company's products, there
can be no assurance that a significant number of customers would not elect to
accept such limited functionality in lieu of purchasing additional software
from another vendor such as the
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<PAGE>
Company. If any of the foregoing events were to occur, they would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Risk of Inclusion of Remote Access
Utility Functionality in Network Operating Systems, Network Management
Software or Intranet Server Software" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTELLECTUAL PROPERTY AND THIRD PARTY LICENSES
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and generally requires licensees to sign license
agreements that impose certain restrictions on licensees' right to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets, including but not limited to, generally requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
code.
The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. In addition, the Company has applied for patents in the United
States and certain other countries with respect to certain aspects of its
software. None of these patents have been granted and there can be no
assurance that a patent will be issued pursuant to any of these applications
or that, if granted, such patent would survive a legal challenge to its
validity or provide significant protection to the Company.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. While the Company's competitive
position may be affected by its ability to protect its proprietary
information, the Company believes that trade secret, copyright and, if
granted, patent protections are less significant to the Company's competitive
position than other factors such as the knowledge, ability and experience of
the Company's personnel, name recognition and ongoing product development and
support.
For certain of its client products and the RemoteWare Discovery System, the
Company uses "shrinkwrap" licenses that are not signed by licensees to protect
its copyrights and trade secrets in those products. In addition, the Company
uses an electronic version of a shrinkwrap license for all users of the trial
version of its SessionXpress Basic product distributed electronically through
the Company's web site. In addition, the Company expects to use a shrinkwrap
license agreement, or an electronic version of such agreement, for its
NetEssentials products when commercially released. Since these shrinkwrap
licenses are not signed by the licensee, many authorities believe that they
may not be enforceable under many state laws and the laws of many foreign
jurisdictions. The laws of the State of Georgia, which govern these licenses
for the Company's products, continue to be unclear on this subject. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
In 1995, the Company received a claim that its products infringe upon a
third party's intellectual property rights, and there can be no assurance that
other third parties will not in the future claim infringement by the Company
with respect to current or future products, trademarks or other proprietary
rights. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing
40
<PAGE>
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or available at all, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Risk Factors--Dependence on Proprietary
Technology; Risks of Infringement Claims."
The Company licenses certain third-party products that are incorporated into
the Company's products. These components include database drivers, a scripting
engine, a document viewer, spell checker and X.400 gateway API libraries, some
of which perform key functions within the Company's products. In the future,
the Company may license or acquire other such products or may acquire products
that expand the functionality of the Company's existing or potential future
products where the Company considers such an acquisition preferable to
developing the functionality internally. If any of these current or future
third-party vendors were to terminate their relationship with the Company or
to materially increase the cost to the Company for their products, or if a
material problem were to arise in connection with any of the software products
licensed from them, the Company would be required to license an alternative
product from another third party or attempt to internally develop a
replacement for the function of the licensed software. The loss of or
inability to maintain any of these technology licenses could result in
interruptions in the availability of the Company's existing products and
delays in the introduction of new products and services until equivalent
technology, if available, is identified, licensed or developed, and
integrated. There can be no assurance that an alternative source of a suitable
product would be available or that the Company would be able to develop an
alternative product in sufficient time or at a reasonable cost. The failure of
the Company to obtain or develop an alternative product on a timely basis and
at a reasonable cost would have a material adverse effect on the Company's
business, operating results or financial condition. See "Risk Factors--
Dependence upon Certain Licenses."
EMPLOYEES
As of December 31, 1996, the Company had 280 full-time employees, consisting
of 81 in product development, 57 in sales, 45 in marketing, 50 in customer
service and 47 in finance and administration. The Company's employees are not
represented by any collective bargaining organization, and the Company has
never experienced a work stoppage.
FACILITIES
The Company's corporate headquarters are located in Atlanta, Georgia, in a
leased facility consisting of approximately 98,000 square feet of office space
under a lease expiring September 1, 2000. The Company also leases an
additional 2,700 square feet in Raleigh, North Carolina for its E-Comm
subsidiary under a lease expiring December 31, 1999 and an additional 2,500
square feet in High Wycombe, Buckinghamshire, in the United Kingdom for its
European operations center under a lease expiring in 2006. Additionally, the
Company leases direct sales offices with square footage ranging from 150 to
400 square feet and lease terms of one to two years, in 14 locations in the
United States and in Sydney, Australia, Montreal, Canada, and Dusseldorf and
Munich, Germany. The Company believes that its existing facilities and offices
and additional space available to it are adequate to meet its requirements
through December 1997, and that, if necessary, additional or alternative space
will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
February 28, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION ELECTED DIRECTOR
---- --- -------- ----------------
<S> <C> <C> <C>
Dennis M. 44 Chairman of the Board, Chief Executive 1986
Crumpler(3)(4)......... Officer and Director
Shereef W. Nawar(3)..... 37 Chief Technical Officer and Director 1987
Corey M. Smith.......... 40 President
Sidney V. Sack.......... 51 Executive Vice President, Chief
Financial Officer and Assistant
Secretary
Stefanus F. Coetzee..... 44 Vice President--North American
Customer Operations
W. Michael Parham....... 43 Vice President--North American Sales
Jeanne N. Bateman....... 42 Vice President--Finance, Treasurer and
Secretary
Joel A. Miller.......... 37 Vice President--Human Resources
Stephen P. 55 Director 1995
Bradley(2)(3)..........
Donald L. House(1)(4)... 55 Director 1992
Richard C. 58 Director 1990
Marcus(1)(2)(4)........
Geoffrey A. Moore(3).... 50 Director 1996
Richard L. Nolan(3)..... 56 Director 1995
Jeffrey P. Parker(2).... 53 Director 1990
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Strategic Oversight Committee.
(4) Member of the Nominating Committee.
Each of the directors of the Company serves until the next annual meeting of
the shareholders of the Company or until his successor is elected and
qualifies. Each of the executive officers of the Company serves at the
pleasure of the Board of Directors.
Mr. Crumpler is a co-founder of the Company and has served as Chairman of
the Board, a director and Chief Executive Officer of the Company since its
inception in 1986. Mr. Crumpler also served as the President of the Company
from September 1986 to October 1992 and from September 1996 to January 1997.
Mr. Nawar is a co-founder of the Company. Mr. Nawar has served as a director
of the Company since 1987, and has served as the Company's Chief Technical
Officer since October 1992. Mr. Nawar served as the Company's Vice President
of Development from 1987 until October 1992.
Mr. Smith joined the Company in September 1996 as its Executive Vice
President responsible for marketing and became President in January 1997.
Prior to joining the Company, Mr. Smith was the President of Decision Point
Data, a human resources decision support software company, from October 1995
until September 1996. He served as the President and Chief Executive Officer
of Creative Multimedia, Inc., a consumer CD-ROM multimedia company, from
December 1993 until September 1995. In July 1992, Mr. Smith founded Legacy
Venture Capital and served as its President and General Partner from July 1992
until September 1994 and continues to serve as General Partner. From January
1988 until May 1992, Mr. Smith was the President and Chief Executive Officer
of Central Point Software, Inc., a personal computer utilities
42
<PAGE>
software company. From 1978 to October 1988, Mr. Smith served in various
positions at Hewlett-Packard Company including market development and product
marketing manager positions.
Mr. Sack joined the Company in September 1990 as its Chief Financial
Officer. Mr. Sack has served as an Executive Vice President of the Company
since September 1996. Mr. Sack has served as Assistant Secretary of the
Company since January 1995 and from October 1990 to October 1991, and served
as the Secretary of the Company from October 1991 to January 1995. He also
served as Chief Operating Officer of the Company from September 1996 to
January 1997.
Mr. Coetzee joined the Company in April 1992 as Managing Director of
XcelleNet Ltd. Mr. Coetzee served as the Company's Vice President--
International from January 1995 until August 1995, Vice President--Global
Customer Operations from August 1995 to April 1996, and has been Vice
President--North American Customer Operations since April 1996. From 1988
until 1992, he was employed by Dun & Bradstreet Europe Ltd., a business
information services company.
Mr. Parham joined the Company in November 1988 as its Director of Sales,
served as the Vice President--Sales from December 1990 to April 1996, and has
served as Vice President--North American Sales since April 1996.
Ms. Bateman joined the Company in December 1993 as its Vice President and
Treasurer, and has been Secretary of the Company since January 1995 and Vice
President--Finance since April 1995. Prior to joining the Company, Ms. Bateman
was employed by HBO & Company, a healthcare information systems company, from
December 1985 until August 1993, and served as its Vice President and
Treasurer from March 1993 to August 1993 and its Assistant Treasurer, Investor
Relations from January 1991 to March 1993.
Mr. Miller joined the Company as its Director of Human Resources in February
1995 and has served as the Company's Vice President--Human Resources since
October 1995. Prior to joining the Company, he held various positions in
manufacturing, sales and administration with Procter & Gamble Company, a
consumer products company, over a period of fourteen years, including Manager
of Corporate Training & Development for P&G China, Ltd. from February 1992
until April 1994.
Mr. Bradley has served as a director of the Company since October 1995. Mr.
Bradley is currently a professor at the Harvard Business School, a position he
has held since 1968. He also serves as the Chairman of the Harvard Business
School's Competition and Strategy Area. From September 1993 to January 1996,
Mr. Bradley served as the Senior Associate Dean for Faculty Development at the
Harvard Business School. Mr. Bradley is a director of RDM Sports Group, Inc.
(formerly Roadmaster Industries, Inc.), a sporting goods company.
Mr. House has served as a director of the Company since 1992. Mr. House has
served as the Chairman of the Board of SQL Financials International, Inc., an
early-stage client/server software company since January 1993. From January
1992 until December 1992, he was President of Prentice Hall Professional
Software, a subsidiary of Simon and Schuster, Inc. Since 1988, he has been a
consultant and investor in a number of early-stage technology firms, including
the Company.
Mr. Marcus has served as a director of the Company since 1990. Mr. Marcus is
a principal of InterSolve Group Inc., a firm that provides management
consulting services to companies in several industries. He has served in this
capacity since InterSolve was formed in 1991. From December 1994 until
December 1995, Mr. Marcus was also the Chief Executive Officer of Plaid
Clothing Group, Inc., a manufacturer of tailored clothing. Plaid Clothing
Group filed a voluntary federal bankruptcy petition in July 1995. From January
1989 to January 1992, Mr. Marcus was a principal of RCM Consulting, a provider
of consulting services to the retail industry. From 1979 until 1988, Mr.
Marcus was Chief Executive Officer of Neiman-Marcus, a department store
retailer. Mr. Marcus is a director of Zale Corporation, a specialty retailer
of fine jewelry, and a member of its compensation committee. He is also a
director of Edisol Bros. Stores, a specialty retailer of apparel.
43
<PAGE>
Mr. Moore has served as a director of the Company since March 1996. Mr.
Moore is a founder of The Chasm Group, a firm that provides marketing strategy
and organizational consulting to high-technology companies. He has served as
President of that firm since it was founded in 1992. From 1987 until 1992, Mr.
Moore was a principal and partner of Regis McKenna, Inc., a high-technology
marketing and communications company. Mr. Moore is a director of BroadVision,
Inc., a supplier of software applications for enabling personalized business
on the Web.
Mr. Nolan has served as a director of the Company since 1995. Mr. Nolan is
currently a professor at the Harvard Business School, a position he has held
since July 1991. From 1977 to July 1991, Mr. Nolan served as a principal of
KPMG Peat Marwick, and as Chairman of the Board of Nolan, Norton & Co., a
technology-strategy consulting firm. Mr. Nolan was a general partner of
Lincoln North Associates Limited Partnership ("Lincoln") from 1986 to 1994,
and was a general partner of Cranberry Hill Associates Limited Partnership
("Cranberry") from 1984 to 1993. Lincoln and Cranberry owned office buildings
in Massachusetts. Lincoln and Cranberry filed voluntary federal bankruptcy
petitions in May 1993 and July 1992, respectively. Mr. Nolan is a director of
H.F. Ahmanson & Company, a bank holding company.
Mr. Parker has served as a director of the Company since 1990. Mr. Parker is
a private investor focusing on start-up and early-stage investments. From
October 1986 until December 1990, Mr. Parker was the Chief Executive Officer
of Thomson Financial Services ("Thomson"), and from October 1986 to December
1991, Mr. Parker was also Chairman of the Board and Chief Executive Officer of
First Call Corporation ("First Call"). Both Thomson and First Call are
financial information service companies.
44
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of
January 31, 1997, and as adjusted to reflect the sale of the Common Stock
offered hereby (assuming no exercise of the underwriters' over-allotment
option) by (i) each Selling Shareholder, (ii) all persons known by the Company
to be the beneficial owners of more than 5% of the outstanding Common Stock of
the Company, (iii) each director of the Company, (iv) the Chief Executive
Officer and each of the Company's five most highly compensated executive
officers other than the Chief Executive Officer who were serving as executive
officers at the end of the last completed fiscal year, and (v) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) NUMBER OF OFFERING (1)
NAME AND ADDRESS OF ----------------- SHARES -----------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Motorola, Inc.................... 731,047 9.8% 731,047 -- *
1303 East Algonquin Road
Schaumburg, Illinois 60196
GeoCapital Corporation (2)....... 685,616 9.2 -- 685,616 8.4%
767 Fifth Avenue
New York, New York 10153
Robert Fleming Inc. (3).......... 410,750 5.5 -- 410,750 5.1
320 Park Avenue, 11th Floor
New York, New York 10022
Dennis M. Crumpler (4)........... 1,434,831 19.2 100,000 1,334,831 16.4
Stephen P. Bradley (5)........... 10,000 * -- 10,000 *
Donald L. House (6).............. 36,599 * -- 36,599 *
Richard C. Marcus (7)............ 81,494 1.1 -- 81,494 1.0
Geoffrey A. Moore (5)............ 10,000 * -- 10,000 *
Shereef W. Nawar (8)............. 157,498 2.1 3,000 154,498 1.9
Richard L. Nolan (9)............. 20,000 * -- 20,000 *
Jeffrey P. Parker (10)........... 136,751 1.8 -- 136,751 1.7
Stefanus F. Coetzee (11)......... 42,694 * -- 42,694 *
W. Michael Parham (12)........... 82,630 1.1 -- 82,630 1.0
Sidney V. Sack (13).............. 103,666 1.4 -- 103,666 1.3
Corey M. Smith................... 10,000 * 10,000 -- *
All executive officers and
directors as a group
(14 persons)(14)................ 2,149,841 27.5 113,000 2,036,841 24.1
</TABLE>
- --------
*Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable. Shares of Common Stock subject to options
that are currently exercisable or exercisable within 60 days of January
31, 1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) GeoCapital Corporation ("GeoCapital") is an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940. GeoCapital has
sole investment power with respect to all of these shares and voting
power with respect to none of these shares. The information herein
regarding
45
<PAGE>
GeoCapital's stock ownership was obtained from a Schedule 13G filed by
GeoCapital with the Securities and Exchange Commission and received by the
Company on February 25, 1997. The Company makes no representation as to
the accuracy or completeness of the information reported regarding
GeoCapital.
(3) Robert Fleming Inc. ("Fleming") is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940. Fleming has shared
investment power and shared voting power with respect to all of these
shares. The information herein regarding Fleming's stock ownership was
obtained from a Schedule 13G filed by Fleming with the Securities and
Exchange Commission and received by the Company on February 25, 1997. The
Company makes no representation as to the accuracy or completeness of the
information reported regarding Fleming.
(4) Includes 1,200,000 shares held by a limited partnership, the general
partner of which is a limited liability company of which Mr. Crumpler is
the controlling manager. As such, Mr. Crumpler has voting and investment
power over these shares. Also includes 104,800 shares owned by Mr.
Crumpler's spouse. In November 1989, Mr. Crumpler entered into an
agreement with his spouse that provides that Mr. Crumpler has sole voting
power with respect to the shares of Common Stock presently held, or
acquired in the future, by her. This agreement also places certain
restrictions on the ability of Mr. Crumpler's spouse to transfer her
shares of Common Stock and provides Mr. Crumpler a right of first refusal
in connection with such shares. Also includes 3,800 shares held by Mr.
Crumpler as trustee of a trust for the benefit of his mother, as to which
he retains sole voting and investment power. Also includes 3,000 shares
held by Mr. Crumpler as custodian for his minor children and as to which
he retains sole voting and investment power.
(5) Consists of 10,000 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(6) Includes 30,350 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(7) Consists of 33,114 shares held jointly by Mr. Marcus and his spouse and
48,380 shares subject to stock options that are currently exercisable or
will become exercisable within 60 days of January 31, 1997.
(8) Includes 64,661 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(9) Consists of 20,000 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(10) Includes 21,050 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(11) Includes 900 shares held by Mr. Coetzee's spouse. Also includes 40,551
shares subject to stock options that are currently exercisable or will
become exercisable within 60 days of January 31, 1997.
(12) Includes 39,098 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(13) Includes 39,352 shares held jointly by Mr. Sack and his spouse. Also
includes 36,718 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
(14) Includes 330,564 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days of January 31,
1997.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of January 31, 1997, there were 7,474,372 shares of Common Stock
outstanding, held of record by approximately 245 shareholders. Holders of
Common Stock are entitled to one vote for each share held on all matters
submitted to a vote of shareholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of Common Stock are entitled to receive ratably such
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 Common Stock, as such, have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue from time to time in the
future.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 10,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company. No shares of Preferred Stock are currently
outstanding.
CERTAIN CHARTER AND BYLAW PROVISIONS
Certain shareholders' rights and related matters are governed by the Georgia
Business Corporation Code and the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Amended and Restated Bylaws. Certain
provisions of the Amended and Restated Articles of Incorporation and Bylaws of
the Company, which are summarized below, could, either alone or in combination
with each other, have the effect of preventing a change in control of the
Company or making changes in management more difficult.
Corporate Takeover Provisions
The Company's Amended and Restated Bylaws make applicable to the Company
provisions authorized by the Georgia Business Corporation Code relating to
business combinations with interested shareholders ("Corporate Takeover
Provisions"). The Corporate Takeover Provisions are designed to encourage any
person, before acquiring 10% of the Company's voting shares, to seek approval
of the Board of Directors for the terms of any contemplated business
combination. The Corporate Takeover Provisions will prevent for five years
certain business combinations with an "interested shareholder" (as defined in
the Corporate Takeover Provisions) unless (i) prior to the time such
shareholder became an interested shareholder the Board of Directors approved
either the business combination or the transaction that resulted in the
shareholder becoming an interested shareholder, (ii) in the transaction that
resulted in the shareholder becoming an interested shareholder, the interested
shareholder became the beneficial owner of at least 90% of the outstanding
voting shares of the Company excluding, however, shares owned by the Company's
officers,
47
<PAGE>
directors, affiliates, subsidiaries and certain employee stock plans or (iii)
subsequent to becoming an interested shareholder, such interested shareholder
acquired additional shares resulting in the interested shareholder becoming
the owner of at least 90% of the Company's outstanding voting shares and the
business combination is approved by the holders of a majority of the Company's
voting shares, excluding from said vote the stock owned by the interested
shareholder or by the Company's officers, directors, affiliates, subsidiaries
and certain employee stock plans.
Constituency Considerations
The Company's Articles provide for the right of the Board of Directors to
consider the interests of various constituencies, including employees,
customers, suppliers and creditors of the Company, as well as the communities
in which the Company is located, in addition to the interest of the Company
and its shareholders, in discharging their duties in determining what is in
the Company's best interests.
Limitation of Directors' Liability
The Articles eliminate, subject to certain exceptions, the personal
liability of directors to the Company or its shareholders for monetary damages
for breaches of such directors' duty of care or other duties as a director.
The Articles do not provide for the elimination of or any limitation on the
personal liability of a director for (i) any appropriation, in violation of
the director's duties, of any business opportunity of the Company, (ii) acts
or omissions that involve intentional misconduct or a knowing violation of
law, (iii) unlawful corporate distributions or (iv) any transaction from which
the director received an improper benefit. In addition, the Company's Amended
and Restated Bylaws provide broad indemnification rights to directors and
officers so long as the director or officer acted in a manner believed in good
faith to be in or not opposed to the best interest of the Company, and with
respect to criminal proceedings, if the director had no reasonable cause to
believe his or her conduct was unlawful. The personal liability of directors
for monetary damages for violations of federal securities laws is not affected
by these provisions. These provisions of the Articles and Amended and Restated
Bylaws will limit the remedies available to a shareholder who is dissatisfied
with a Board decision protected by these provisions, and such shareholder's
only remedy in that circumstance may be to bring a suit to prevent the Board's
action. In many situations, this remedy may not be effective, as, for example,
when shareholders have no prior awareness of the Board's consideration of the
particular transaction or event.
REGISTRATION RIGHTS
In the event the Company proposes to register any of its shares of Common
Stock under the Securities Act of 1933, as amended, including the offering
contemplated by this Prospectus, certain holders of the Company's Common Stock
are entitled to require the Company to include all or a portion of their
shares in such registration, subject to certain conditions. While the Company
expects to obtain waivers of these registration rights, any shareholder that
does not waive such rights will be entitled to include certain of their shares
in this offering or in future registered offerings by the Company that are
declared effective prior to April 14, 1999. All fees, costs and expenses of
such registration will be borne by the Company, with certain exceptions,
provided that such holders will be required to bear their pro rata share of
the underwriting discounts and commissions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is SunTrust Bank,
Atlanta, Georgia.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,130,325 shares of
Common Stock outstanding (assuming no exercise of options after January 31,
1997). In addition to the 1,500,000 shares sold in this offering, 4,874,048 of
such outstanding shares will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares
purchased by "affiliates" of the Company, as that term is defined under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.
48
<PAGE>
Of the remaining outstanding shares of Common Stock, 50,000 are deemed
"Restricted Shares" under Rule 144. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act and, with respect to shares held by officers and directors of
the Company, lock-up agreements under which the officers and directors have
agreed not to sell or otherwise dispose of any of their shares for a period of
90 days after the effective date of this offering without the prior written
consent of Robertson, Stephens & Company. Because of these restrictions, on
the date of this Prospectus, all of the outstanding shares of the Company's
Common Stock other than the shares that are Restricted Securities or subject
to lock up agreements will be eligible for sale. Beginning 90 days after the
effective date of this offering (or earlier with the prior written consent of
Robertson, Stephens & Company), 1,706,277 shares held by executive officers
and directors, but none of the Restricted Shares, will become available for
sale in the public market subject to Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
"restricted" shares for at least two years (after the effective date of the
recently adopted amendment to Rule 144, such period will be reduced to one
year), including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock of the Company (approximately 81,304 shares after giving effect
to this offering) or the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 of the Securities Act are subject to
certain restrictions relating to manner of sale, notice and the availability
of current public information about the Company. In addition, under Rule
144(k) of the Securities Act, a person who is not an Affiliate of the Company
at any time 90 days preceding a sale, and who has beneficially owned shares
for at least three years (after the effective date of the recently adopted
amendment to Rule 144, such period will be reduced to two years), would be
entitled to sell such shares immediately following this offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act.
As of January 31, 1997, options to purchase a total of 484,733 shares of
Common Stock pursuant to the 1987 Plan, the Director Plan, the Long-Term
Incentive Plan (collectively, the "Option Plans") and pursuant to options
granted on an individual basis outside of these plans were outstanding and
exercisable and options to purchase a total of 1,712,906 shares of Common
Stock pursuant to the Option Plans were outstanding but not yet exercisable.
An additional 2,576,353 shares of Common Stock were available for future
option grants or direct issuances under the Option Plans, and an additional
256,665 shares of Common Stock were available for sale pursuant to the
company's Employee Stock Purchase Plan. See Note 2 of Notes to Consolidated
Financial Statements.
The Company has registered on registration statements on Form S-8, a total
of 2,030,657 shares of Common Stock reserved for issuance under the Company's
Option Plans, Employee Stock Purchase Plan and options granted on an
individual basis outside of the Option Plans (assuming no exercise of
outstanding stock options after January 31, 1997).
Any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
In the event the Company proposes to register any of its shares of Common
Stock under the Securities Act of 1933, as amended, including the offering
contemplated by this Prospectus, certain holders of the Company's Common Stock
are entitled to require the Company to include all or a portion of their
shares in such registration, subject to certain conditions. While the Company
expects to obtain waivers of these registration rights, any shareholder that
does not waive such rights will be entitled to include certain of their shares
in this offering or in future registered offerings by the Company that are
declared effective prior to April 14, 1999. All fees, costs and expenses of
such registration will be borne by the Company, with certain exceptions,
provided that such holders will be required to bear their pro rata share of
the underwriting discounts and commissions. If the Company were required to
include in a Company-initiated registration shares held by such holders
pursuant to the exercise of their registration rights, such sales may have an
adverse effect on the Company's ability to raise needed capital.
49
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Alex. Brown & Sons Incorporated and Punk,
Ziegel & Knoell, L.P. (the "Representatives"), have severally agreed with the
Company and the Selling Shareholders, subject to the terms and conditions of
the Underwriting Agreement, to purchase the number of shares of Common Stock
set forth opposite their respective names below. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC..................................
Alex. Brown & Sons Incorporated....................................
Punk, Ziegel & Knoell, L.P.........................................
---------
Total............................................................ 1,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that they propose to offer the shares of Common Stock to the public at the
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Underwriters. No such reduction shall change the amount of proceeds to be
received by the Company or the Selling Shareholders as set forth on the cover
page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock, at the same price per share as will be paid
for the 1,500,000 shares that the Underwriters have agreed to purchase from
the Company and the Selling Shareholders. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above
table represents as a percentage of the 1,500,000 shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the 1,500,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Each officer and director of the Company has agreed with the Representatives
that for a period of 90 days after the effective date of the Registration
Statement of which this Prospectus is a part (the "Lock-up Period"), subject
to certain limited exceptions, they will not offer to sell, contract to sell,
or otherwise sell, dispose of, loan, pledge or grant any rights with respect
to any shares of Common Stock, any options or warrants to purchase any shares
of Common Stock or any securities convertible into or exchangeable for shares
of Common Stock without the prior written consent of the Representatives. The
Representatives may, at their sole discretion and at any time or from time to
time, without notice, release all or any portion of the shares subject to the
lock-up agreements. In addition, the Company has agreed that during the Lock-
up Period, the Company will not, without the prior written consent of the
Representatives, subject to certain limited exceptions, issue, sell, contract
to sell or otherwise dispose of any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than
the issuance of Common Stock upon
50
<PAGE>
the exercise of outstanding options and under the existing Employee Stock
Purchase Plan, and the Company's issuance of options under the Option Plans.
The offering price for the Common Stock will be determined by negotiations
among the Company, the Selling Shareholders and the Representatives of the
Underwriters, based largely upon the market price for the Common Stock as
reported on the Nasdaq National Market.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
Stock Market may engage in passive market making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Securities Exchange Act of 1934, as amended during the
qualifying period which is two business days before commencement of sales in
this offering. The passive market making transactions must comply with
applicable price and volume limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the
highest independent bid for the security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded. Net purchases by a passive market
maker on each day are generally limited to 30% of the passive market maker's
average daily trading volume in the Common Stock during a prior period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which
might otherwise prevail, and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Alston & Bird LLP,
Atlanta, Georgia. Certain legal matters will be passed upon for the
Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said report.
51
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 under the
Securities Act with the Securities and Exchange Commission (the "Commission")
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. For further information with respect to the Company and
the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits thereto. Statements contained in this Prospectus
regarding the contents of any contract or other document to which reference is
made are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement and the exhibits thereto
may be inspected without charge at the offices of the Commission at Judiciary
Plaza, 450 Fifth Street, Washington, D.C. 20549, and copies of all or any part
of the Registration Statement may be obtained from the Public Reference Section
of the Commission, Washington, D.C. 20549 upon the payment of the fees
prescribed by the Commission.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also makes electronic filings publicly available on the
Internet within 24 hours of acceptance. The Commission's Internet address is
http://www.sec.gov. The Commission web site also contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is quoted
on the Nasdaq National Market. Reports, proxy and information statements and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington,
D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission (File No. 0-
23560) pursuant to the Exchange Act are hereby incorporated in this Prospectus
by reference: (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as filed with the Commission on February 24, 1997, and (ii)
the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A as filed with the Commission on March 2,
1994.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of this offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and
all of the information that has been incorporated by reference in this
Prospectus (excluding exhibits unless such exhibits are specifically
incorporated by reference into such documents). Please direct such requests to
XcelleNet, Inc., 5 Concourse Parkway, Suite 850, Atlanta, Georgia 30328, Attn:
Investor Relations, telephone (770) 804-8100.
52
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994..................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of XCELLENET,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. 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 XcelleNet, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 23, 1997
F-2
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $10,587 $ 9,304
Short-term investments...................................... 2,157 9,115
Trade receivables, less allowance for doubtful accounts of
$503 and $325 at December 31, 1996 and 1995, respectively.. 13,306 8,091
Prepaid expenses and other current assets................... 1,049 714
Income tax receivable....................................... 793 522
------- -------
Total current assets..................................... 27,892 27,746
------- -------
Furniture, fixtures, and equipment, net...................... 5,378 4,885
Capitalized software development costs, net of accumulated
amortization of $1,566 and $922 at December 31, 1996 and
1995, respectively.......................................... 2,231 767
Deferred income tax assets................................... 754 --
Other noncurrent assets...................................... 428 63
------- -------
$36,683 $33,461
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,207 $ 991
Accrued bonuses and commissions............................. 1,375 610
Sales tax payable........................................... 360 146
Deferred income tax liabilities............................. -- 33
Other current liabilities................................... 1,752 998
------- -------
Total current liabilities................................ 4,694 2,778
------- -------
Long-term liabilities........................................ 859 834
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding................ -- --
Common stock, $.01 par value; 30,000,000 shares authorized,
7,537,876 shares issued and 7,380,337 shares outstanding in
1996 and 7,537,876 shares issued and 7,039,641 outstanding
in 1995.................................................... 75 75
Additional paid-in capital.................................. 24,211 28,093
Retained earnings........................................... 9,232 9,232
Treasury stock at cost, 157,539 shares in 1996 and 498,235
shares in 1995............................................. (2,388) (7,551)
------- -------
Total shareholders' equity............................... 31,130 29,849
------- -------
$36,683 $33,461
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES
Software license fees................................ $30,703 $25,612 $21,399
Services............................................. 11,948 8,487 5,490
------- ------- -------
Total revenues.................................... 42,651 34,099 26,889
------- ------- -------
COSTS AND EXPENSES
Costs of license fees................................ 1,986 1,816 1,230
Costs of services.................................... 3,806 2,340 1,786
Sales and marketing.................................. 21,628 14,500 11,621
Product development.................................. 6,451 5,128 2,377
General and administrative........................... 6,218 5,547 4,693
Nonrecurring charges................................. 3,496 -- --
------- ------- -------
Total costs and expenses.......................... 43,585 29,331 21,707
------- ------- -------
Operating income (loss)............................... (934) 4,768 5,182
Other income, net..................................... 934 1,264 748
------- ------- -------
Income before income taxes............................ -- 6,032 5,930
Provision for income taxes............................ -- 2,230 2,375
------- ------- -------
NET INCOME............................................ $ -- $ 3,802 $ 3,555
======= ======= =======
NET INCOME PER SHARE.................................. $ -- $ .45 $ .45
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING................... 7,915 8,480 7,833
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------ ---------------- ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ --------- ------ -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 1,062,594 $ 11 1,702,881 $17 -- $ -- $ 7,966 $1,875 $ 9,869
Conversion of preferred
stock to common stock. (1,062,594) (11) 3,187,782 32 (21) --
Initial public offering
of common stock, net
of issuance costs..... 1,810,000 18 17,748 17,766
Stock options exercised
for cash.............. 451,276 4 172 176
Compensation related to
stock options......... 121 121
Income tax benefits
related to exercise of
stock options......... 948 948
Net income............. 3,555 3,555
Foreign currency
translation
adjustment............ 38 38
---------- ---- --------- --- -------- ------- ------- ------ -------
Balance, December 31,
1994................... -- -- 7,151,939 71 -- -- 26,972 5,430 32,473
Purchase of treasury
shares................ (527,879) (8,000) (8,000)
Stock options exercised
for cash.............. 385,937 4 17,100 259 37 300
Employee stock purchase
plan shares issued.... 12,544 190 15 205
Income tax benefits
related to exercise of
stock options......... 1,131 1,131
Net income............. 3,802 3,802
Unrealized loss on
short-term
investments........... (50) (50)
Foreign currency
translation
adjustment............ (12) (12)
---------- ---- --------- --- -------- ------- ------- ------ -------
Balance, December 31,
1995................... -- -- 7,537,876 75 (498,235) (7,551) 28,093 9,232 29,849
Exercise of stock
options............... 347,831 5,450 (4,282) 1,168
Shares acquired related
to stock option
exercises............. (47,926) (906) (906)
Employee stock purchase
plan shares issued.... 30,791 467 (94) 373
Restricted stock
issuance.............. 10,000 152 (28) 124
Income tax benefits
related to exercise of
stock options......... 480 480
Net income............. -- --
Unrealized loss on
short-term
investments........... (21) (21)
Foreign currency
translation
adjustment............ 63 63
---------- ---- --------- --- -------- ------- ------- ------ -------
Balance, December 31,
1996................... -- $-- 7,537,876 $75 (157,539) $(2,388) $24,211 $9,232 $31,130
========== ==== ========= === ======== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................... $ -- $ 3,802 $ 3,555
Adjustments to reconcile net income to net cash
provided by operating activities:
Writeoff of WorldLink product line................ 3,037 -- --
Issuance of restricted stock...................... 124 -- --
Depreciation and amortization..................... 3,030 2,330 1,351
Increase in trade receivables..................... (5,215) (1,601) (2,101)
Increase in prepaid expenses and other current
assets........................................... (335) (55) (251)
(Increase) decrease in income taxes receivable.... (271) 494 (899)
(Increase) decrease in deferred income tax assets. (754) -- 295
Decrease in other long-term assets................ -- -- 186
Increase (decrease) in current liabilities........ 1,916 (77) 1,253
Increase in long-term liabilities................. 25 18 83
------- ------- -------
Total adjustments............................... 1,557 1,109 (83)
------- ------- -------
Net cash provided by operating activities....... 1,557 4,911 3,472
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments...... 6,958 1,655 (10,770)
Purchase of WorldLink product line................. (3,037) -- --
Purchases of furniture, fixtures, and equipment.... (2,879) (3,217) (2,749)
Additions to capitalized software development
costs............................................. (2,108) (319) (786)
Decrease (increase) in long-term investments....... (225) (35) 142
Other.............................................. (77) (12) 114
------- ------- -------
Net cash used in investing activities........... (1,368) (1,928) (14,049)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock......................... -- (8,000) --
Proceeds from issuance of common stock, net of
related costs..................................... 635 505 17,942
Income tax benefits related to exercise of stock
options........................................... 480 1,131 948
Other.............................................. (21) (50) 41
------- ------- -------
Net cash provided by (used in) financing
activities..................................... 1,094 (6,414) 18,931
------- ------- -------
Net increase (decrease) in cash and cash equiva-
lents.............................................. 1,283 (3,431) 8,354
Cash and cash equivalents, beginning of year........ 9,304 12,735 4,381
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR.............. $10,587 $ 9,304 $12,735
======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid...................................... $ -- $ -- $ 1
Income taxes paid.................................. $ 887 $ 1,253 $ 1,771
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying consolidated financial statements include the accounts of
XcelleNet, Inc. and its wholly owned subsidiaries (the "Company"). The Company
develops, markets and supports software utilities that improve the
manageability and enhance the performance of remote access computing for users
who routinely work offline and periodically dial in to enterprise systems to
exchange or synchronize information.
The Company's foreign subsidiaries accounted for approximately 9%, 9% and 7%
of consolidated revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. Thus, separate disclosure is not included.
On April 14, 1994, the Securities and Exchange Commission declared effective
the Company's registration statement relating to the initial public offering
of its common stock. The offering was comprised of 2,300,000 shares (1,810,000
shares issued by the Company and 490,000 shares sold by certain existing
shareholders) at an initial offering price of $11.00 per share. The net
proceeds to the Company (after underwriters' discounts and commissions and
other costs associated with the offering of $2,144,000) totaled $17,766,000.
Basis of Presentation
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.
Change in Company Year End
Effective December 31, 1993, the Company changed its fiscal year-end from
June 30 to December 31. All prior year financial statements have been restated
to reflect a December 31 year-end.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of"
("SFAS 121"), which becomes effective for fiscal years beginning after
December 15, 1995. SFAS 121 established standards for determining when
impairment losses on long lived assets have occured and how impairment losses
should be measured. The Company adopted SFAS 121 effective January 1, 1996.
The financial statement impact of adopting SFAS 121 was not material.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Effective in 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do
not choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings per share as if
SFAS 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
F-7
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Cash, Cash Equivalents, and Short-term Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
investments consist of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Municipal securities............................................ $1,658 $5,860
U.S. Government agencies........................................ 499 1,751
Corporate notes and bonds....................................... -- 1,005
U.S. Treasury securities........................................ -- 499
------- -------
Short-term investments.......................................... $2,157 $9,115
======= =======
</TABLE>
The fair value of financial instruments is estimated based on quoted market
prices. Differences between the fair value and the cost of investments are
recorded as unrealized gains (losses) in additional paid-in capital. All
investments are considered available for sale and have effective maturities of
less than one year.
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets ranging from three to five years. Maintenance and repairs are
charged to expense as incurred. Replacements and improvements are capitalized.
Furniture, fixtures, and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Computer equipment............................................ $ 7,814 $ 6,771
Furniture and fixtures........................................ 2,540 2,408
Leasehold improvements........................................ 676 600
Automobiles................................................... 168 81
------- -------
11,198 9,860
Less accumulated depreciation................................. (5,820) (4,975)
------- -------
Furniture, fixtures, and equipment, net....................... $ 5,378 $ 4,885
======= =======
</TABLE>
Capitalized Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," the Company capitalizes
certain software development costs when a new or enhanced product is released
for customer testing and ceases capitalization when the product is released
for sale. Software development costs of $2,108,000, $319,000 and $786,000 were
capitalized in 1996, 1995, and 1994, respectively. Amortization of capitalized
software development costs begins as products are made available for sale,
with annual amortization equal to the greater of the amount computed using the
ratio that current gross revenues bear to the total of current and anticipated
future gross revenues for the product or the straight-line method over the
remaining estimated economic life of the product, which is a maximum of three
years. Amortization expense is included in costs of license fees. Amortization
totaled $644,000, $332,000, and $48,000 in 1996, 1995, and 1994, respectively.
F-8
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenue Recognition
The Company's revenues are generated from the licensing of its software
products; from fees paid for extended warranties and rights to upgrades and
updates ("maintenance") of the software products; and from training,
installation, implementation, support, and consulting services related to such
software products. In accordance with AICPA Statement of Position No. 91-1,
Software Revenue Recognition, the Company recognizes revenue from software
licenses upon the execution of a license agreement and delivery of the product
to a customer, provided the Company has no significant future obligations and
collection of the license fees is probable. Maintenance fees are recognized on
a straight-line basis over the period covered by the related contract. Service
revenues are recognized when the specific service is performed.
Advertising
The Company expenses the production costs of advertising at the time
incurred, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits. Direct-response
advertising consists primarily of advertisements in business, financial, and
software magazines and newspapers. The cost of each advertisement is amortized
over the four-month period following the issuance of the publication in which
it appears. Advertising expenditures totaled $2,171,000, $194,000 and $707,000
for 1996, 1995 and 1994, respectively. Advertising expense was $2,027,000,
$194,000 and $707,000 for 1996, 1995 and 1994, respectively. Unamortized
advertising costs included in prepaid expenses were $144,000 and $0 at
December 31, 1996 and 1995, respectively.
Other Income, Net
Other income primarily includes interest income. Interest income was
$911,000, $1,256,000, and $719,000 in 1996, 1995, and 1994, respectively.
Income Taxes
Deferred income tax assets and liabilities are recorded based on the
differences between the financial reporting and income tax bases of assets and
liabilities.
Net Income Per Share
Net income per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from convertible
preferred stock and stock options have been included in the computation when
dilutive. The difference between primary and fully diluted earnings per share
is not material for any of the periods presented, and fully diluted earnings
per share have therefore been excluded.
Foreign Currency Translation
Non-U.S. assets and liabilities are translated into U.S. dollars using the
balance sheet date exchange rates. Revenues and expenses are translated at
average rates during the period. Foreign currency translation adjustments are
reflected as increases (decreases) in additional paid-in capital and were
$63,000, $(12,000) and $38,000 in 1996, 1995 and 1994, respectively.
Cumulative foreign currency translation adjustments were $76,000 and $13,000
at December 31, 1996 and 1995, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-9
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. SHAREHOLDERS' EQUITY
Convertible Preferred Stock
Upon closing of the Company's initial public offering in April 1994, all of
the outstanding shares of each series of convertible preferred stock were
converted, on a 3-for-1 basis, into a total of 3,187,782 shares of common
stock. The convertible preferred stock converted into common stock has been
returned to the status of authorized but unissued shares of preferred stock.
At December 31, 1996 and 1995, 10,000,000 shares were authorized and none were
issued or outstanding.
Stock Options
The Company maintains three stock option plans: the 1987 Stock Option Plan
(the "1987 Plan"), the 1994 Stock Option Plan for Outside Directors (the
"Director Plan"), and the 1996 Long-Term Incentive Plan (the "LTIP"). The 1987
Plan provides for the issuance of incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs"), and stock appreciation rights ("SARs")
to employees and officers of the Company. The Director Plan provides for the
issuance of NQSOs to non-employee members of the Company's Board of Directors
who are not prohibited by their employer from receiving options under the
Director Plan. The LTIP Plan provides for the issuance of ISOs, NQSOs, SARs
and other stock-based awards to employees, officers and directors of the
Company. Additionally, the Company has granted NQSOs to non-employee Directors
and consultants on an individual basis and not under a plan. A total of
516,945 options were exercisable at December 31, 1996.
Under the 1987 Plan, ISOs, NQSOs, and SARs to purchase a total of 2,650,000
shares were authorized for issuance, of which 1,327,756 options were
outstanding and 345,773 options were exercisable at December 31, 1996. All
options have been granted at the fair market value of the Company's common
stock at the date of grant. The ISOs and NQSOs are generally exercisable
beginning one to three years from the date of grant, after which options vest
over a period not to exceed ten years from the date of grant and terminate ten
years from the date of grant. No SARs have been granted under the plan.
During 1994, the Company adopted the Director Plan, under which 300,000
shares were authorized for issuance. Under the Director Plan, the Company
automatically grants nonqualified stock options to purchase 40,000 shares of
common stock, at the fair market value of the Company's common stock at the
date of grant, to each eligible non-employee member of the Company's Board of
Directors. These options vest over a four-year period and terminate five years
from the date of grant. A total of 240,000 options were outstanding, of which
70,000 options were exercisable, at December 31, 1996.
During 1996, the Company adopted the LTIP Plan, under which 3,000,000 shares
were authorized for issuance, of which 437,950 options were outstanding, and
none were exercisable, at December 31, 1996. All options have been granted at
the fair market value or higher of the Company's common stock at the date of
grant. The ISOs and NQSOs are exercisable beginning one year from the date of
grant, after which options vest over a period not to exceed ten years from the
date of grant and terminate up to ten years from the date of grant. No SARs or
other stock-based awards have been granted under the plan.
The Company has granted NQSOs to purchase shares on an individual basis and
not under a plan, on terms similar to the 1987 Plan. At December 31, 1996,
101,172 options were outstanding and exercisable.
F-10
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Changes in all outstanding options are as follows:
<TABLE>
<CAPTION>
PRICE RANGE SHARES
------------- ---------
<S> <C> <C>
Outstanding at December 31, 1993..................... $ .07-$ 4.00 1,962,138
Granted............................................. 7.50- 14.50 437,800
Exercised........................................... .07- 4.00 451,276
Forfeited........................................... .32- 4.00 103,215
------------- ---------
Outstanding at December 31, 1994..................... .07- 14.50 1,845,447
Granted............................................. 15.50- 30.25 488,500
Exercised........................................... .07- 11.00 403,037
Forfeited........................................... .47- 23.50 197,071
------------- ---------
Outstanding at December 31, 1995..................... .07- 30.25 1,733,839
Granted............................................. 10.00- 19.00 1,172,007
Exercised........................................... .32- 10.00 347,831
Forfeited........................................... .47- 30.25 451,137
------------- ---------
Outstanding at December 31, 1996..................... $ .07-$23.50 2,106,878
============= =========
</TABLE>
In 1996, 1995 and 1994, the Company recognized income tax benefits of
$480,000, $1,131,000 and $948,000, respectively, related to disqualifying
dispositions of ISOs and NQSO exercises. These benefits were recorded as
increases to additional paid-in capital.
Stock-Based Compensation
During 1995, the FASB issued SFAS 123 which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB 25. Entities electing to remain with the accounting in APB 25 must make
pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in the statement had been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1995 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the
following weighted average assumptions used for grants in 1996 and 1995:
<TABLE>
<S> <C>
Risk free interest rate........................................ 6.17%-6.48%
Expected dividend yield........................................ 0%
Expected lives................................................. 4.2-5.8 years
Expected volatility............................................ 73.6%
</TABLE>
F-11
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The total fair value of the options granted during the years ended December
31, 1996 and 1995 were computed as approximately $7,580,000 and $4,938,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's reported pro forma net income (loss) and pro forma net income (loss)
per share for the years ended December 31, 1996 and 1995 would have been as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Net income (loss):
As reported.................................................... $ -- $3,802
Pro forma...................................................... (2,027) 2,817
Primary EPS:
As reported.................................................... -- .45
Pro forma...................................................... (.28) .33
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that expected in future years.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
ACTUAL NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .07-
.47 176,689 2.9 $ .27 176,689 $ .27
1.08-
1.08 136,227 5.6 1.08 89,754 1.08
2.33-
2.33 34,095 6.2 2.33 14,101 2.33
4.00-
4.00 257,199 6.7 4.00 122,925 4.00
7.50-
7.50 81,150 7.6 7.50 -- --
10.00-
14.99 1,188,192 8.4 12.32 84,900 10.71
15.50-
19.00 180,076 6.8 16.99 17,926 15.81
23.50-
23.50 53,250 8.3 23.50 10,650 23.50
- ------- --------- --- ------ ------- ------
$ .07-
23.50 2,106,878 7.3 $ 9.90 516,945 $ 4.09
======= ========= === ====== ======= ======
</TABLE>
Restricted Stock
During 1996, the Company issued 10,000 shares of restricted stock to an
executive officer at no cost. The fair market value of the stock at the date
of issuance was $12.375 per share and the Company recorded compensation
expense of $123,750 related to the stock issuance.
F-12
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Employee Stock Purchase Plan
During 1995, the Company established an employee discount stock purchase
plan for eligible employees of XcelleNet, Inc. and designated subsidiaries and
authorized 300,000 shares for issuance under this plan. Participants may use
up to 10% of their compensation to purchase the Company's common stock at the
end of each six-month plan period for 85% of the lower of the beginning or
ending stock price in the plan period. At December 31, 1996, there were
256,665 shares of stock reserved for issuance under this plan. The weighted
average fair value of the purchase rights granted in 1996 and 1995 was $14.42
and $18.49, respectively.
Treasury Stock
In November 1995, the Company's Board of Directors approved the repurchase
of 527,879 shares of its common stock from Motorola, Inc. at a negotiated
price of approximately $15.15 per share. The closing price of the Company's
common stock on the date of the transaction was $15.50. After the transaction,
Motorola, Inc. owned 731,047 shares of the Company's common stock.
Additionally, on October 27, 1995, the Company's Board of Directors
authorized a common stock repurchase program of up to 350,000 shares. The
stock repurchase plan authorizes the Company to periodically purchase shares
in the open market or through privately negotiated transactions to meet the
requirements of its stock-based compensation plans.
3. INCOME TAXES
The components of the income tax provision are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 621 $ 1,792 $ 1,657
State............................................ 113 303 278
Foreign.......................................... 33 -- --
------- -------- --------
767 2,095 1,935
------- -------- --------
Deferred:
Federal.......................................... (663) 128 410
State............................................ (104) 7 30
Foreign.......................................... -- -- --
------- -------- --------
(767) 135 440
------- -------- --------
$ -- $ 2,230 $ 2,375
======= ======== ========
</TABLE>
The Company's effective tax rate varies from the statutory federal income
tax rate as a result of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.............. 34% 34% 34%
Foreign losses providing no tax benefit........ 25 1 2
State income taxes, net of federal benefit..... 3 3 3
R&D tax credits................................ (35) (3) (2)
FSC tax benefit................................ (2) -- --
State tax credits.............................. (9) -- --
Tax exempt interest income..................... (19) (2) --
Other, net..................................... 3 4 3
-------- ------- -------
Effective tax rate............................. --% 37% 40%
======== ======= =======
</TABLE>
F-13
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The sources of the difference between the financial reporting and income tax
bases of the Company's assets and liabilities that give rise to the deferred
income tax liabilities and assets and the tax effects of each are as follows
(in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Deferred income tax liabilities:
Capitalized software development costs....................... $ 832 $ 286
Prepaid marketing expense.................................... 55 121
Other........................................................ 83 99
-------- ------
970 506
-------- ------
Deferred income tax assets:
Software acquisition......................................... (1,115) --
Net losses from foreign subsidiaries......................... (533) (433)
Deferred lease credits....................................... (302) (316)
Allowance for doubtful accounts receivable................... (181) (97)
Other........................................................ (126) (60)
-------- ------
(2,257) (906)
-------- ------
Valuation allowance for deferred income tax assets............ 533 433
-------- ------
Net deferred income tax (assets) liabilities.................. $ (754) $ 33
======== ======
</TABLE>
The losses from the Company's U.K. operations were $258,000, $190,000, and
$289,000 in 1996, 1995, and 1994, respectively. The income tax benefit related
to losses since inception of $533,000 and $433,000 at December 31, 1996 and
1995, respectively, has been offset by a valuation allowance due to the
uncertainty of realization.
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office space and equipment under noncancelable
operating lease agreements, which expire at various dates through 2000. In
1996, 1995, and 1994, rent expense under these agreements totaled $1,754,000,
$1,131,000, and $790,000, respectively.
For financial reporting purposes, rent expense and lease incentives related
to the office lease are being recognized on a straight-line basis over the
term of the lease. The lease incentives and accrued lease costs resulted in
deferred credits of $885,000 and $847,000 at December 31, 1996 and 1995,
respectively, the majority of which are included in long-term liabilities in
the accompanying balance sheets.
F-14
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Future minimum payments due under all noncancelable operating lease
agreements at December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C> <C>
1997............................................ $2,412
1998............................................ 2,411
1999............................................ 2,472
2000............................................ 1,737
2001............................................ 41
Thereafter...................................... --
-------------
$9,073
=============
</TABLE>
Employment Agreement
The Company has entered into an agreement with its Chief Executive Officer
("CEO") that permits the CEO to obtain, at no cost, a license to use the full
range of the Company's products at one central site, and on up to 250 nodes
for his own internal business, charitable, or educational purposes. The CEO's
license right commences when his employment with the Company, any subsidiary
of the Company, or any 40% shareholder of the Company, is terminated other
than for cause, or in the event the CEO resigns from employment following a
change in control, as defined. This agreement has a term of twenty years
following the CEO's termination of employment.
Legal Proceedings
The Company is not a party to any material legal proceedings.
5. RELATED PARTY TRANSACTIONS
Electronic Commerce, Inc. ("E-Comm"), a system integrator based in Raleigh,
North Carolina that remarkets the Company's software to end-user customers, is
partially owned by the brother of the Company's CEO. During 1995 the Company's
CEO personally loaned E-Comm $200,000 which was outstanding at December 31,
1996, in the form of an unsecured note for working capital purposes.
Subsequent to year end, this loan was paid back in full in conjunction with
the acquisition of E-Comm by the Company. See Note 7 "Subsequent Events."
During 1996, 1995 and 1994, E-Comm purchased software from the Company
totaling $734,000, $852,000 and $63,000, respectively, of which $734,000,
$664,000 and $63,000 were remarketed to end-user customers and the balance was
used internally. All of these transactions were at the Company's standard
terms and conditions. At December 31, 1996 and 1995, $107,000 and $243,000,
respectively, were receivable from E-Comm and related to remarketing
activities. See Note 7 "Subsequent Events."
6. NONRECURRING CHARGES
Effective November 5, 1996, the Company acquired all tangible and intangible
WorldLink software rights from The NetPlex Group, Inc. under the terms of an
asset purchase agreement for a total consideration of approximately
$3,037,000. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations" ("APB 16"), and accordingly, the purchase price was allocated to
goodwill as of the acquisition date. An amount equal to the purchase price was
recorded on the Company's statement of operations as nonrecurring charges due
to uncertainties regarding its recoverability.
F-15
<PAGE>
XCELLENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In addition, the Company recorded nonrecurring charges of $459,000 primarily
representing severance plus hiring costs associated with certain key
employees.
7. SUBSEQUENT EVENTS
The following events have occurred subsequent to December 31, 1996:
Acquisition of E-Comm
During January 1997, the Company acquired all of the outstanding shares of
E-Comm for a total consideration comprising cash and stock of approximately
$2,675,000. The Company will account for the acquisition as a purchase in
accordance with APB 16. See Note 5 "Related Party Transactions."
Potential Public Stock Offering
During January 1997, the Company commenced an underwritten offer to the
public of up to 655,953 shares of the Company's common stock (the "Offering")
(excluding shares that may be sold upon exercise of the underwriters' over-
allotment option and any selling shareholders' shares and including 157,539
shares currently classified as treasury stock in the Company's accompanying
Consolidated Balance Sheets). It is currently anticipated that up to 844,047
shares would be offered by selling shareholders, of which no more than 113,000
shares would be offered by officers and directors of the Company. The Offering
will commence as soon as practicable after a registration statement to be
filed with the Securities and Exchange Commission by the end of February 1997
becomes effective.
Employment Agreements
During February 1997, the Company entered into employment agreements with
certain of its executive officers that provide for compensation and benefit
arrangements upon a change in control as defined in the agreements.
F-16
<PAGE>
[LOGO OF XCELLENET APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the Common
Stock, other than underwriting discounts, are set forth in the following
table. All amounts except the Securities and Exchange Commission registration
fee and the NASD filing fee are estimated.
<TABLE>
<CAPTION>
PORTION BORNE BY PORTION BORNE BY THE
THE COMPANY SELLING SHAREHOLDERS
---------------- --------------------
<S> <C> <C>
Securities and Exchange Commission
Registration Fee.................... $ 6,363 $ 2,491
NASD Filing Fee...................... 2,459 963
Nasdaq Listing Fee................... 12,577 4,923
Printing and Engraving Expenses...... 89,831 35,169
Accountants' Fees and Expenses....... 32,339 12,661
Legal Fees and Expenses.............. 89,831 35,169
Blue Sky Fees and Expenses........... 3,593 1,407
Transfer Agent and Registrar Fees.... 3,593 1,407
Miscellaneous........................ 46,874 18,350
-------- --------
Total.......................... $287,460 $112,540
======== ========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Company's Amended and Restated Bylaws and indemnification
agreements between the Company and each of its officers and directors, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by law with respect to all liability and loss
suffered and reasonable expense incurred by such person in any action, suit or
proceeding in which such person was or is made or threatened to be made a
party or is otherwise involved by reason of the fact that such person is or
was a director or officer of the Company. The Company is also obligated to pay
the reasonable expenses of the directors and officers incurred in defending
such proceeding if the indemnified party agrees to repay all amounts advanced
if it is ultimately determined that such person is not entitled to
indemnification.
In addition, the Company's Amended and Restated Articles of Incorporation
provide that the Company's directors shall not be liable to the Company or its
shareholders for monetary damages for breach of a director's fiduciary duty as
a director to the Company and its shareholders, except to the extent such
exemption from liability or limitation thereof is not permitted under the
Georgia Business Corporation Code. This provision in the Company's Amended and
Restated Articles of Incorporation does not eliminate the duty of care, and in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Georgia law. In
addition, each director continues to be subject to liability for monetary
damages for misappropriation of any corporate opportunity in violation of the
director's duties, for acts or omissions involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director and for distributions (including payment of dividends, stock
repurchases or redemptions) that are unlawful under Georgia law. This
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
The Company holds an insurance policy covering directors and officers under
which the insurer agrees to pay, subject to certain exclusions, for any claim
made against the directors and officers of the Company for a wrongful act that
they may become legally obligated to pay or for which the Company is required
to indemnify the directors or officers, including liabilities under the
Securities Act. The Company believes that these provisions of its Amended and
Restated Articles of Incorporation, Bylaws and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
II-1
<PAGE>
Reference is hereby made to the Section entitled Indemnification and
Contribution of the Underwriting Agreement, the form of which is filed as
Exhibit 1 hereto, in which the Underwriters agree to indemnify the directors
and officers of the Company and certain other persons against certain civil
liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company 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
Company of expenses incurred or paid by a director, officer or controlling
person of the Company 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 Company 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1 Form of Underwriting Agreement.
4.1* Specimen Stock Certificate for the Common Stock of the Registrant
(Incorporated herein by reference to Exhibit 4.01 to Registration
Statement No. 33-76012).
4.2* Amended and Restated Articles of Incorporation of the Registrant
(Incorporated herein by reference to Exhibit 3.01 to Registration
Statement No. 33-76012).
4.3* Amended and Restated Bylaws of the Registrant (Incorporated herein by
reference to Exhibit 3.02 to Registration Statement No. 33-76012).
4.4* Shareholder Agreement dated June 22, 1990 as amended by the Amendment
to Shareholder Agreement dated February 11, 1994 (the "Amendment")
among the Registrant and the persons listed on Exhibit A to the
Amendment (Incorporated herein by reference to Exhibit 10.12 to
Registration Statement No. 33-76012).
5 Opinion of Alston & Bird LLP.
23.1 Consent of Alston & Bird LLP (Included in Exhibit 5 above).
23.2 Consent of Arthur Andersen LLP.
24.1* Powers of Attorney (Included on signature page).
</TABLE>
- --------
*Previously filed
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise,
II-2
<PAGE>
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 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 Act
and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II- 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to a
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Atlanta, and state of Georgia, on
February 28, 1997.
XcelleNet, Inc.
/s/ Dennis M. Crumpler
By: _________________________________
Dennis M. Crumpler
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to a registration statement has been signed below by the following persons in
the capacities indicated on February 28, 1997.
SIGNATURE TITLE
/s/ Dennis M. Crumpler Chairman of the Board of Directors
- ------------------------------------- and Chief Executive Officer
DENNIS M. CRUMPLER (Principal Executive Officer)
Executive Vice President and Chief
* Financial Officer (Principal
- ------------------------------------- Financial and Accounting Officer)
SIDNEY V. SACK
Director
*
- -------------------------------------
STEPHEN P. BRADLEY
II-4
<PAGE>
SIGNATURE TITLE
Director
*
- -------------------------------------
DONALD L. HOUSE
Director
*
- -------------------------------------
RICHARD C. MARCUS
Director
*
- -------------------------------------
GEOFFREY A. MOORE
Director
*
- -------------------------------------
SHEREEF W. NAWAR
Director
*
- -------------------------------------
RICHARD L. NOLAN
Director
*
- -------------------------------------
JEFFREY P. PARKER
* By: /s/ Dennis M. Crumpler
---------------------------------
DENNIS M. CRUMPLER
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
<C> <S> <C>
1 Form of Underwriting Agreement.
4.1* Specimen Stock Certificate for the Common Stock of the
Registrant (Incorporated herein by reference to Exhibit 4.01 to
Registration Statement No. 33-76012).
4.2* Amended and Restated Articles of Incorporation of the
Registrant (Incorporated herein by reference to Exhibit 3.01 to
Registration Statement No. 33-76012).
4.3* Amended and Restated Bylaws of the Registrant (Incorporated
herein by reference to Exhibit 3.02 to Registration Statement
No. 33-76012).
4.4* Shareholder Agreement dated June 22, 1990 as amended by the
Amendment to Shareholder Agreement dated February 11, 1994 (the
"Amendment") among the Registrant and the persons listed on
Exhibit A to the Amendment (Incorporated herein by reference to
Exhibit 10.12 to Registration Statement No. 33-76012).
5 Opinion of Alston & Bird LLP.
23.1 Consent of Alston & Bird LLP (Included in Exhibit 5 above).
23.2 Consent of Arthur Andersen LLP.
24.1* Powers of Attorney (Included on signature page).
</TABLE>
- --------
*Previously filed
<PAGE>
1,500,000 SHARES/1/
XCELLENET, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
____________, 1997
ROBERTSON, STEPHENS & COMPANY LLC
ALEX. BROWN & SONS INCORPORATED
PUNK, ZIEGEL & KNOELL, L.P.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street, Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Xcellenet, Inc., a Georgia corporation (the "Company"), certain
shareholders of the Company named in Part I of Schedule B hereto (hereafter
called the "Inside Selling Shareholders"), and the shareholder of the Company
named in Part II of Schedule B hereto (hereafter called the "Outside Selling
Shareholder") (the Inside Selling Shareholders and the Outside Selling
Shareholder are hereafter collectively referred to as the "Selling
Shareholders") address you as the Representatives of each of the persons, firms
and corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirm their respective agreements with the several
Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell 655,953
---------------------
shares of its authorized and unissued Common Stock, par value $0.01 per share,
to the several Underwriters. The Selling Shareholders, acting severally and not
jointly, propose to sell an aggregate of 844,047 shares of the Company's
authorized and outstanding Common Stock, par value $0.01 per share, to the
several Underwriters. The 655,953 shares of Common Stock, par value $0.01 per
share, of the Company to be sold by the Company are hereinafter called the
"Company Shares" and the 844,047 shares of Common Stock, par value $0.01 per
share, to be sold by the Selling Shareholders are hereinafter called the
"Selling Shareholder Shares." The Company Shares and the Selling Shareholder
Shares are hereinafter collectively referred to as the "Firm Shares." The
Company also proposes to grant to the Underwriters an option to purchase up to
225,000 additional shares of the Company's Common Stock, par value $0.01 per
share (the "Option Shares"), as provided in Section 7 hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
- ----------
/1/ Plus an option to purchase up to 225,000 additional shares from the Company
to cover over-allotments.
<PAGE>
Shares. All shares of Common Stock, par value $0.01 per share, of the Company
to be outstanding after giving effect to the sales contemplated hereby,
including the Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the Selling
-------------------------------------------------------------------------
Shareholders.
- ------------
I. The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form S-3 (File No. 333-_____) with respect
to the Shares, including a prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the applicable rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "Preliminary
Prospectuses"), including all documents incorporated by reference therein, and
of any abbreviated registration statement pursuant to Rule 462(b) of the Rules
and Regulations have been delivered to you. The Company and the transactions
contemplated by this Agreement meet the requirements for using Form S-3 under
the Act.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
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and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement. Any reference to the Registration Statement or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date
of the Registration Statement or the Prospectus, as the case may be, and any
reference to any amendment or supplement to the Registration Statement or the
Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used in this Agreement, the term
"Incorporated Documents" means the documents which at the time are incorporated
by reference in the Registration Statement, the Prospectus or any amendment or
supplement thereto.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus or instituted proceedings for that purpose,
and each such Preliminary Prospectus has conformed in all material respects to
the requirements of the Act and the Rules and Regulations and, as of its date,
has not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
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circumstances under which they were made, not misleading; and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
and on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
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warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
The Incorporated Documents heretofore filed, when they were filed (or,
if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission thereunder;
any further Incorporated Documents so filed will, when they are filed, conform
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder; no such document when it was filed
(or, if an amendment with respect to any such document was filed, when such
amendment was filed), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and no such further amendment will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
4
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authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor any of its subsidiaries is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than __________________________. No subsidiary of the Company owns or
controls, directly or indirectly, any corporation, association or other entity.
(d) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and is a valid
and binding agreement on the part of the Company, enforceable in accordance with
its terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the Exchange Act or
under state or other securities or blue sky laws, all of which requirements have
been satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's knowledge,
threatened action, suit, claim or proceeding against the Company, any of its
subsidiaries or any of their respective officers or any of their respective
properties, assets or rights before any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective officers or properties or otherwise which
(i) might result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
5
<PAGE>
and its subsidiaries considered as one enterprise or might materially and
adversely affect their properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so disclosed;
and there are no agreements, contracts, leases or documents of the Company or
any of its subsidiaries of a character required to be described or referred to
in the Registration Statement or Prospectus or any Incorporated Document or to
be filed as an exhibit to the Registration Statement or any Incorporated
Document by the Act or the Rules and Regulations or by the Exchange Act or the
rules and regulations of the Commission thereunder which have not been
accurately described in all material respects in the Registration Statement or
Prospectus or any Incorporated Document or filed as exhibits to the Registration
Statement or any Incorporated Document.
(f) All outstanding shares of capital stock of the Company (including the
Selling Shareholder Shares) have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
the authorized and outstanding capital stock of the Company is as set forth in
the Prospectus under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus and any Incorporated Document (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Company Shares and the Option Shares have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right, co-
sale right, registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Company Shares or Option Shares
or the issuance and sale thereof other than those that have been expressly
waived prior to the date hereof and those that will automatically expire upon
and will not apply to the consummation of the transactions contemplated on the
Closing Date. No further approval or authorization of any shareholder, the
Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares except as may be required under the Act, the
Exchange Act or under state or other securities or blue sky laws. All issued
and outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
and were not issued in violation of or subject to any preemptive right, or other
rights to subscribe for or purchase shares and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest. Except as disclosed in the Prospectus and the financial statements of
the Company, and the related notes thereto, included or incorporated by
reference in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth or incorporated by reference in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
6
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(g) Arthur Andersen LLP, which has examined the consolidated financial
statements of the Company, together with the related schedules and notes, as of
December 31, 1996 and 1995 and for each of the years in the three (3) years
ended December 31, 1996, filed with the Commission as a part of or incorporated
by reference into the Registration Statement, which are included or incorporated
by reference in the Prospectus, are independent accountants within the meaning
of the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information, filed
with the Commission as part of or incorporated by reference into the
Registration Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as may be otherwise stated therein. The selected and summary financial
and statistical data included or incorporated by reference in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included or
incorporated by reference in the Registration Statement.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (i) any material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise, (ii) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(i) Except as set forth in the Registration Statement and Prospectus and
any Incorporated Document, (i) each of the Company and its subsidiaries has good
and marketable title to all properties and assets described in the Registration
Statement and Prospectus and any Incorporated Document as owned by it, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise, (ii)
the agreements to which the Company or any of its subsidiaries is a party
described in the Registration Statement and Prospectus and any Incorporated
Document are valid agreements, enforceable by the Company and its subsidiaries
(as applicable), except as the enforcement thereof may be limited by applicable
7
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bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) each of the Company and its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus and any Incorporated Document as leased by it, except
as the enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus and any Incorporated
Document, the Company owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise; and
all tax liabilities are adequately provided for on the books of the Company and
its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(l) To the best of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses adequate
rights to use all patents, patent rights, inventions, trade secrets, know-how,
8
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trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and Prospectus
and any Incorporated Document; the expiration of any patents, patent rights,
trade secrets, trademarks, service marks, trade names or copyrights would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise; the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(n) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(o) The Company has been advised concerning the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(p) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) Neither the Company nor any of its subsidiaries has at any time during
the last five (5) years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation of law,
or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
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(s) Each officer and director of the Company and each Selling Shareholder
has agreed in writing that such person will not, for a period of 90 days from
the date that the Registration Statement is declared effective by the Commission
(the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) with the prior written consent of
Robertson, Stephens & Company LLC. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder.
(t) Except as set forth in the Registration Statement and Prospectus and
any Incorporated Document, (i) the Company is in compliance with all rules, laws
and regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus and any Incorporated Document, (iii) the Company
will not be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
-- ----
applicable state or local law.
(u) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
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existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus and any
Incorporated Document.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
II. Each Selling Shareholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that (except that
the Outside Selling Shareholder does not make the representations or warranties
contained in Section 2(II)(l)):
(a) Such Selling Shareholder now has and on the Closing Date will have
valid marketable title to the Shares to be sold by such Selling Shareholder,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest other than pursuant to this Agreement; and upon delivery of
such Shares hereunder and payment of the purchase price as herein contemplated,
each of the Underwriters will obtain valid marketable title to the Shares
purchased by it from such Selling Shareholder, free and clear of any pledge,
lien, security interest pertaining to such Selling Shareholder or such Selling
Shareholder's property, encumbrance, claim or equitable interest, including any
liability for estate or inheritance taxes, or any liability to or claims of any
creditor, devisee, legatee or beneficiary of such Selling Shareholder.
(b) Such Selling Shareholder has duly authorized (if applicable), executed
and delivered, in the form heretofore furnished to the Representatives, an
irrevocable Power of Attorney (the "Power of Attorney") appointing ___________
and ___________ as attorneys-in-fact (collectively, the "Attorneys" and
individually, an "Attorney") and a Letter of Transmittal and Custody Agreement
(the "Custody Agreement") with ______________________________, as custodian (the
"Custodian"); each of the Power of Attorney and the Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Shareholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 6(i) hereof on behalf of
such Selling Shareholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Shareholder as provided in Section 3
hereof, to authorize the delivery of the Selling Shareholder Shares under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Shareholder in connection with this Agreement.
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(c) All consents, approvals, authorizations and orders required for the
execution and delivery by such Selling Shareholder of the Power of Attorney and
the Custody Agreement, the execution and delivery by or on behalf of such
Selling Shareholder of this Agreement and the sale and delivery of the Selling
Shareholder Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
blue sky laws) have been obtained and are in full force and effect; such Selling
Shareholder, if other than a natural person, has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Shareholder has full legal right, power and authority to enter into and perform
its obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Shareholder under this Agreement.
(d) Such Selling Shareholder will not, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired directly by
such Selling Shareholder or with respect to which such Selling Shareholder has
or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to partners or shareholders of
such Selling Shareholder, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the prior
written consent of Robertson, Stephens & Company LLC. The foregoing restriction
is expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition of Securities during the Lock-up Period, even
if such Securities would be disposed of by someone other than the Selling
Shareholder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Such Selling
Shareholder also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the securities held by
such Selling Shareholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by such
Selling Shareholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Shareholder, have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling Shareholder
that is not a natural person and has been duly executed and delivered by or on
behalf of such Selling Shareholder and is a valid and binding agreement of such
Selling Shareholder, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and the performance of this
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Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of or
constitute a default under any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder, or any
Selling Shareholder Shares hereunder, may be bound or, to the best of such
Selling Shareholders' knowledge, result in any violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
such Selling Shareholder or over the properties of such Selling Shareholder, or,
if such Selling Shareholder is other than a natural person, result in any
violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Shareholder.
(g) Such Selling Shareholder has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(h) Such Selling Shareholder has not distributed and will not distribute
any prospectus or other offering material in connection with the offering and
sale of the Shares.
(i) All information furnished by or on behalf of such Selling Shareholder
relating to such Selling Shareholder and the Selling Shareholder Shares that is
contained in the representations and warranties of such Selling Shareholder in
such Selling Shareholder's Power of Attorney or set forth in the Registration
Statement or the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date, was or will be, true, correct and
complete, and does not, and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(j) Such Selling Shareholder will review the Prospectus and will comply
with all agreements and satisfy all conditions on its part to be complied with
or satisfied pursuant to this Agreement on or prior to the Closing Date and will
advise one of its Attorneys and Robertson, Stephens & Company LLC prior to the
Closing Date if any statement to be made on behalf of such Selling Shareholder
in the certificate contemplated by Section 6(i) would be inaccurate if made as
of the Closing Date.
(k) Such Selling Shareholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Shareholders to the Underwriters pursuant to
this Agreement; such Selling Shareholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Shareholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Shareholder does not own any warrants, options
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or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus and any Incorporated Document.
(l) Each Inside Selling Shareholder has read the Registration Statement
and the Prospectus and represents and warrants that there are no untrue
statements of any material fact contained in the Registration Statement or any
amendment or supplement thereto, including any Incorporated Document, or
omissions to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any untrue
statements of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or omissions to state therein
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. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Shareholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Shareholders, respectively, at a purchase price of $_____ per share,
the respective number of Firm Shares as set forth opposite the names of the
Company and the Selling Shareholders in Schedule B hereto. The obligation of
each Underwriter to the Company and to each Selling Shareholder shall be to
purchase from the Company or such Selling Shareholder that number of Firm Shares
that (as nearly as practicable, as determined by you) is in the same proportion
to the number of Company Shares or Selling Shareholder Shares, as the case may
be, set forth opposite the name of the Company or such Selling Shareholder in
Schedule B hereto as the number of Firm Shares which is set forth opposite the
name of such Underwriter in Schedule A hereto (subject to adjustment as provided
in Section 10) is to the total number of Firm Shares to be purchased by all the
Underwriters under this Agreement.
The certificates in negotiable form for the Selling Shareholder Shares
have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Shareholder agrees that the certificates for
the Selling Shareholder Shares of such Selling Shareholder so held in custody
are subject to the interests of the Underwriters hereunder, that the
arrangements made by such Selling Shareholder for such custody, including the
Power of Attorney, is to that extent irrevocable and that the obligations of
such Selling Shareholder hereunder shall not be terminated by the act of such
Selling Shareholder or by operation of law, whether by the death or incapacity
of such Selling Shareholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Shareholder should die or be incapacitated, or if any other such event should
occur, before the delivery of the certificates for the Selling Shareholder
Shares hereunder, the Selling Shareholder Shares to be sold by such Selling
Shareholder shall, except as specifically provided herein or in the Custody
Agreement, be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether the Custodian shall have received notice of such
death or other event.
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Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company with regard to the Shares being purchased from the Company, and
to the order of the Custodian for the respective accounts of the Selling
Shareholders with regard to the Shares being purchased from such Selling
Shareholders (and the Company and such Selling Shareholders agree not to deposit
and to cause the Custodian not to deposit any such check in the bank on which it
is drawn, and not to take any other action with the purpose or effect of
receiving immediately available funds, until the business day following the date
of its delivery to the Company or the Custodian, as the case may be, and, in the
event of any breach of the foregoing, the Company or the Selling Shareholders,
as the case may be, shall reimburse the Underwriters for the interest lost and
any other expenses borne by them by reason of such breach), at the offices of
Alston & Bird, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia
30309-3424 (or at such other place as may be agreed upon among the
Representatives and the Company and the Attorneys), at 7:00 A.M., San Francisco
time (a) on the third (3rd) full business day following the first day that
Shares are traded, (b) if this Agreement is executed and delivered after 1:30
P.M., San Francisco time, the fourth (4th) full business day following the day
that this Agreement is executed and delivered or (c) at such other time and date
not later than seven (7) full business days following the first day that Shares
are traded as the Representatives and the Company and the Attorneys may
determine (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date;" provided, however, that if the
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Company has not made available to the Representatives copies of the Prospectus
within the time provided in Section 4(d) hereof, the Representatives may, in
their sole discretion, postpone the Closing Date until no later than two (2)
full business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
(2) full business days prior to the Closing Date. If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at a public offering price of $_____ per
share. After the public offering, the several Underwriters may, in their
discretion, vary the public offering price.
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The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
under the _____ and _____ paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement or any Incorporated
Document, and you, on behalf of the respective Underwriters, represent and
warrant to the Company and the Selling Shareholders that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. Further Agreements of the Company. The Company agrees with the several
---------------------------------
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
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any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus or the Incorporated Documents, or, prior to
the end of the period of time in which a prospectus relating to the Shares is
required to be delivered under the Act, file any document which upon filing
becomes an Incorporated Document, which shall not previously have been submitted
to you a reasonable time prior to the proposed filing thereof or to which you
shall reasonably object in writing, subject, however, to compliance with the Act
and the Rules and Regulations, the Exchange Act and the rules and regulations of
the Commission thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive notice or
obtain knowledge, of the issuance of any stop order by the Commission suspending
the effectiveness of the Registration Statement or of the initiation or threat
of any proceeding for that purpose; and it will promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal at the
earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, and the Incorporated Documents (three of which will include all
exhibits) all in such quantities as you may from time to time reasonably
request. Notwithstanding the foregoing, if Robertson, Stephens & Company LLC,
on behalf of the several Underwriters, shall agree to the utilization of Rule
434 of the Rules and Regulations, the Company shall provide to you copies of a
Preliminary Prospectus updated in all respects through the date specified by you
in such quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders as
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soon as practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the Company
will furnish to its shareholders as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to shareholders or prepared by the Company or any of its subsidiaries,
and (vi) any additional information of a public nature concerning the Company or
its subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the Shares
being sold by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by reason
of any failure, refusal or inability on the part of the Company or any Selling
Shareholder to perform any agreement on their respective parts to be performed
hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the
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Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith prepare, consult
with you concerning the substance of and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the prior
written consent of Robertson Stephens & Company LLC, effect the Disposition of,
directly or indirectly, any Securities other than the sale of the Company Shares
and the Option Shares hereunder and (i) the Company's issuance of options (or
Common Stock issued upon exercise thereof) under the Company's 1987 Stock Option
Plan, 1994 Stock Option Plan for Outside Directors, 1996 Long-Term Incentive
Plan (collectively, the "Plans"), (ii) the Company's issuance of Common Stock
upon the exercise of the 101,172 options currently outstanding outside of the
Plans and (iii) the Company's issuance of Common Stock under the Company's 1995
Employee Stock Purchase Plan.
(l) During a period of ninety (90) days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Option Plan or other employee benefit plan.
5. Expenses.
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(a) The Company and the Selling Shareholders agree with each Underwriter
that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and the Incorporated Documents and any
amendments or supplements thereto; the printing of this Agreement, the Agreement
Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky
Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and
Power of Attorney, and any instruments related to any of the foregoing; the
issuance and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates representing the
Shares and transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's independent
certified public accountants; the cost of furnishing to the several Underwriters
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectus and the Prospectus and the Incorporated Documents, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of Underwriters'
Counsel in connection with such NASD filings and blue sky qualifications); and
all other expenses directly incurred by the Company in connection with the
performance of their obligations hereunder. Any additional expenses incurred as
a result of the sale of the Shares by the Selling Shareholders will be borne
collectively by the Company and the
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Selling Shareholders. The provisions of this Section 5(a)(i) are intended to
relieve the Underwriters from the payment of the expenses and costs which the
Selling Shareholders and the Company hereby agree to pay, but shall not affect
any agreement which the Selling Shareholders and the Company may make, or may
have made, for the sharing of any of such expenses and costs. Such agreements
shall not impair the obligations of the Company and the Selling Shareholders
hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section 8(a) hereof, the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in Section 8(a)
hereof, it will reimburse the Underwriters on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section 8(b) hereof,
each Selling Shareholder agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(b) hereof relating to such Selling Shareholder, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of such Selling
Shareholder's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Shareholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof, the
Underwriters severally and not jointly agree that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(c) hereof, they will reimburse the Company and each
Selling Shareholder on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to
20
<PAGE>
reimburse the Company and each such Selling Shareholder for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and each
such Selling Shareholder shall promptly return such payment to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
and each such Selling Shareholder within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(c) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and
5(b) hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof and will not resolve the ultimate propriety or enforceability of
the obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the several
---------------------------------------
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
2:00 P.M., San Francisco time, on the date following the date of this Agreement,
or such later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been initiated or, to the knowledge of the Company,
any Selling Shareholder or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or any Incorporated Document or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel.
(b) All corporate proceedings and other legal matters in connection with
this Agreement, the form of Registration Statement and the Prospectus, any
Incorporated Document and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished
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<PAGE>
with such papers and information as they may reasonably have requested to enable
them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of counsel for the Company and the Inside Selling Shareholders, dated
the Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company and each Significant Subsidiary (as that term is
defined in Regulation S-X of the Act, but including Xcellenet UK Limited) has
been duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary are duly
qualified to do business as foreign corporations and are in good standing in
each jurisdiction, if any, in which the ownership or leasing of their properties
or the conduct of their businesses requires such qualification, except where the
failure to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise. To
such counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than
. To such counsel's knowledge, no Significant Subsidiary
- --------------------
owns or controls, directly or indirectly, any corporation, association or other
entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein, the issued and outstanding shares of capital stock
of the Company (including the Selling Shareholder Shares) have been duly and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or
other similar right;
(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to such counsel's knowledge,
have not been issued in violation of or
22
<PAGE>
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right and are owned by the Company free and clear
of any pledge, lien, security interest, encumbrance, claim or equitable
interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to
be issued by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or other similar right;
(vii) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
(x) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations; and each of the Incorporated
Documents (other than the financial statements (including supporting schedules)
and the financial data derived therefrom as to which such counsel need express
no opinion) complied when filed pursuant to the Exchange Act as to form in all
material respects with the requirements of the Act and the Rules and Regulations
and the Exchange Act and the applicable rules and regulations of the Commission
thereunder;
(xi) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply with
Georgia law;
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<PAGE>
(xii) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which are not described or
referred to therein or filed as required;
(xiv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations;
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or blue sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its subsidiaries
of a character required to be disclosed in the Registration Statement or the
Prospectus or any Incorporated Document by the Act or the Rules and Regulations
or by the Exchange Act or the applicable rules and regulations of the Commission
thereunder, other than those described therein;
(xvii) To such counsel's knowledge, neither the Company nor any of
its subsidiaries is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries, or over any of their properties or
operations;
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus and any Incorporated Document, no holders
of Common
24
<PAGE>
Stock or other securities of the Company have registration rights with
respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of Common
Stock or other securities, because of the filing of the Registration Statement
by the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or have
included securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights;
(xix) Each Inside Selling Shareholder which is not a natural
person has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of each Inside Selling Shareholder that
is not a natural person has been duly authorized by such Inside Selling
Shareholder; the Power of Attorney and Custody Agreement of each Inside Selling
Shareholder has been duly executed and delivered by or on behalf of such Inside
Selling Shareholder; and the Power of Attorney and Custody Agreement of each
Inside Selling Shareholder constitutes the valid and binding agreement of such
Inside Selling Shareholder, enforceable in accordance with its terms, except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(xx) Each of the Inside Selling Shareholders has full right, power
and authority to enter into and to perform its obligations under this Agreement
and to sell, transfer, assign and deliver the Shares to be sold by such Inside
Selling Shareholder hereunder;
(xxi) This Agreement has been duly authorized by each Inside Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Inside Selling Shareholder; and
(xxii) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will receive valid
marketable title to the Shares purchased by it from such Inside Selling
Shareholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. In rendering such opinion, such counsel may assume
that the Underwriters are without notice of any defect in the title of the
Shares being purchased from the Inside Selling Shareholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any
25
<PAGE>
amendment or supplement thereto and any Incorporated Document, when such
documents became effective or were filed with the Commission (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
and any Incorporated Document (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. Such counsel shall also state that the conditions for
the use of Form S-3 set forth in the General Instructions thereto have been
satisfied.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Georgia upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, the Inside Selling Shareholders or
officers of the Inside Selling Shareholders (when the Inside Selling Shareholder
is not a natural person), and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing Date, the following opinion of
counsel for the Outside Selling Shareholder, dated the Closing Date, addressed
to the Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters, to the effect that:
(i) The Outside Selling Shareholder has full right, power and
authority to enter into and to perform its obligations under the Power of
Attorney and Custody Agreement to be executed and delivered by it in connection
with the transactions contemplated herein; the Power of Attorney and Custody
Agreement of the Outside Selling Shareholder has been duly authorized by such
Outside Selling Shareholder; the Power of Attorney and Custody Agreement of the
Outside Selling Shareholder has been duly executed and delivered by or on behalf
of such Outside Selling Shareholder; and the Power of Attorney and Custody
Agreement of the Outside Selling Shareholder constitutes the valid and binding
agreement of such Outside Selling Shareholder, enforceable in accordance with
its terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
(ii) The Outside Selling Shareholder has full right, power and
authority to enter into and to perform its obligations under this Agreement and
to sell, transfer, assign and deliver the Shares to be sold by such Outside
Selling Shareholder hereunder;
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<PAGE>
(iii) This Agreement has been duly authorized by the Outside Selling
Shareholder and has been duly executed and delivered by or on behalf of the
Outside Selling Shareholder; and
(iv) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will receive valid
marketable title to the Shares purchased by it from the Outside Selling
Shareholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. In rendering such opinion, such counsel may assume
that the Underwriters are without notice of any defect in the title of the
Shares being purchased from the Outside Selling Shareholder.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Illinois upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Outside Selling Shareholder and of government
officials, in which case their opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(f) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, an opinion of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, in form and
substance satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole
27
<PAGE>
judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from
Arthur Andersen LLP shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent, to
the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheets of the Company as of
December 31, 1996 and December 31, 1995 and related consolidated statements of
operations, shareholders' equity, and cash flows for the twelve (12) months
ended December 31, 1996, December 31, 1995 and December 31, 1994, and (iii)
address other matters agreed upon by Arthur Andersen LLP and you. In addition,
you shall have received from Arthur Andersen LLP a letter addressed to the
Company and made available to you for the use of the Underwriters stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's consolidated financial statements as of December 31, 1996, did not
disclose any weaknesses in internal controls that they considered to be material
weaknesses.
(h) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later date on which Option Shares are to be purchased, as the case may be, and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto and the Incorporated Documents, when such Incorporated Documents became
effective or were filed with the Commission, contained all material information
required to be included therein by the Act and the Rules and Regulations or the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material respects conformed to the
requirements of the Act and the Rules and Regulations or the Exchange Act and
the applicable rules and regulations of the Commission thereunder, as the case
may be, the Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not
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<PAGE>
include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (b) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (d) any change in the capital stock
or outstanding indebtedness of the Company or any of its subsidiaries that is
material to the Company and its subsidiaries considered as one enterprise, (e)
any dividend or distribution of any kind declared, paid or made on the capital
stock of the Company or any of its subsidiaries, or (f) any loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(i) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date from the Attorneys for each Selling
Shareholder to the effect that, as of the Closing Date, they have not been
informed that:
(i) The representations and warranties made by any Selling
Shareholder herein is not true or correct in any material respect on the Closing
Date; or
(ii) Any Selling Shareholder has not complied with any obligation or
satisfied any condition which is required to be performed or satisfied on the
part of such Selling Shareholder at or prior to the Closing Date.
(j) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company and each Selling Shareholder in
writing prior to the date hereof that such person will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or shareholders of such person,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, or (iii) with the prior written consent of Robertson,
Stephens & Company LLC. The foregoing restriction shall have been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the such holder. Such
prohibited hedging or other transactions would including, without
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limitation, any short sale (whether or not against the box) or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to any Securities or with respect to any security (other
than a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from Securities. Furthermore, such person will
have also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(k) The Company and the Selling Shareholders shall have furnished to you
such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Shareholders or
officers of the Selling Shareholders (when the Selling Shareholder is not a
natural person) as to the accuracy of the representations and warranties of the
Company and the Selling Shareholders herein, as to the performance by the
Company and the Selling Shareholders of their respective obligations hereunder
and as to the other conditions concurrent and precedent to the obligations of
the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Shareholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby grants to the several Underwriters, for the purpose of covering over-
allotments in connection with the distribution and sale of the Firm Shares only,
a nontransferable option to purchase up to an aggregate of 225,000 Option Shares
at the purchase price per share for the Firm Shares set forth in Section 3
hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of
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the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment
shall take place at the offices of Alston & Bird, One Atlantic Center, 1201 West
Peachtree Street, Atlanta, Georgia 30309-3424, or at such other place as may be
agreed upon among the Representatives and the Company (i) on the Closing Date,
if written notice of the exercise of such option is received by the Company at
least two (2) full business days prior to the Closing Date, or (ii) on a date
which shall not be later than the third (3rd) full business day following the
date the Company receives written notice of the exercise of such option, if such
notice is received by the Company less than two (2) full business days prior to
the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof, the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject (including, without limitation, in its
capacity as an Underwriter or as a "qualified independent underwriter" within
the meaning of Schedule E of the Bylaws of the NASD), under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims,
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damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, including any Incorporated Document, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
-------- -------
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the Company
by such Underwriter, directly or through you, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement provided
-------- -------
in this Section 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter within the meaning of the Act or the Exchange Act.
This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Shareholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, including any Incorporated Document, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or
32
<PAGE>
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or such Underwriter by such Selling
Shareholder, directly or through such Selling Shareholder's representatives,
specifically for use in the preparation thereof, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement provided in
-------- -------
this Section 8(b) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of a material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
such Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify and
hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Shareholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, including any Incorporated Document, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii) of
this Section 8(c) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter, directly or through you, specifically for use in
the preparation thereof, and agrees to reimburse the Company and each such
Selling Shareholder for any legal or other expenses reasonably incurred by the
Company and each such Selling Shareholder in connection with investigating or
defending any such loss, claim, damage, liability or action.
33
<PAGE>
The indemnity agreement in this Section 8(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
each Selling Shareholder and each person, if any, who controls the Company or
any Selling Shareholder within the meaning of the Act or the Exchange Act. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
-------- -------
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
--------
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
34
<PAGE>
(e) In order to provide for just and equitable contribution in any action
in which a claim for indemnification is made pursuant to this Section 8 but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 8 provides for indemnification
in such case, all the parties hereto shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that, except as set forth in Section 8(f)
hereof, the Underwriters severally and not jointly are responsible pro rata for
the portion represented by the percentage that the underwriting discount bears
to the initial public offering price, and the Company and the Selling
Shareholders are responsible for the remaining portion, provided, however, that
-------- -------
(i) no Underwriter shall be required to contribute any amount in excess of the
amount by which the underwriting discount applicable to the Shares purchased by
such Underwriter exceeds the amount of damages which such Underwriter has
otherwise required to pay and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(e) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter, the Company or any Selling
Shareholder within the meaning of the Act or the Exchange Act and each officer
of the Company who signed the Registration Statement and each director of the
Company.
(f) The liability of each Selling Shareholder under the representations,
warranties and agreements contained herein and under the indemnity agreements
contained in the provisions of this Section 8 shall be limited to an amount
equal to the initial public offering price of the Selling Shareholder Shares
sold by such Selling Shareholder to the Underwriters minus the amount of the
underwriting discount paid thereon to the Underwriters by such Selling
Shareholder. The Company and such Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive Delivery.
-------------------------------------------------------------------------
All representations, warranties, covenants and agreements of the Company, the
Selling Shareholders and the Underwriters herein or in certificates delivered
pursuant hereto, and the indemnity and contribution agreements contained in
Section 8 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter within the meaning of the Act or the Exchange Act,
or by or on behalf of the Company or any Selling Shareholder, or any of their
35
<PAGE>
officers, directors or controlling persons within the meaning of the Act or the
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters shall
----------------------------
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Shareholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
36
<PAGE>
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i) 6:30 A.M.,
San Francisco time, on the first full business day following the effective date
of the Registration Statement, or (ii) the time of the initial public offering
of any of the Shares by the Underwriters after the Registration Statement
becomes effective. The time of the initial public offering shall mean the time
of the release by you, for publication, of the first newspaper advertisement
relating to the Shares, or the time at which the Shares are first generally
offered by the Underwriters to the public by letter, telephone, telegram or
telecopy, whichever shall first occur. By giving notice as set forth in Section
12 before the time this Agreement becomes effective, you, as Representatives of
the several Underwriters, or the Company, may prevent this Agreement from
becoming effective without liability of any party to any other party, except as
provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
or any Selling Shareholder shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
37
<PAGE>
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Xcellenet, Inc., 5 Concourse Parkway,
Suite 850, Atlanta, Georgia 30328, telecopier number (___) ________, Attention:
Dennis M. Crumpler, Chief Executive Officer; if sent to one or more of the
Selling Shareholders, such notice shall be sent mailed, delivered, telegraphed
(and confirmed by letter) or telecopied (and confirmed by letter) to
_____________________________, as Attorney-in-Fact for the Selling Shareholders,
at 5 Concourse Parkway, Suite 850, Atlanta, Georgia 30328, telecopier number
(___) ________.
13. Parties. This Agreement shall inure to the benefit of and be binding upon
-------
the several Underwriters and the Company and the Selling Shareholders and their
respective executors, administrators, successors and assigns. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person or entity, other than the parties hereto and their respective executors,
administrators, successors and assigns, and the controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in respect of
this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Shareholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company LLC on behalf of you.
38
<PAGE>
14. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts, each
------------
of which will constitute an original.
39
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Shareholders and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Shareholders and the several
Underwriters.
Very truly yours,
XCELLENET, INC.
By:
----------------------------------
Dennis M. Crumpler,
Chief Executive Officer
SELLING SHAREHOLDERS
By:
----------------------------------
Attorney-in-Fact for the Selling Shareholders
named in Schedule B hereto
40
<PAGE>
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
ALEX. BROWN & SONS INCORPORATED
PUNK, ZIEGEL & KNOELL, L.P.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: ROBERTSON, STEPHENS & COMPANY LLC
By: ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By:
----------------------------------
Authorized Signatory
41
<PAGE>
SCHEDULE A
----------
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------------
Robertson, Stephens & Company LLC..............
Alex. Brown & Sons Incorporated................
Punk, Ziegel & Knoell, L.P.....................
42
<PAGE>
SCHEDULE B
----------
PART I
- ------
NUMBER OF FIRM SHARES
COMPANY TO BE SOLD
------- ---------------------
Xcellenet, Inc.................. 655,953
NUMBER OF FIRM SHARES
NAME OF SELLING SHAREHOLDER TO BE SOLD
----------------------------- ---------------------
Dennis M. Crumpler.............. 100,000
Shereef W. Nawar................ 3,000
Corey M. Smith.................. 10,000
PART II
- -------
NUMBER OF FIRM SHARES
NAME OF SELLING SHAREHOLDER TO BE SOLD
----------------------------- ---------------------
Motorola, Inc................... 731,047
43
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EXHIBIT 5
[LETTERHEAD OF ALSTON & BIRD LLP APPEARS HERE]
February 27, 1997
XcelleNet, Inc.
5 Concourse Parkway
Suite 850
Atlanta, Georgia 30328
Re: Public Offering of Common Stock
Ladies and Gentlemen:
This opinion is given in connection with the filing by XcelleNet, Inc., a
Georgia corporation (the "Company"), of a Registration Statement on Form S-3
(the "Registration Statement") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, in connection with the registration of
1,725,000 shares of the $.01 par value Common Stock of the Company (the
"Shares"), consisting of up to 844,047 Shares to be sold by selling shareholders
(the "Selling Shareholder Shares") and up to 880,953 Shares (the "Company
Shares") to be sold by the Company if the underwriters' over-allotment option is
exercised.
We have examined such corporate records and documents as we deemed relevant
and necessary to enable us to give the opinion set forth herein, including the
Articles of Incorporation and Bylaws of the Company, as amended, and resolutions
of the Board of Directors of the Company authorizing the actions to be taken.
In conducting our examination we assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such documents.
Based upon the foregoing, we are of the opinion that (i) the Selling
Shareholder Shares are duly authorized, legally issued, fully paid and non-
assessable under the Georgia Business Corporation Code as in effect on this
date, and (ii) following the due execution and delivery of the Underwriting
Agreement in the form of Exhibit 1 to the Registration Statement among the
Company, certain Shareholders of the Company named in Part I of Schedule B
thereto, and Robertson Stephens & Company LLC, Alex. Brown & Sons Incorporated
and Punk, Ziegel & Knoell, L.P. as representatives of the several underwriters
named in Schedule A thereto (the "Underwriting Agreement"), the Company Shares,
when issued and sold to the several underwriters as provided in the Underwriting
Agreement, will be duly authorized, legally issued, fully paid and non-
assessable under the Georgia Business Corporation Code as in effect on this
date.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement. We further consent to the reference to our firm under
the heading "Legal Matters" in the Prospectus which is a part of the
Registration Statement.
ALSTON & BIRD LLP
By: ______________________
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this registration statement of our report dated January 23, 1997 for the fiscal
year ended December 31, 1996 and to all references to our Firm included in or
made a part of this Registration Statement.
Arthur Andersen LLP
Atlanta, Georgia
February 27, 1997
