<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998
REGISTRATION NO. 333-63125
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SMITH-GARDNER & ASSOCIATES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 7372 65-0090038
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1615 SOUTH CONGRESS AVENUE
DELRAY BEACH, FLORIDA 33445-6368
(561) 265-2700
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
GARY G. HEGNA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SMITH-GARDNER & ASSOCIATES, INC.
1615 SOUTH CONGRESS AVENUE
DELRAY BEACH, FLORIDA 33445-6368
(561) 265-2700
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
BRUCE I. MARCH STEPHEN A. RIDDICK
AKERMAN, SENTERFITT & EIDSON, P.A PIPER & MARBURY L.L.P.
450 EAST LAS OLAS BOULEVARD 36 SOUTH CHARLES STREET
FORT LAUDERDALE, FL 33301 BALTIMORE, MD 21201
(954) 463-2700 (410) 539-2530
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value........ 5,071,500 shares $10.00 $50,715,000 $14,778
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</TABLE>
(1) Includes 661,500 shares which may be purchased by the underwriters solely to
cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Act.
(3) $11,800 of the registration fee was previously paid. Accordingly, a fee of
$2,978 ($14,778 less $11,800) is being paid hereunder.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. INFORMATION CONTAINED
HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
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<PAGE> 2
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
, 1999
4,410,000 Shares
[Logo]
Smith-Gardner & Associates, Inc.
Common Stock
------------------------
Of the 4,410,000 shares of Common Stock being offered hereby, 4,000,000
shares are being sold by Smith-Gardner & Associates, Inc. ("Smith-Gardner" or
the "Company") and 410,000 shares are being sold by certain shareholders of the
Company (the "Selling Shareholders"). See "Principal and Selling Shareholders."
The Company will not receive any proceeds from the sale of shares by the Selling
Shareholders. Prior to this Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $8.00 and $10.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Company has made application for quotation of the
Common Stock on the Nasdaq National Market under the symbol "SGAI."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
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Total(3)................ $ $ $ $
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- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
661,500 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1999.
BT Alex. Brown SoundView Technology Group
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
[GRAPHIC DESCRIPTION FOR INSIDE FRONT COVER]
[COMPANY LOGO]
MAILORDER AND CATALOGING SYSTEM (MACS(R)) AND WEBORDER(TM) are suites of
software modules that provide a fully integrated, mission critical
enterprise-wide business system to the non-store marketing industry.
Smith-Gardner's family of software products offers a full range of
functions to automate non-store commerce including advertising and sales,
merchandising and purchasing, telemarketing and ordering, electronic and
Internet commerce, warehousing and shipping, production and operations,
accounting and enterprise-wide decision support. The MACS database is at the
core of all non-store marketing and sales functions.
[circular representation]
WebOrder for Internet Commerce
API to Other Best of Breed Applications
Peoplesoft (GL/AP/HR)
Manhattan Associates (WMS)
Great Plains (GL/AP)
Island Pacific Retail
MACS Unix
Enterprise MACS
MACS NT
EuroMACS
Functional Modules
MACS Database
[photos of computer screens]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
MACS, MACSII, AND THE MACSIMUM ARE REGISTERED TRADEMARKS OF THE COMPANY.
THE COMPANY ALSO HAS APPLIED FOR THE REGISTRATION OF EUROMACS, WEBORDER, AND
MACSIII. ALL OTHER TRADEMARKS OR TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE
THE PROPERTY OF THEIR RESPECTIVE OWNERS.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the consolidated financial statements and the notes thereto ("Consolidated
Financial Statements") appearing elsewhere in this Prospectus. Unless the
context otherwise requires, all references to "Smith-Gardner" or the "Company"
include Smith-Gardner & Associates, Inc. and its subsidiaries. Unless otherwise
indicated, all information contained in this Prospectus (i) assumes that the
Underwriters' over-allotment option is not exercised and (ii) gives effect to
the following transactions upon the consummation of this Offering, (a) the
conversion of $12.0 million aggregate principal amount of convertible debentures
(the "Convertible Debentures") into 22,556.14 shares of convertible
participating preferred stock, par value $0.01 per share (the "Convertible
Preferred Stock"), and 12,000 shares of redeemable preferred stock, par value
$0.01 per share (the "Redeemable Preferred Stock"), (b) the simultaneous
conversion of the Convertible Preferred Stock into 2,255,614 shares of Common
Stock and the redemption of the Redeemable Preferred Stock and (c) the issuance
of promissory notes (the "Promissory Notes") by the Company to its three
existing shareholders, Allan J. Gardner, Wilburn W. Smith and Thomas Quigley,
each of whom is a Selling Shareholder in this Offering ( collectively the
"Selling Shareholders" or the "Existing Shareholders"), in an aggregate amount
representing the estimated individual income tax liability of each of the
Existing Shareholders for the period beginning January 1, 1998 and ending on the
earlier of the date of the consummation of this Offering or a voluntary S
Corporation revocation (the "Distribution") (the conversion of the Convertible
Debentures and the Convertible Preferred Stock, the redemption of the Redeemable
Preferred Stock in connection with the consummation of this Offering and the
Distribution are referred to collectively as the "Concurrent Transactions").
THE COMPANY
Smith-Gardner & Associates, Inc. is a leading provider of mission-critical,
enterprise-wide software solutions, and related hardware and services, to the
non-store marketing industry. The Company's clients in the non-store marketing
industry are traditional direct marketing companies and Internet-only retailers,
as well as manufacturers, fulfillment houses and retailers with significant
non-store sales channels. The Company's MACS family of software products
("MACS") is designed to automate non-store commerce activities, including
advertising analysis, sales, telemarketing, ordering, merchandising,
procurement, electronic and Internet commerce, warehousing, shipping, accounting
and systems operation. The MACS products also provide managers and sales
personnel with real-time operations, inventory and customer data to improve both
management decision making and customer service.
Since the Company's inception in 1988, management of the Company has
concentrated on providing software-based systems and services to leading
non-store marketing companies and to retailers, manufacturers and fulfillment
houses with significant non-store sales channels. By focusing on this market,
management believes that the Company has been able to develop a significant
industry expertise that has been incorporated in the functionality of the
Company's products and services. The Company's MACS II and MACS III products
offer over 3,000 functional options, process up to 200,000 transactions per day
and are used primarily by companies with high-volume non-store commerce
operations. WebOrder, the Company's new Internet commerce solution, is a highly
scalable system that enables real-time interactive customer ordering and
automates processing and back-office operations for companies selling products
or services over the Internet. WebOrder incorporates both the functionality and
scalability of MACS II and MACS III.
The Company's solutions are used by more than 200 clients located primarily
in North America, Europe and Australia. Smith-Gardner's client base includes
companies such as Barnes & Noble, Coldwater Creek, Cyberian Outpost,
Egghead.com, Hammacher Schlemmer, Hickory Farms, Lego, Micro Warehouse,
Nordstrom, QVC Network and Time Life.
3
<PAGE> 5
The non-store marketing industry encompasses companies selling products
directly to customers through channels other than in-store sales, such as
catalogs, direct mail, television, radio, print media and the Internet. Over the
last ten years, a number of large retailers such as Macy's, Bloomingdale's,
Nordstrom and Saks Fifth Avenue have entered the non-store marketing industry by
establishing significant catalog sales operations. Recently, the non-store
marketing industry has expanded to include Internet-only retailers and a large
number of retailers, manufacturers and distributors adding Web-based sales
channels. According to a study sponsored by the Direct Marketing Association
("DMA"), this industry accounted for approximately $1.2 trillion in sales in
1997. Within the non-store marketing industry, Internet commerce is the fastest
growing segment, with a compound annual revenue growth of almost 250% over the
last three years.
As a result of the growth in Internet commerce and the increased use of
non-store marketing channels, many marketers need to enhance their information
technology solutions. Smith-Gardner believes that these companies seek solutions
that can help them effectively manage their order flow from Web pages and other
non-store channels, while simultaneously centralizing and automating their
back-office operations. These solutions must also be integrated seamlessly with
the companies' existing systems, applications and databases.
Smith-Gardner's strategy is to expand its client base within the non-store
marketing industry and to provide best-of-breed solutions to companies entering
the non-store marketing industry. To achieve this objective, the Company intends
to: (i) aggressively market its WebOrder product and capitalize on the rapid
growth in Internet commerce; (ii) extend its current product offerings onto new
platforms such as Windows NT and UNIX; (iii) develop a global market presence;
(iv) expand its direct sales force to generate sales of new products and
intensify its sales effort to existing clients; (v) continue the enhancement of
its service offerings; and (vi) pursue strategic opportunities.
The Company was incorporated as a Florida corporation in 1988. The
Company's principal offices are located at 1615 South Congress Avenue, Delray
Beach, Florida 33445-6368 and the telephone number at that location is (561)
265-2700.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
Common Stock offered by the Company....... 4,000,000 shares
Common Stock offered by the Selling
Shareholders.............................. 410,000 shares
Common Stock to be outstanding after this
Offering................................ 11,518,714 shares (1)
Use of proceeds........................... Repayment of indebtedness and
accrued interest, expansion of the
Company's marketing and sales
resources, further international
expansion and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.... SGAI
- ---------------
(1) Does not include (i) 850,000 shares of Common Stock reserved for issuance
under the Company's Stock Option Plan adopted in 1996 (the "1996 Stock
Option Plan"), pursuant to which options to purchase 776,300 shares of
Common Stock at an exercise price of $2.53 per share and options to purchase
9,236 shares of Common Stock at an exercise price of $4.53 per share (or the
initial public offering price upon the consummation of this Offering prior
to July 1, 1999) were outstanding at September 30, 1998 and (ii) 1,000,000
shares of Common Stock reserved for issuance under the Company's 1998 Stock
Option Plan (the "1998 Stock Option Plan," and together with the 1996 Stock
Option Plan, the "Plans"), pursuant to which options to purchase 538,003
shares of Common Stock, at an exercise price of $4.53 per share (or the
initial public offering price upon the consummation of this Offering prior
to July 1, 1999), were outstanding at September 30, 1998. See
"Management -- Stock Option Plans."
4
<PAGE> 6
SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................ $19,669 $21,465 $24,929 $18,529 $18,652 $15,093 $24,749
Cost of sales and services..... 11,333 12,351 14,922 10,433 11,889 9,046 13,128
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit................... 8,336 9,114 10,007 8,096 6,763 6,047 11,621
Operating expenses:
General and administrative... 1,671 3,246 3,206 4,776 4,567 3,102 4,646
Research and development..... 1,929 1,609 2,166 2,254 2,011 1,444 1,638
Sales and marketing.......... 410 508 523 980 1,482 1,066 1,653
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 4,010 5,363 5,895 8,010 8,060 5,612 7,937
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................... 4,326 3,751 4,112 86 (1,297) 435 3,684
Interest expense:
Interest on outstanding
debt....................... -- (39) (1,200) (1,200) (1,500) (1,050) (1,350)
Amortization of original
issue discount(1).......... -- (32) (960) (960) (660) (570) (270)
Interest income................ 26 50 129 42 109 84 68
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net interest
income (expense)..... 26 (21) (2,031) (2,118) (2,051) (1,536) (1,552)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).............. 4,352 3,730 2,081 (2,032) (3,348) (1,101) 2,132
Net income (loss) per share:
Basic........................ $0.83 $0.71 $0.39 (0.39) (0.64) (0.21) 0.40
========== ========== ========== ========== ========== ========== ==========
Diluted...................... $0.83 $0.50 $0.34 (0.39) (0.64) (0.21) 0.37
========== ========== ========== ========== ========== ========== ==========
Weighted average shares used in
calculating net income (loss)
per share:
Basic...................... 5,263 5,263 5,263 5,263 5,263 5,263 5,263
========== ========== ========== ========== ========== ========== ==========
Diluted.................... 5,263 7,519 7,519 5,263 5,263 5,263 7,519
========== ========== ========== ========== ========== ========== ==========
Pro forma data:
Net income (loss) before
income
tax (expense) benefit...... 4,352 3,730 $2,081 (2,032) (3,348) (1,101) 2,132
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma income tax (expense)
benefit (unaudited)(2)....... (1,672) (1,425) (1,155) 360 948 312 (1,053)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)
(unaudited)(2)............... $2,680 $2,305 $926 $(1,672) $(2,400) $(789) $1,079
========== ========== ========== ========== ========== ========== ==========
Pro forma basic and diluted net
loss per share
(unaudited)(2)............... $(0.46) $0.32
========== ==========
Number of shares used in
calculating pro forma basic
and diluted net loss per
share........................ 5,263 7,519
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
DECEMBER 31, -------------------------
------------------------------------------------ AS ADJUSTED
1993 1994 1995 1996 1997 ACTUAL (3)
------- ------- ------- ------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 132 $12,187 $ -- $ 60 $ 169 $ 3,567 $20,524
Working capital.......................... 1,18 0 13,614 1,175 1,232 16 3,062 21,163
Total assets 3,005 18,580 4,717 3,666 3,135 11,958 28,541
Convertible debt and accrued
interest(1)............................ -- 8,589 9,510 11,670 13,830 15,450 0
Stockholders' equity (deficit)(1)........ 1,381 5,502 (7,667) (9,699) (13,048) (10,967) 20,562
</TABLE>
(Footnotes on next page)
5
<PAGE> 7
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(1) The fair value of the conversion features of the Convertible Debentures has
been determined to be $3.5 million based on the difference between the
stated interest rates and the estimated market rate of such Convertible
Debentures on the date of issuance. The amount is included in additional
paid-in capital in the accompanying consolidated balance sheets, with the
resulting original issue discount ("OID") on the convertible debt being
amortized over the term of the note. This interest expense is a non-cash
item.
(2) As a result of its election to be treated as an S Corporation for income tax
purposes, the Company has not been subject to federal or certain state
income taxes. Immediately prior to or contemporaneously with this Offering,
the Company's S Corporation status will terminate and thereafter the Company
will be subject to federal and certain state taxes at applicable rates for a
C corporation. The unaudited pro forma income tax (expense) benefit
presented in the consolidated statements of operations represents the
estimated taxes that would have been recorded had the Company been a C
corporation for income tax purposes for each of the periods presented.
(3) Adjusted to (a) give retroactive effect to the Concurrent Transactions and
(b) give effect to the sale by the Company of 4,000,000 shares of Common
Stock offered and sold by the Company hereby at an assumed initial public
offering price of $9.00 and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company. See "Use
of Proceeds."
6
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should consider the following factors
carefully in evaluating an investment in the Common Stock offered hereby. This
Prospectus contains "forward-looking statements" relating to, without
limitation, future performance and plans and objectives of management for future
operations that are based on the beliefs of, assumptions made by and information
currently available to the Company's management. The words "expect," "estimate,"
"anticipate," "believe," "intend," "plan" and similar expressions and variations
thereof are intended to identify forward-looking statements. The cautionary
statements set forth in this "Risk Factors" section and elsewhere in this
Prospectus identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those expressed in or implied by such
forward-looking statements.
Dependence on Principal Product Line. The Company currently derives
substantially all of its revenue from sales of its MACS family of products and
related services and hardware. The Company expects to continue to focus on
non-store marketing companies as its primary source of clients. Any factor
adversely affecting the market for non-store commerce systems in general, or the
Company's products in particular, could adversely affect the Company's business,
financial condition or results of operations. The Company's future performance
will depend in large part on the successful development, introduction and client
acceptance of new and enhanced versions of MACS. There can be no assurance that
the Company will be successful in marketing and selling MACS or in developing
and introducing new or enhanced versions of MACS. Any factor adversely affecting
the sale of the Company's MACS family of products or other new products,
including delays in development, software flaws, incompatibility with
industry-leading hardware platforms or operating systems, or negative ratings of
the Company's products could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"Business -- Products."
Dependence on Product Development. The market for the Company's products
and services is characterized by rapidly changing technology, evolving industry
standards and new product introductions. The Company's future success will
depend in part upon its ability to enhance its existing products and services
and to develop and introduce new products and services to meet changing industry
and client requirements. There can be no assurance that the Company will be able
to avoid the possible obsolescence of its products due to rapid technological
change and evolving industry standards. The process of developing software
products such as those offered by the Company is extremely complex and is
expected to become increasingly complex and expensive in the future. The Company
is currently developing a number of new software products including, among
others, MACS for UNIX, MACS for Windows NT ("MACS for NT") and nMACS. The
Company has only recently developed and commenced sales of WebOrder. There can
be no assurance that the Company will successfully complete the development of
such new products in a timely fashion or that the Company's current or future
products will satisfy the needs of the non-store marketing industry. The
Company's continued growth is highly dependent on the success of such products,
and a failure of any one of such products to achieve market acceptance could
have a material adverse effect on the Company's business, financial condition or
results of operations. In addition, certain of the Company's clients request
customization of the Company's software products to address unique
characteristics of their businesses or computing environments. The Company's
commitment to customization could place a burden on the Company's resources or
delay the delivery or installation of products which, in turn, could materially
adversely affect the Company's relationship with significant clients or
otherwise materially adversely affect its business, financial condition or
results of operations. The Company's ability to remain competitive and respond
to technological change is also dependent, to a lesser degree, upon the Omnidex
software, which the Company licenses from Dynamic Information System Corporation
("DISC") and incorporates in MACS. In the event that Omnidex or other products
from similar such vendors have design defects or flaws, or if such
7
<PAGE> 9
products are unexpectedly delayed in their introduction or become obsolete
subsequent to release, the Company's business, financial condition or operating
results could be materially adversely affected. Such material adverse effects
could diminish the Company's reputation, credibility and relationships with its
current and prospective clients. There can also be no assurance that products or
services developed by others will not adversely affect the Company's competitive
position or render its products noncompetitive or obsolete.
Dependence on the Non-Store Marketing Industry. The Company currently
derives substantially all of its revenue from licensing its applications
software, selling related maintenance, consulting and training services to
companies in the non-store marketing industry and selling hardware. The
Company's clients include a range of organizations in the non-store marketing
industry, but during the Company's most recent fiscal year a substantial
majority of the Company's revenue was generated from the licensing and sale of
its products and services to traditional direct marketers, such as mail order
catalog companies. The success of the Company's clients, particularly the mail
order catalog companies, is directly related to general economic conditions
affecting consumer purchases from non-store marketers. In addition, because of
the capital expenditures required in connection with an investment in the
Company's products and services, the Company believes that demand for its
products could be disproportionately affected by fluctuations, disruptions,
instability or downturns in the non-store marketing industry and general
economic conditions in the United States and Europe, which may cause clients and
potential clients to delay, cancel or reduce any planned expenditures for the
Company's software products and services. Any resulting decline in demand for
the Company's products and services could have a material adverse effect on the
Company's business, financial condition or results of operations.
Dependence on Proprietary Technology. The Company's success and ability to
compete are dependent largely upon its proprietary technology. The Company
relies on a combination of trade secret, copyright and trademark law,
nondisclosure agreements and technical measures to protect its proprietary
technology. The Company enters into confidentiality agreements with all of its
employees, as well as with its clients and potential clients seeking proprietary
information, and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of its technology. In
addition, the laws of some foreign countries do not protect proprietary
technology rights to the same extent as do the laws of the United States. There
can be no assurance that third parties will not assert infringement claims in
the future or, if infringement claims are asserted, that such claims will be
resolved in the Company's favor. Any infringement claims resolved against the
Company could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Proprietary
Rights and Licenses."
Fluctuations in Quarterly Performance; Seasonality; Recent Losses. The
Company's revenue and operating results have varied substantially from quarter
to quarter. The Company's quarterly operating results may continue to fluctuate
due to a number of factors, including: (i) the timing, size and nature of the
Company's individual license transactions; (ii) the timing of the introduction
and the market acceptance, if any, of new products or product enhancements by
the Company or its competitors; (iii) the timeliness of such product
introductions relative to any announced timetable; (iv) the size and timing of
individual orders; (v) the deferral of orders by clients in anticipation of new
products or product upgrades; (vi) technological changes in the operating
systems upon which the Company's products run; (vii) changes in the Internet
adversely affecting Internet commerce; (viii) the relative proportions of
revenue derived from license fees, hardware, maintenance, consulting and other
recurring revenue and professional services; (ix) the hardware/software revenue
mix; (x) the ability to procure and delivery of hardware system components
within a required time period; (xi) changes in the Company's operating expenses;
(xii) the timing and magnitude of software upgrades, if any, by the Company's
clients; (xiii) price changes in the Company's products; (xiv) personnel
changes; and (xv) fluctuations in economic and financial
8
<PAGE> 10
market conditions. Fluctuations in operating results may also occur as a result
of the Company's business strategy to focus on developing and selling customized
applications to larger customers to meet such customers' specific requirements.
The Company believes it will be difficult to predict the timing of these types
of sales because they involve both designing the solution to meet the client's
needs and convincing the client to purchase the products, and other risks over
which the Company has little or no control. The Company is generally unable to
adjust its spending quickly enough to compensate for unexpected shortfalls in
revenue. Consequently, a significant shortfall in revenue in any quarter could
adversely impact the Company's operating results for that quarter. As a result,
the Company believes that period-to-period comparisons of its operating results
will not necessarily be meaningful and should not be relied upon as an
indication of future performance.
The timing, size and nature of individual license transactions are also
important factors in the Company's quarterly operating results. Many such
license transactions involve large dollar amounts, and the sales cycles for
these transactions are often lengthy and unpredictable. There can be no
assurance that the Company will be successful in closing large license
transactions on a timely basis or at all. The Company generally has realized
lower revenue in the fourth calendar quarter of the year than in the other
quarters. The Company believes that this has been due primarily to the tendency
of many of the Company's clients to avoid implementing a new system or an
upgrade of an existing system during the holiday season, typically the busiest
time of year for substantially all of the Company's clients. Due to all of the
foregoing factors, the Company believes that period to period comparisons of its
operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indicators of future performance.
Furthermore, the Company experienced net losses of $2.0 million and $3.3
million for fiscal years 1996 and 1997, respectively. Such losses resulted
primarily from interest expense and original issue discount relating to the
Convertible Debentures which equaled $2.2 million in 1996 and 1997, costs
incurred in connection with the Company's international expansion, including the
opening of offices in the United Kingdom and Australia, product development with
respect to MACS III, EuroMACS, WebOrder, nMACS and other products, and
reorganization of the Company's marketing, support and sales operations. There
can be no assurance that the Company will be profitable in the future, that
future revenue and operating results will not vary substantially or that the
Company's operating results will not be below the expectations of public market
analysts and investors. In either case, the price of the Common Stock could be
materially adversely affected by fluctuations in the Company's quarterly
performance or future losses of the Company.
Management of Growth. The Company's business has grown significantly in
size and complexity over the past five years. For example, from 1995 to 1998,
the number of employees increased from 168 to 255, and the Company expects to
hire additional personnel during 1999. The growth in the size and complexity of
the Company's business as well as its client base has placed, and any additional
growth would be expected to continue to place, a significant strain on the
Company's management, operations and resources. The Company anticipates that
continued growth, if any, will require it to recruit, hire and retain a
substantial number of new research and development, managerial, finance, sales,
marketing and support personnel. There can be no assurance that the Company will
be successful in recruiting, hiring or retaining such personnel. The Company's
ability to compete effectively and to manage future growth, if any, will depend
on its ability to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
its work force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations.
Furthermore, one element of the Company's growth strategy is to seek
acquisitions of businesses, products and technologies that are complementary to
those of the Company. There can be no assurance that the Company will be able to
fully integrate any such acquired businesses with the Company's existing
operations, operate any such businesses profitably or otherwise implement its
growth strategy. If the Company's management is unable to manage growth
effectively, the
9
<PAGE> 11
Company's business, financial condition or results of operations could be
materially adversely affected.
Expansion into New Markets. As the non-store marketing industry continues
to evolve, it is expected that there will be an increase in the number of
marketers utilizing non-store based sales and marketing functions in which
automation plays a key role in the sales process. With the rapid growth of
Internet commerce and the continued growth of the non-store marketing industry
in general, the Company expects to target clients to whom it has not previously
sold its products and who sell their products in markets in which the Company
has not previously participated. There can be no assurance that the Company will
be able to sell products to these new market participants. In addition, some of
the Company's existing clients will expand their activities into markets in
which the Company has limited or no experience. There can be no assurance that
the Company will be able to successfully expand its business with these existing
clients. If the Company is unable to sell products to these new market
participants and develop its business with its existing clients entering new
markets, the Company's growth plans would be curtailed which could have a
materially adverse effect on the Company's business, financial condition or
results of operations.
Dependence on Third Parties. The development and implementation of the
Company's MACS software depends on proprietary technology licensed from third
parties. The implementation of MACS is dependent on Omnidex by DISC. The
introduction and increased market acceptance of other operating systems that are
incompatible with the Company's products, or the failure of the Hewlett-Packard
("HP") MPE/iX operating system to continue to receive market acceptance, could
materially adversely affect the market for the Company's products. MACS also
relies on certain proprietary features of the IMAGE database management system
developed by HP. MACS for UNIX and MACS for NT, which are currently under
development by the Company, will be dependent on the Raima, and, if integrated,
Oracle and SQL Server databases. The introduction and increased market
acceptance of database management systems that are incompatible with the
Company's products, or the failure of HP3000 products to achieve continued
market acceptance, could adversely affect the market for the Company's products.
In the event the Company's current platform becomes obsolete, there can be no
assurance that the Company would be able to license in a timely fashion, or at
all, a database with similar features and on terms acceptable to the Company.
Any failure of the Company to license such a database would adversely affect its
business, financial condition or results of operations. See
"Business -- Products" and "-- Products Under Development."
Dependence on Hardware Sales. In conjunction with the licensing of MACS
products, the Company resells a variety of hardware developed and manufactured
by third parties in order to provide the Company's clients with an integrated
solution. The Company obtains all of the HP hardware sold by it pursuant to a
distribution agreement with Client Systems, Inc., an HP distributor. Revenue
from such hardware sales can amount to a significant portion of the Company's
total revenue in any period. For the fiscal years ended December 31, 1996 and
December 31, 1997 and for the nine months ended September 30, 1998, revenue
derived from the sale of HP equipment amounted to 30.0%, 26.6% and 27.3%,
respectively, of the Company's total revenue. As the market for the distribution
of hardware products becomes more competitive, the Company's clients may choose
to purchase such hardware directly from the manufacturers or distributors of
such products, with a resulting decrease in the Company's revenue derived from
the sales of such products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Products."
Competition. The market for non-store marketing software is competitive,
rapidly evolving and highly sensitive to new product introductions and marketing
efforts by industry participants. The market is also highly fragmented and
served by enterprise resource planning ("ERP") software providers, electronic
commerce software providers, consulting firms, point solution providers targeted
at the non-store marketing industry and other software companies. Some of these
companies serve only their respective local markets or specific client types.
Much of the Company's
10
<PAGE> 12
competition stems from information systems developed and serviced internally by
its competitors' in-house management information systems ("MIS") departments.
Many of the Company's present and potential future competitors may have
significantly greater resources, generate higher revenue and have greater name
recognition than the Company. In addition, as the Company continues its
expansion into new segments of the non-store marketing industry, such as
Internet commerce, the Company will face competition from other software
companies, MIS departments and unforeseen and unpredictable sources. There can
be no assurance that the Company's competitors will not develop products
comparable or superior to those developed by the Company or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
client requirements. It is also possible that alliances among competitors may
emerge and rapidly acquire significant market share. Increased competition may
result in price reductions, reduced gross margins and loss of market share, any
of which could materially adversely affect the Company's business, financial
condition or results of operations. There can be no assurance that the Company
will be able to compete effectively against current and future competitors. See
"Business -- Competition."
Product Defects and Product Liability. The Company's software products are
highly complex and sophisticated and could from time to time contain design
defects or software errors that could be difficult to detect and correct.
Errors, bugs or viruses may result in loss of or delay in market acceptance or
loss of client data as well as diminish the Company's reputation, credibility
and relationships with its current clients and any prospective clients. There
can be no assurance that, despite testing by the Company and its clients, errors
will not be found in the Company's products, which errors could result in a
delay in or the prevention of the applicable software product from attaining
broad market acceptance and thus could have a material adverse effect upon the
Company's business, financial condition or results of operations. The Company's
products are frequently used by its clients to perform mission-critical
functions. Therefore, design defects, software errors, misuse of the Company's
products, incorrect data from external sources or other potential problems
within or outside of the Company's control that may arise from the use of the
Company's products could result in financial or other damage to the Company's
clients. Although the Company's license agreements with its clients typically
contain provisions designed to limit the Company's exposure to such potential
claims, the provisions may not effectively protect the Company against such
claims and the liability and costs associated therewith. Although the Company
maintains general liability insurance coverage, including coverage for errors or
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. Accordingly, any such claim could have a material
adverse effect upon the Company's business, financial condition or results of
operations.
Dependence on Key Personnel. The Company's business involves the delivery
of services and is labor intensive. The Company's success will depend in large
part upon its ability to attract, recruit, hire, retain and motivate highly
skilled employees. There is significant competition for employees with the
skills required to perform the services offered by the Company. There can be no
assurance that the Company will be able to attract and retain sufficient numbers
of highly skilled employees in the future. The loss of Gary G. Hegna, the
Company's President and Chief Executive Officer, Allan J. Gardner, the Company's
Executive Vice President -- Advanced Technologies, Wilburn W. Smith, the
Company's Executive Vice President -- Sales, or a significant number of the
Company's highly skilled employees, could have a material adverse effect on the
Company's business, financial condition or results of operations, including its
ability to attract employees, obtain new clients and perform installations. The
Company does not hold a key person insurance policy on the lives of any of its
executive officers or directors and has not entered into employment agreements
with any of its executive officers. See "Management."
Risks Associated with International Operations. The Company intends to
expand its international sales activity as part of its business strategy. In
order to increase international sales, the Company must establish additional
foreign operations and hire additional personnel. This will
11
<PAGE> 13
require significant management attention and financial resources and could
materially adversely affect the Company's business, financial condition or
results of operations. In addition, there can be no assurance that the Company
will be able to maintain or increase international market demand for the
Company's products. In addition, the Company's international business may be
subject to a variety of risks, including difficulties in collecting
international accounts receivable or obtaining U.S. export licenses, potentially
longer payment cycles, increased costs associated with maintaining international
marketing efforts, the introduction of non-tariff barriers and higher duty rates
and difficulties in enforcement of contractual obligations and intellectual
property rights. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition or results of
operations.
Control by Existing Management and Shareholders. Upon the completion of
this Offering, Wilburn W. Smith and Allan J. Gardner, the founders of the
Company, together with the holders of the Convertible Debentures (Advent VII
L.P., Advent Atlantic and Pacific II L.P., Advent Industrial II L.P., Advent New
York L.P., Chestnut Capital International III Limited Partnership and TA Venture
Investors Limited Partners (each a "Lender" and collectively the "Lenders")),
will beneficially own approximately 59.5% of the Company's outstanding Common
Stock. As a practical matter, these shareholders, if acting together, would have
the ability to elect the Company's directors and may have the ability to
determine the outcome of corporate actions requiring shareholder approval,
irrespective of how other shareholders of the Company may vote. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Management" and "Principal and Selling
Shareholders."
Benefits of the Offering to Existing Shareholders and the Lenders. Upon
the completion of this Offering and the sale of shares of Common Stock by the
Existing Shareholders, the Existing Shareholders will, in the aggregate,
beneficially own 4,853,100 shares of outstanding Common Stock, which shares will
represent approximately 42.1% of the Company's total outstanding Common Stock.
The Existing Shareholders have paid an average of $.01 per share for the Common
Stock held by them, as compared to an assumed initial public offering price of
$9.00 per share, representing an increase in the market price per share of
$8.99, or an aggregate increase of approximately $43.6 million. Furthermore, a
portion of the net proceeds of the Offering will be used to effect the
Distribution to the Existing Shareholders, which is estimated to be
approximately $600,000. Upon consummation of this Offering, the Lenders will
receive (i) $12.0 million of the net proceeds of this Offering as a result of
the redemption of all of the Redeemable Preferred Stock, (ii) approximately $4.2
million of the proceeds to pay accrued interest due and payable, and (iii)
2,255,614 shares of Common Stock upon the conversion of the Convertible
Preferred Stock, which shares will represent 19.6% of the Company's outstanding
Common Stock upon completion of this Offering. This Offering will also create a
public market for the resale, and substantially increase the market value, of
shares held by the Existing Shareholders and Lenders, as well as shares held by
various executive officers of the Company.
No Public Market; Volatility of Stock Price. Prior to this Offering, there
has been no public market for the Common Stock, and there can be no assurance
that an active trading market will develop or be sustained after this Offering
or that the market price of the Common Stock will not decline below the initial
public offering price. The initial public offering price will be determined by
negotiations among the Company, the Selling Shareholders and the Representatives
of the Underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Investors should be
aware that market prices for securities of software companies such as the
Company are highly volatile. Moreover, from time to time, the stock market
experiences significant price and volume volatility that may affect the market
price of the Common Stock for reasons unrelated to the Company's performance.
12
<PAGE> 14
Absence of Dividends. Although the Company has made distributions in the
past to its shareholders in part to offset their tax liability with respect to
the Company's S Corporation earnings, the Company does not anticipate paying
cash dividends in the foreseeable future. See "Dividend Policy" and "S
Corporation Status."
Dilution. Purchasers of shares of Common Stock in this Offering will
suffer an immediate and substantial dilution in the net tangible book value of
their Common Stock from the initial public offering price. See "Dilution."
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
amounts of the shares in the public market could adversely affect the market
price of the Common Stock and could impair the Company's ability to raise
capital through sale of its equity securities. Upon completion of this Offering,
the Company will have 11,518,714 shares of Common Stock outstanding (assuming no
exercise of options outstanding under the Plans). Of these shares, the 4,410,000
shares sold in this Offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless they are purchased by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act (the resales of which
would be subject to certain limitations and restrictions described below). The
remaining 7,108,714 shares are "restricted shares" under Rule 144 (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered under the Securities Act or if they qualify for an exemption from
registration under the Securities Act. The Company and the holders of such
7,108,714 shares of Common Stock have agreed not to offer, pledge, sell, offer
to sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
shares of Common Stock until 180 days after the date of this Prospectus, subject
to certain exceptions. These exceptions include: (i) the prior written consent
of BT Alex. Brown Incorporated, (ii) grants or awards of shares of Common Stock
authorized under the Plans at the time of the effectiveness of the Registration
Statement, (iii) bona fide pledges to persons who agree to be bound by the
restrictions to which the pledgor is subject, (iv) bona fide gifts or similar
transfers or devises for estate planning, charitable and other related purposes,
in any such case only to persons who agree to be bound by the restrictions to
which the transferor is subject, and (v) as consideration for future
acquisitions.
After the completion of the Offering, the Company intends to file a
Registration Statement on Form S-8 (the "Form S-8") under the Securities Act to
register the 1,850,000 shares of Common Stock issued or reserved for issuance
under the Plans. After the date of such filing, if not otherwise subject to a
lock-up agreement, shares purchased pursuant to such plans and options generally
would be available for resale in the public market upon vesting and/or exercise
of options or awards, subject to the restrictions of Rule 144 applicable to
affiliates of the Company. See "Management -- Stock Option Plans" and "Shares
Eligible for Future Sale."
Anti-takeover Provisions. The Articles of Incorporation provide for a
classified Board of Directors. In addition, shares of the Company's Preferred
Stock may be issued in the future without further shareholder approval and upon
such terms and conditions, and having such rights, privileges and preferences,
as the Board of Directors may determine. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of any
holders of Preferred Stock that may be issued in the future. There are no shares
of Preferred Stock currently outstanding and the Company has no present plans to
issue any shares of Preferred Stock subsequent to the consummation of this
Offering. These provisions, together with certain provisions of Florida law and
other provisions of the Articles of Incorporation and Bylaws, may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or management of the Company, including transactions in which
shareholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
shareholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock -- Certain Anti-takeover Effects."
13
<PAGE> 15
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the Year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, prior to January 1, 2000 computer systems and/or software used by many
companies may need to be upgraded to become Year 2000 compliant. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The original design of MACS featured a four
position century field which provided century independence. The only exception
to this feature was the GTS programs developed by a third-party provider and
incorporated into MACS to provide general ledger and accounts payable functions.
The Company's MACS products have been determined to be fully Year 2000
compliant, except for the GTS programs. The Company performed tests of all major
functionality within the MACS family of software products, specifically those
areas which utilize date fields. GTS provided Year 2000 compliant code to the
Company in September 1998. With respect to the GTS programs, the Company has
identified all changes necessary to integrate the Year 2000 compliant code into
MACS. The Company has completed the internal functional specifications for the
necessary changes and expects them to be incorporated into a new version of MACS
to be released in early 1999. The Company anticipates total expenditures for
time and materials to implement such changes to be less than $40,000. In the
event that the Company is unable to remedy the Year 2000 issue with respect to
the GTS programs prior to January 1, 2000, the Company may be subject to
liability in the event that any defects occur in MACS.
The Company has also reviewed all material vendor systems for Year 2000
compliance and, except as indicated below, either confirmed that these systems
are Year 2000 compliant or obtained Year 2000 compliance statements from the
respective vendor. All of the Company's network software is Year 2000 compliant
except NT Server 4.0, Backoffice Server and Raptor Firewall. All of the
Company's desktop software is Year 2000 compliant except Windows 95, Visual C++,
Visual Basic and Word 6.0. With respect to such noncompliant software, the
Company expects to obtain updated versions which are compliant early in 1999.
The Company anticipates total expenditures for time and materials to make such
systems Year 2000 compliant to be approximately $10,000. In addition, the
Company has reviewed all of its internal systems including its hardware and
software systems, its embedded systems, networks, accounting systems, and
development, testing, training and demonstration platforms for Year 2000
compliance. The Company has upgraded all internal systems to Year 2000 compliant
operating system versions where compliance statements were not provided for such
systems. There were no material costs incurred by the Company in connection with
testing its vendor or internal systems. All of the Company's non-IT systems are
Year 2000 compliant. Any failure of the Company or its suppliers or clients to
be Year 2000 compliant, however, could have a material adverse effect on the
Company's business, financial condition or results of operations.
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company (at an assumed initial public offering price
of $9.00 per share), are estimated to be approximately $32.7 million after
deducting estimated underwriting discounts and offering expenses payable by the
Company ($38.3 million if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any proceeds from the sale of Common
Stock offered by the Selling Shareholders.
The Company anticipates that it will use $12.0 million of the net proceeds
of this Offering to redeem all of the Redeemable Preferred Stock to be issued
upon the conversion of the Convertible Debentures and approximately $4.7 million
of the proceeds to pay accrued interest due and payable on the Convertible
Debentures. The maturity date of the Convertible Debentures is December 1, 1999
with regard to $6.0 million in aggregate principal amount and December 1, 2000
with regard to the remaining $6.0 million in aggregate principal amount, unless
the Company consummates an initial public offering prior thereto, in which case
the maturity dates would be accelerated to the date of such initial public
offering. The Convertible Debentures accrued interest at a rate of 10% per annum
through June 30, 1997 and began accruing interest at a rate of 15% per annum
thereafter. The Company anticipates that a portion of the net proceeds will be
used to effect the Distribution. At September 30, 1998, the estimated
Distribution would have been approximately $600,000. The balance of the net
proceeds of this Offering will be used for the Company's expansion of marketing
and sales resources, further international expansion, working capital and other
general corporate purposes. A portion of such proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the right
to use complementary technologies. The Company is not currently a party to any
agreement, arrangement or understanding with respect to any such transaction and
is not currently engaged in discussions with any party concerning any such
possible transaction. Pending such uses, the Company intends to invest the net
proceeds of this Offering in short-term, interest-bearing investment grade
securities, certificates of deposit or obligations issued or guaranteed by the
United States government.
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and does not anticipate paying any
dividends in the foreseeable future. Any payment of dividends in the future will
be subject to the discretion of the Company's Board of Directors and will depend
upon, among other things, the Company's financial condition, capital
requirements, earnings, restrictions under loan agreements and other factors the
Board of Directors may deem relevant.
As an S Corporation, the Company has paid dividends to its shareholders
from time to time in part to partially fund or offset their tax liability with
respect to S Corporation earnings. In 1995, in connection with the sale of the
Convertible Debentures, the Company paid an aggregate dividend to its
shareholders in the amount of approximately $15.3 million. In September 1998,
the Company paid an aggregate dividend to its shareholders in the aggregate
amount of $70,000 to offset their 1997 tax liability.
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<PAGE> 17
S CORPORATION DISTRIBUTION AND
CONVERSION TO C CORPORATION STATUS
Since January 1, 1989, the Company has been a corporation subject to income
taxation under Subchapter S of the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, substantially all of the Company's net income has
been attributed, for income tax purposes, directly to the Company's shareholders
rather than to the Company. The Company's S corporation status will terminate in
connection with this Offering and, thereupon, the Company will, pursuant to an
agreement to be entered into with the Existing Shareholders, make the
Distribution to the Existing Shareholders in the form of the Promissory Notes.
The estimated aggregate principal amount of the Promissory Notes will change
depending upon the date of this Offering or a voluntary S Corporation
revocation. At September 30, 1998, the estimated aggregate principal amount of
the Promissory Notes would have been approximately $600,000. Purchasers of
Common Stock in this Offering will not receive any portion of the Promissory
Notes.
Following the termination of its S Corporation status, the Company will be
subject to corporate income taxation on an accrual basis under Subchapter C of
the Code. In connection with the termination of its S Corporation status, the
Company has estimated an available net deferred tax asset of approximately
$630,000. This is also an estimate subject to change, dependent upon the date of
this Offering or earlier S Corporation revocation date. The majority of this net
deferred tax asset will be recorded in accordance with Statement of Financial
Accounting Standards No. 109. A valuation allowance may be required to offset
the net deferred tax asset if it is more likely than not that all or some
portion of the deferred tax asset will not be realized.
The Internal Revenue Service is currently auditing the Company's tax
returns for fiscal 1995. The Existing Shareholders have agreed to indemnify the
Company for any possible taxes owed by the Company. In addition, the S
Corporation shareholders have agreed to revoke the S Corporation status prior to
this Offering, if necessary, in order to provide income tax benefit to the C
Corporation for certain accrued expenses.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) on an
actual basis as of September 30, 1998, and (ii) on an as adjusted basis (a) to
give retroactive effect to the Concurrent Transactions and (b) to give effect to
the application of the net proceeds from the sale of shares of Common Stock by
the Company pursuant to this Offering (at an assumed initial public offering
price of $9.00 per share), as set forth in "Use of Proceeds." The following
table should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Convertible debt:
Convertible debt.......................................... $ 11,400 $ 0
Promissory Notes.......................................... -- 600
Accrued interest payable.................................. 4,050 0
Redeemable preferred stock, 10,000,000 shares authorized:
Redeemable convertible participating preferred stock,
$0.01 par value; none issued;.......................... -- --
Redeemable participating preferred stock, $0.01 par value;
none issued;........................................... -- --
Stockholders' deficit:
Common stock, $0.01 par value. 50,000,000 shares
authorized; 5,263,100 shares issued and outstanding
actual; 11,518,714 shares issued and outstanding as
adjusted(1)............................................ 53 115
Additional paid-in capital.................................. 3,500 36,168
Accumulated deficit......................................... (14,520) (15,721)
-------- -------
Total stockholders' (deficit) equity...................... (10,967) 20,562
-------- -------
Total capitalization.............................. $ 4,483 $21,162
======== =======
</TABLE>
- ---------------
(1) Does not include (i) 850,000 shares of Common Stock reserved for issuance
under the 1996 Stock Option Plan, pursuant to which options to purchase
776,300 shares of Common Stock at an exercise price of $2.53 per share and
options to purchase 9,236 shares of Common Stock at an exercise price of
$4.53 per share (or the initial public offering price upon the consummation
of this Offering prior to July 1, 1999) were outstanding at September 30,
1998 and (ii) 1,000,000 shares of Common Stock reserved for issuance under
the 1998 Stock Option Plan, pursuant to which options to purchase 538,003
shares, at an exercise price of $4.53 per share (or the initial public
offering price upon the consummation of this Offering prior to July 1, 1999)
were outstanding at September 30, 1998. See "Management -- Stock Option
Plans."
17
<PAGE> 19
DILUTION
The pro forma deficit in net tangible book value of the Company at
September 30, 1998, was approximately $11,941,796 , or $(1.59) per share. Net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in this Offering
and the net tangible book value per share of Common Stock as adjusted
immediately after completion of this Offering. After giving effect to the
Concurrent Transactions and the sale by the Company of 4,000,000 shares of
Common Stock (at an assumed initial public offering price of $9.00 per share)
and the application of the estimated net proceeds therefrom, the net tangible
book value of the Company as of September 30, 1998, would have been $20,562,564
or $1.79 per share. This represents an immediate increase in net tangible book
value of $3.38 per share to the Existing Shareholders and Lenders (which will
collectively receive 2,255,614 shares of Common Stock in connection with the
Concurrent Transactions) and an immediate dilution in the net tangible book
value of $7.21 per share to purchasers of Common Stock in this Offering. The
following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 9.00
Pro forma net tangible book value per share at September
30, 1998............................................... $ (1.59)
Increase per share attributable to new investors.......... 3.38
--------
As adjusted net tangible book value per share after this
Offering.................................................. 1.79
--------
Net tangible book value dilution per share to new
investors................................................. $ 7.21
========
</TABLE>
The following table summarizes, after giving effect to the Concurrent
Transactions, the number of shares of Common Stock previously purchased from the
Company, the total consideration paid and the average price per share paid to
the Company by the Existing Shareholders and by new investors, at an assumed
initial public offering price of $9.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders
and Lenders......... 7,518,714 65.3% $ 3,553,213 9.0% $ 0.47
New investors
purchasing shares
from the Company.... 4,000,000 34.7 36,000,000 91.0 $ 9.00
----------- ------- ----------- -------
Total............ 11,518,714 100.0% $39,553,213 100.0%
=========== ======= =========== =======
</TABLE>
After giving retroactive effect to the Concurrent Transactions, the sale of
shares by the Existing Shareholders in this Offering will cause the number of
shares held by the Existing Shareholders and Lenders as of September 30, 1998 to
be reduced to 7,108,714 shares, or 61.7% of total shares of Common Stock to be
outstanding after this Offering, and the pro forma number of shares held by new
investors as of September 30, 1998 to be 4,410,000 shares, or 38.3% of the total
shares of Common Stock to be outstanding after this Offering. See "Principal and
Selling Shareholders."
The foregoing discussion and tables assume no exercise of stock options
outstanding on September 30, 1998. As of September 30, 1998, under the 1996
Stock Option Plan there were options outstanding to purchase a total of 776,300
shares of Common Stock at an exercise price of $2.53 per share and options to
purchase 9,236 shares of Common Stock at an exercise price of $4.53 per share
(or the initial public offering price upon the consummation of this Offering
prior to July 1, 1999). As of September 30, 1998, under the 1998 Stock Option
Plan there were options outstanding to purchase a total of 538,003 shares of
Common Stock at an exercise price of $4.53 per share or the initial public
offering price upon the consummation of this Offering prior to July 1, 1999.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1993, 1994, 1995, 1996 and 1997 and for each of the years in the five year
period ended December 31, 1997 are derived from the Consolidated Financial
Statements of the Company which have been audited by KPMG Peat Marwick LLP,
independent public accountants. The Company's consolidated balance sheets as of
December 31, 1996 and 1997, and consolidated statements of operations for the
years ended December 31, 1995, 1996 and 1997 appear elsewhere in this
Prospectus. The Company's consolidated balance sheets as of December 31, 1993,
1994 and 1995 and consolidated statements of operations for the years ended
December 31, 1993 and 1994 are not included in this Prospectus. The selected
condensed consolidated financial data as of September 30, 1998 and for the nine
month periods ended September 30, 1997 and 1998 have been derived from the
unaudited condensed consolidated financial statements of the Company which
appear elsewhere in this Prospectus. In the opinion of management, the Company's
unaudited condensed consolidated financial statements have been prepared on a
basis consistent with the audited consolidated financial statements which appear
elsewhere in this Prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information set forth therein. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements and Notes thereto,
included elsewhere in this Prospectus.
19
<PAGE> 21
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Computer software........... $4,908 $6,551 $6,594 $5,932 $5,084 $4,417 $8,615
Computer hardware........... 13,530 11,988 13,641 7,370 8,144 6,489 9,853
Support..................... 833 2,159 3,343 4,038 4,100 3,064 3,817
Services.................... 398 767 1,351 1,189 1,324 1,123 2,464
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue......... 19,669 21,465 24,929 18,529 18,652 15,093 24,749
Cost of sales and services:
Computer software........... 250 1,082 808 585 1,504 1,042 1,930
Computer hardware........... 9,352 8,586 10,607 5,805 6,010 4,929 7,309
Support..................... 963 1,956 2,491 3,141 3,271 2,270 2,282
Services.................... 768 727 1,016 902 1,104 805 1,607
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of sales
and services........ 11,333 12,351 14,922 10,433 11,889 9,046 13,128
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit.................. 8,336 9,114 10,007 8,096 6,763 6,047 11,621
Operating expenses:
General and
administrative............ 1,671 3,246 3,206 4,776 4,567 3,102 4,646
Research and development.... 1,929 1,609 2,166 2,254 2,011 1,444 1,638
Sales and marketing......... 410 508 523 980 1,482 1,066 1,653
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 4,010 5,363 5,895 8,010 8,060 5,612 7,937
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.................. 4,326 3,751 4,112 86 (1,297) 435 3,684
Other income (expense):
Interest expense:
Interest on outstanding
debt...................... -- (39) (1,200) (1,200) (1,500) (1,050) (1,350)
Amortization of original
issue discount(1)......... -- (32) (960) (960) (660) (570) (270)
Interest income............... 26 50 129 42 109 84 68
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest income
(expense), net...... 26 (21) (2,031) (2,118) (2,051) (1,536) (1,552)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............. 4,352 3,730 2,081 (2,032) (3,348) (1,101) 2,132
Net income (loss) per share:
Basic....................... $0.83 $0.71 $0.39 (0.39) (0.64) (0.21) 0.40
========== ========== ========== ========== ========== ========== ==========
Diluted..................... $0.83 $0.50 $0.34 (0.39) (0.64) (0.21) 0.37
========== ========== ========== ========== ========== ========== ==========
Weighted average shares used
in calculating net income
(loss) per share:
Basic..................... 5,263 5,263 5,263 5,263 5,263 5,263 5,263
========== ========== ========== ========== ========== ========== ==========
Diluted................... 5,263 7,519 7,519 5,263 5,263 5,263 7,519
========== ========== ========== ========== ========== ========== ==========
Pro forma data:
Net income (loss) before
income
tax (expense) benefit..... 4,352 3,730 $2,081 (2,032) (3,348) (1,101) 2,132
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma income tax (expense)
benefit (unaudited)(2)...... (1,672) (1,425) (1,155) 360 948 312 (1,053)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)
(unaudited)(2).............. $2,680 $2,305 $926 $(1,672) $(2,400) $(789) $1,079
========== ========== ========== ========== ========== ========== ==========
Pro forma basic and diluted
net loss per share
(unaudited)(2).............. $(0.46) $0.32
========== ==========
Weighted average number of
shares used in calculating
pro forma basic and diluted
net loss per share.......... 5,263 7,519
========== ==========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
------------------------------------------------ -----------------------
(UNAUDITED)
AS ADJUSTED
1993 1994 1995 1996 1997 ACTUAL (3)
------- ------- ------- ------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 132 $12,187 $ -- $ 60 $ 169 $ 3,567 $20,524
Working capital...................... 1,180 13,614 1,175 1,232 16 3,062 21,163
Total assets......................... 3,005 18,580 4,717 3,666 3,135 11,958 28,541
Convertible debt and accrued
interest(1)........................ -- 8,589 9,510 11,670 13,830 15,450 0
Stockholders' equity (deficit)(1).... 1,381 5,502 (7,667) (9,699) (13,048) (10,967) 20,562
</TABLE>
- ---------------
(1) The fair value of the conversion features of the Convertible Debentures has
been determined to be $3.5 million based on the difference between the
stated interest rates and the estimated market rate of such Convertible
Debentures on the date of issuance. The amount is included in additional
paid-in capital in the accompanying consolidated balance sheets, with the
resulting OID on the convertible debt being amortized over the term of the
note. This interest expense is a non-cash item.
(2) As a result of its election to be treated as an S Corporation for income tax
purposes, the Company has not been subject to federal or certain state
income taxes. Immediately prior to or contemporaneously with this Offering,
the Company's S Corporation status will terminate and thereafter the Company
will be subject to federal and certain state taxes at applicable rates for a
C corporation. The unaudited pro forma income tax (expense) benefit
presented in the consolidated statements of operations represents the
estimated taxes that would have been recorded had the Company been a C
corporation for income tax purposes for each of the periods presented.
(3) Adjusted to (a) give retroactive effect to the Concurrent Transactions and
(b) give effect to the sale by the Company of 4,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $9.00
and after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of mission-critical, enterprise-wide
software solutions, and related hardware and services, to the non-store
marketing industry. The Company's clients in the non-store marketing industry
are traditional direct marketing companies and Internet-only retailers, as well
as wholesalers, fulfillment houses and retailers with significant non-store
sales channels. The Company's MACS family of software products is designed to
automate non-store commerce activities, including advertising analysis, sales,
telemarketing, ordering, merchandising, procurement, electronic and Internet
commerce, warehousing, shipping, accounting and systems operation. The MACS
products also provide managers and sales personnel with real-time operations,
inventory and customer data to improve both management decision making and
customer service.
Since its inception in 1988, management of the Company has concentrated on
providing software-based systems and services to leading non-store marketing
companies and to retailers, wholesalers and fulfillment houses with significant
non-store sales channels. By focusing on this market, management believes that
the Company has been able to develop a significant industry expertise that has
been incorporated in the functionality of the Company's products and services.
The Company's MACS II and MACS III products offer over 3,000 functional options,
process up to 200,000 transactions per day and are used primarily by companies
with high-volume non-store commerce operations. WebOrder, the Company's new
Internet commerce solution, is a highly scalable system that enables real-time
interactive customer ordering, and automates processing and back-office
operations for companies selling products or services over the Internet.
WebOrder incorporates both the functionality and scalability of MACS II and MACS
III.
During 1996, the Company effected an internal reorganization which included
adding support, development and sales resources to generate future increases in
new customer installations, improve client services and develop new software
products such as WebOrder, MACS for UNIX and MACS for NT. This reorganization
was precipitated by a decline in new customer sales which began in 1995 and
continued in 1996. In turn, this decline led to a decrease in total revenue from
1995 to 1996. Primarily because of this reorganization, the Company experienced
losses in 1996 and 1997.
In 1997, new client revenue increased by 108.3% while upgrade revenue
declined by 41.2%, resulting in virtually no change in the Company's total
revenue from 1996 to 1997. The decline in upgrade revenue was primarily a result
of lower new client sales in 1995 and 1996. In 1997, the Company's net loss was
attributable to a number of factors, including the Company's continued
investment in infrastructure. To accommodate its new client sales and to fuel
potential future revenue growth, the Company increased its number of
installation and support personnel, added salespeople, continued the development
of its UNIX and Windows NT products, and started the development of WebOrder. In
addition, the Company opened offices in the United Kingdom and Australia to
expand its presence abroad.
Since January 1998, the Company has experienced a continued increase in new
client sales. Total revenue increased 63.6% during the nine months ended
September 30, 1998, compared to the same period in 1997, which resulted in
increased income from operations in the first nine months of 1998. The revenue
growth in 1998 is attributable to a number of factors, including clients seeking
to replace systems that are not Year 2000 compliant, the Company's greater focus
on services revenue, increasing sales of WebOrder and increasing demand for MACS
in Europe. In early 1999, management expects to make generally available its
nMACS product, which runs on the Windows NT operating system.
The Company generates revenue from four principal sources: (i) license fees
for its software products; (ii) sales of related computer hardware components;
(iii) software support; and (iv) services consisting of consulting, training and
custom programming. System revenue, which
22
<PAGE> 24
includes software license fees and hardware components, is generated by sales to
new and existing clients.
The Company's revenue and long-term growth are largely dependent on the
sale of its systems to new clients. These new system sales have a fairly
predictable implementation cycle. System sales to new clients represented 35.6%
of total revenue during the nine months ended September 30, 1998, and increased
49.2% from the nine months ended September 30, 1997. System upgrades represented
39.3% of total revenue for the nine months ended September 30, 1998. System
upgrades consist primarily of additional software user license fees and central
processing unit ("CPU") upgrades for its existing clients. System upgrades
typically have short sales cycles and therefore are fairly unpredictable.
The Company believes that computer hardware upgrades are generally
performed during the one to two-year period following a new sale. During 1993
and 1994, the Company experienced a high level of new customer revenue,
resulting in substantial upgrades in 1995 and 1996. In 1995 and 1996, new
customer revenue declined substantially, thus causing hardware and software
upgrade revenue to decline in fiscal 1997 and the nine months ended September
30, 1998. The Company believes that upgrades are dictated solely by the business
requirements of individual clients and, therefore, the Company is unable to
accurately predict or explain the actual mix between software and hardware
upgrades.
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition. Under this provision, hardware and
software license fees for new systems are recognized as revenue upon the
completion of the software installation and when collectibility is probable.
Revenue relating to system upgrades is recognized upon installation, provided
that all significant obligations have been met. Revenue from hardware and
software components sold separately is recognized upon receipt by the client.
Each new system client executes a contract which identifies the number of
licensed MACS users, hardware configuration, and pricing for the software
license and support services. The contract also contains pricing provisions for
supplemental software user licenses and CPU upgrades. The Company typically
receives a deposit equal to 25% of the system selling price upon contract
signing and an additional 25% prior to installation of the system. The balance
is generally payable in two installments, one of which is payable upon
installation of the software and the balance upon operation of the installed
system. The differences between amounts received and amounts recognized are
recorded as deferred revenue.
Support services are billed monthly, in advance, and revenue from such
services is recognized ratably over the contract term. The Company's software
support agreements typically have one-year terms, are automatically renewed
annually and may be terminated at the discretion of the client. Historically,
more than 95% of all clients utilizing the Company's software have renewed their
support agreements.
Training and consulting services are performed on a time-and-materials
basis and revenue is recognized as the services are completed. Contract
programming services are generally short-term in nature and performed on a
fixed-fee basis. When performed in conjunction with a sale to a new client,
contract programming revenue is recognized upon delivery and receipt of a signed
client acknowledgment that hardware and software have been installed.
Programming services performed for existing clients are recognized upon receipt
of final payment.
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility of the software is established, after which any additional costs are
capitalized. To date, the Company has expensed all software development costs
because development costs incurred subsequent to the establishment of
technological feasibility have been minimal.
23
<PAGE> 25
In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, Software Revenue Recognition, which superseded SOP 91-1. The
Company adopted SOP 97-2 for software transactions entered into in 1997. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. The revenue allocated to hardware and software products
generally is recognized upon installation and when collectibility is probable.
The revenue allocated to postcontract customer support is consistent with fees
charged for renewals and is recognized ratably over the term of the support.
Revenue allocated to service elements is recognized as the services are
performed. The adoption of SOP 97-2 did not have a material impact on the
Company's results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to total revenue:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Computer software..................................... 26.5% 32.0% 27.2% 29.3% 34.8%
Computer hardware..................................... 54.7 39.8 43.7 43.0 39.8
Support............................................... 13.4 21.8 22.0 20.3 15.4
Services.............................................. 5.4 6.4 7.1 7.4 10.0
----- ----- ----- ----- -----
Total revenue.................................. 100.0 100.0 100.0 100.0 100.0
Cost of sales and services:
Computer software..................................... 3.2 3.2 8.1 6.9 7.8
Computer hardware..................................... 42.5 31.3 32.2 32.7 29.5
Support............................................... 10.0 17.0 17.5 15.0 9.2
Services.............................................. 4.1 4.9 5.9 5.3 6.5
----- ----- ----- ----- -----
Total cost of sales and services............... 59.8 56.4 63.7 59.9 53.0
----- ----- ----- ----- -----
Gross profit............................................ 40.2 43.6 36.3 40.1 47.0
Operating expenses:
General and administrative............................ 12.9 25.8 24.5 20.6 18.8
Research and development.............................. 8.7 12.2 10.8 9.6 6.6
Sales and marketing................................... 2.1 5.3 7.9 7.1 6.7
----- ----- ----- ----- -----
Total operating expenses....................... 23.7 43.3 43.2 37.3 32.1
Income (loss) from operations........................... 16.5 0.3 (6.9) 2.8 14.9
Other income (expense):
Interest expense:
Interest on outstanding debt........................ (4.8) (6.5) (8.0) (7.0) (5.5)
Amortization of original issue discount............. (3.9) (5.2) (3.5) (3.8) (1.1)
Interest income....................................... 0.5 0.2 0.6 0.6 0.3
----- ----- ----- ----- -----
Total interest expense, net.................... (8.2) (11.5) (10.9) (10.2) (6.3)
----- ----- ----- ----- -----
Net income (loss) before pro forma income tax (expense)
benefit............................................... 8.3 (11.2) (17.8) (7.4) 8.6
Pro forma for income tax (expense) benefit.............. (4.6) 1.9 5.1 2.1 (4.3)
----- ----- ----- ----- -----
Pro forma net income (loss)............................. 3.7% (9.3)% (12.7)% (5.3)% 4.3%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Computer Software. Sales of computer software licenses accounted for
approximately 34.8% of the Company's total revenue for the nine months ended
September 30, 1998. Computer software license fees consist of license fees for
the new installation of the Company's MACS software and related modules and
additional user license fees, and CPU upgrades for its existing clients.
24
<PAGE> 26
Computer software license fees are based on the number of users and type and
number of CPUs. The Company periodically updates or modifies its software
pricing in response to changes in market conditions or costs of sale. Effective
July 1, 1998, the Company changed its MACS software pricing from a tier-based
(by CPU and number of users) to a user based structure with a provision for
additional license fees for multiple CPUs. This was done to enable the Company's
clients to more accurately forecast future license upgrade costs and facilitate
new client sales. The Company cannot predict what effect, if any, this pricing
change will have on MACS software license revenues. Computer software license
fees increased 95.1% to $8.6 million during the nine months ended September 30,
1998 compared to $4.4 million for the same period in 1997. This improvement
resulted from an increase in computer software sales to both new and existing
clients including a material contract with the United States Mint. The Company
does not believe the pricing change had a material effect on this increase in
computer software revenue. New client computer software sales increased from
$2.6 million for the nine months ended September 30, 1997 to $3.9 million for
the same period in 1998, and computer software upgrades increased from $1.8
million to $4.7 million for the same time period.
Computer Hardware. Sales of computer hardware accounted for approximately
39.8% of the Company's total revenue for the nine months ended September 30,
1998. Sales of computer hardware consists of sales of computer systems,
peripheral components and third-party software. Computer hardware revenue
increased 51.8% to $9.9 million for the nine months ended September 30, 1998,
compared to $6.5 million for the nine months ended September 30, 1997. Computer
hardware revenue relating to new client sales increased 49.0% to $4.9 million
for the nine months ended September 30, 1998, compared to $3.3 million for the
same period in 1997. This increase resulted from increases in new system sales.
Computer hardware upgrades increased by 56.3% to $5.0 million for the nine
months ended September 30, 1998, compared to $3.2 million for the same period in
1997. The increase in 1998 resulted from many of the Company's larger clients
performing major system upgrades.
Support. Support revenue accounted for approximately 15.4% of the
Company's total revenue during the nine months ended September 30, 1998. Support
revenue consists of fees for technical support services and product enhancements
for the MACS software and integrated third-party software utilities. Support
revenue typically represents 17% of the underlying license fee each year.
Support revenue increased 24.6% to $3.8 million during the nine months ended
September 30, 1998, compared to $3.1 million for the nine months ended September
30, 1997. The increase resulted from the addition of new clients in the last
half of 1997 and the first nine months of 1998, as well as support fee increases
related to software user license upgrades.
Services. Services revenue accounted for approximately 10.0% of the
Company's revenue for the nine months ended September 30, 1998. Services revenue
consists principally of revenue derived from training, consulting, and custom
programming. Services revenue increased 119.4% to $2.5 million in the nine
months ended September 30, 1998, compared to $1.1 in 1997. This improvement was
due to increases in new client software modifications, custom interfaces to
third-party products, and consulting services.
Total Revenue. Total revenue increased 64.0% to $24.7 million for the nine
months ended September 30, 1998, compared to $15.1 million in 1997. New client
sales increased 49.2% to $8.8 million from $5.9 million for the nine months
ended September 30, 1997. The increase was due to higher average revenue per
installation than during nine the months ended September 30, 1997 as a result of
a material contract with the United States Mint. Revenue from client system and
component upgrades increased by 94.0% to $9.7 million for the nine months ended
September 30, 1998, compared to $5.0 million for the same period in 1997 due to
increased new client sales in 1997 and clients performing major system upgrades.
Cost of Computer Software. Cost of computer software, which includes
installation and training salaries directly related to new software sales and
subcontractor fees, increased 85.2% to
25
<PAGE> 27
$1.9 million during the nine months ended September 30, 1998, compared to $1.0
for the nine months ended September 30, 1997. The increase resulted from higher
personnel costs related to increased installations of new systems and sales to
new clients. Cost of computer software as a percentage of total revenue
increased to 7.8% from 6.9% for the nine months ended September 30, 1997. Cost
of computer software as a percentage of software license fees decreased to 22.4%
from 23.6% for the nine months ended September 30, 1997. These increases are
directly related to the additional resources added to accommodate the increase
in new client license fee revenue.
Cost of Computer Hardware. Cost of computer hardware, which consists of
purchases of computer systems, peripheral components and third party software,
increased 48.3% to $7.3 million for the nine months ended September 30, 1998,
compared to $4.9 million for the same period in 1997. This increase was related
to the 51.8% increase in computer hardware revenue from the nine months ended
September 30, 1997. Costs of computer hardware as a percentage of total revenue
decreased to 29.5% from 32.7% for the nine months ended September 30, 1997, due
primarily to a shift in sales mix reducing the relative contribution of computer
hardware sales. Costs of computer hardware as a percentage of computer hardware
revenue decreased to 74.2% from 76.0% for the nine months ended September 30,
1997. This decrease primarily resulted from the increase in new client sales,
which generally provided higher computer hardware gross margins than those for
upgrade sales, and the sales of third-party computer software utilities, which
are sold at higher margins than computer hardware system components.
Cost of Support. Cost of support consists primarily of personnel costs
associated with the support of the Company's MACS product and third-party
computer software packages and the cost of MACS user documentation distributed
to clients. Cost of support remained consistent at $2.3 million for the nine
month periods ended September 30, 1998 and September 30, 1997. Cost of support
as a percentage of total revenue decreased to 9.2% from 15.0% for the nine
months ended September 30, 1997. Cost of support as a percentage of support
revenue decreased to 59.8% from 74.1% for the same period in 1997. The reduction
resulted from additional support fees from new clients and increased utilization
of existing support personnel.
Cost of Services. Cost of services, which consists of salaries for
professional services employees, and allocated salaries for training and
programming personnel, increased 99.5% to $1.6 million during the nine months
ended September 30, 1998, compared to $806,000 for the nine months ended
September 30, 1997. The increase was due to the addition of professional
services employees and a greater allocation of programming personnel related to
the increases in custom programming revenue. Cost of services as a percentage of
total revenue increased to 6.5% from 5.3% for the nine months ended September
30, 1997. Cost of services as a percentage of services revenue decreased to
65.2% from 71.7% for the nine months ended September 30, 1997. The decrease was
related to the increased demand for professional services and custom
programming, and the resulting increase in the utilization of available
resources and the implementation of new pricing.
Total Cost of Sales and Services. Total cost of sales and services
increased by 45.1% to $13.1 million for the nine months ended September 30,
1998, compared to $9.0 million during the first nine months of 1997. This
increase resulted from higher hardware cost associated with increased hardware
sales, and additional personnel cost associated with sales growth during 1998.
General and Administrative. General and administrative expenses include
the cost of the Company's finance, human resources, information services, and
administrative functions. General and administrative expenses increased 49.8% to
$4.6 million for the nine months ended September 30, 1998, compared to $3.1
million during the first nine months of 1997. This increase was due to expenses
associated with new offices in the United Kingdom and Australia which were
opened during the second half of 1997, increases in administrative personnel
related to an expanding workforce and client base, and higher communication,
equipment and office expenses associated with more employees. General and
administrative expenses as a percentage of total revenue
26
<PAGE> 28
decreased to 18.8% for the nine months ended September 30, 1998 from 20.6% for
the nine months ended September 30, 1997.
Research and Development. Research and development expenses include costs
associated with the development of new products and enhancements of existing
products. Such expenses consist primarily of employee salaries and benefits,
consulting expenses (including amounts paid to subcontractors for development
work), and the cost of development tools. Research and development expenses
increased 13.4% to $1.6 million during the nine months ended September 30, 1998,
compared to $1.4 for the nine months ended September 30, 1997. This increase was
primarily due to ongoing development of the WebOrder, UNIX and Windows NT
products and existing product enhancements. Research and development costs as a
percentage of total revenue decreased to 6.6% for the nine months ended
September 30, 1998 from 9.6% nine months ended September 30, 1997. Research and
Development expenses as a percentage of computer software license fees were
19.0% for the nine months ended September 30, 1998 and 32.7% for the same period
in 1997.
Sales and Marketing. Sales and marketing expenses include personnel costs,
sales commissions related to the sale and marketing of the Company's products
and services, and the cost of advertising, public relations and participation in
industry conferences and trade shows. Sales and marketing expenses increased by
55.1% to $1.7 million for the nine months ended September 30, 1998, compared to
$1.1 for the same period in 1997. This increase resulted from increased sales,
modifications to the Company's sales commission plan and expanded marketing and
advertising programs. Sales and marketing expenses as a percentage of total
revenue decreased to 6.7% for the nine months ended September 30, 1998 from 7.1%
for the nine months ended September 30, 1997.
Income (Loss) from Operations. As a result of the foregoing factors, the
Company's income from operations increased by $3.2 million to $3.7 million for
the nine months ended September 30, 1998 as compared to $435,000 for the nine
months ended September 30, 1997.
Other Income (Expense), Net. Net interest expense, which includes interest
on the Convertible Debentures, amortization of original discount ("OID") related
to the conversion feature of the Convertible Debentures and interest income on
available cash, decreased 1.1% to $1.5 during the nine months ended September
30, 1998, compared to $1.6 in 1997. The decrease was due to lower interest
earnings on cash balances. See "Liquidity and Capital Resources" and Notes 6(a)
and 6(b) of Notes to Consolidated Financial Statements.
Pro Forma Income Tax (Expense) Benefit. The pro forma effective tax rate
for the nine months ended September 30, 1998 was a provision of 49.4% compared
to a benefit of 28.3% for the nine months ended September 30, 1997. Effective
pro forma income tax rates differ from the federal statutory rates because of
the following: (i) OID is not deductible for federal and state income tax
purposes; (ii) the effect of state income taxes; and (iii) the full valuation of
net losses of foreign subsidiaries. Also, pro forma effective rates vary between
periods because of the differing effects the OID and net losses of foreign
subsidiaries have on pro forma income before income taxes.
Pro Forma Net Income (Loss). As a result of the above factors, the
Company's pro forma net income increased by $1.9 million to $1.1 million from a
loss of $789,000 for the same period in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Computer Software. Computer software fees decreased 14.3% to $5.1 million
for the year ended December 31, 1997, compared to $5.9 million for the year
ended December 31, 1996. This change was due to a decrease in revenue from
system upgrades of $2.0 million from $4.1 million in 1996 to $2.1 million in
1997, and an increase in new client sales of $1.1 million from $1.9 million in
1996 to $3.0 million in 1997. This increase in new client sales during 1997 was
due to changes in the Company's sales process and the addition of new sales
resources.
27
<PAGE> 29
Computer Hardware. Computer hardware revenue increased 10.5% to $8.1
million in 1997, compared to $7.4 million in 1996. Computer hardware revenue
relating to new client sales increased 165.0% to $4.5 million for the year ended
December 31, 1997, compared to $1.7 million in 1996. Revenue from hardware
upgrades decreased by 33.9% to $3.7 million for the year ended December 31,
1997, compared to $5.6 million in 1996.
Support. Support revenue increased 1.5% to $4.1 million during the year
ended December 31, 1997, compared to $4.0 million in 1996. This increase
primarily resulted from the addition of new clients.
Services. Services revenue increased 11.4% to $1.3 million in 1997,
compared to $1.2 million in 1996. This increase was primarily due to additional
software modifications for new and existing clients and a greater demand for
consulting services.
Total Revenue. Total revenue increased 0.7% to $18.7 million in 1997,
compared to $18.5 million in 1996. New client sales increased 108.3% to $7.5
million in 1997 from $3.6 million for the year ended December 31, 1996. Revenue
from client system and component upgrades decreased by 41.2% to $5.7 million for
the year ended December 31, 1997, compared to $9.7 million for 1996.
Cost of Computer Software. Cost of computer software increased 157.3% to
$1.5 million in 1997, compared to $584,000 in 1996. This increase resulted from
the addition of personnel required to support new client sales volume. Cost of
computer software as a percentage of total revenue increased to 8.1% from 3.2%
for the year ended December 31, 1996. Cost of computer software as a percentage
of computer software revenue increased to 29.6% from 9.9% in 1996. This increase
was primarily due to the increase in personnel during 1997 to accommodate future
anticipated sales.
Costs of Computer Hardware. Cost of computer hardware increased 3.5% to
$6.0 million during the year ended December 31, 1997, compared to $5.8 million
in 1996. This increase was related to the 10.5% increase in computer hardware
revenue from 1996. Cost of computer hardware as a percentage of total revenue
increased to 32.2% from 31.3% in 1996. Cost of computer hardware as a percentage
of computer hardware revenue decreased to 73.8% from 78.8% for the year ended
December 31, 1996. This decrease primarily resulted from an increase in new
client sales, which generally provide higher computer hardware gross margins
than those for upgrade sales, and the sale of third-party computer software
utilities, which are sold at higher margins than computer hardware system
components.
Cost of Support. Cost of support increased 4.1% to $3.3 million in 1997,
compared to $3.1 million in 1996, due to the addition of personnel to support
new clients and the cost of MACS user documentation distributed to clients
during 1997. Cost of support as a percentage of total revenue increased to 17.5%
from 17.0% in 1996. Cost of support as a percentage of support revenue increased
to 79.8% from 77.8% in 1996.
Cost of Services. Cost of services increased 22.4% to $1.1 million in 1997,
compared to $902,000 in 1996. This increase was primarily due to the hiring of
additional professional services personnel during 1997 and a greater allocation
of programming personnel utilized for custom programming. Cost of services as a
percentage of total revenue increased to 5.9% in 1997 from 4.9% in 1996. Cost of
services as a percentage of services revenue increased to 83.4% from 75.9% in
1996. The increase was due to utilization of newly trained professional services
personnel in 1997.
Total Cost of Sales and Services. Total cost of sales and services
increased by 14.0% to $11.9 million for the year ended December 31, 1997,
compared to $10.4 million in 1996. This increase resulted primarily from the
increase in new clients during 1997.
General and Administrative. General and administrative expenses decreased
4.4% to $4.6 million for the year ended December 31, 1997, compared to $4.8
million during 1996. This was related to a decrease in bad debt expense offset
by increased expenditures associated with new offices in the United Kingdom and
Australia, and various other administrative expenses. The significant account
28
<PAGE> 30
receivable write-offs in 1997 were primarily attributable to (i) a $382,000
write off of remaining outstanding invoices and advances to a former distributor
of the Company's products (ii) $169,000 of various invoices written off during
the year and (iii) an additional $103,000 write off based on a year-end analysis
of outstanding accounts receivable. General and administrative expenses as a
percentage of total revenue decreased to 24.5% in 1997 from 25.8% in 1996.
Research and Development. Research and development expenses decreased 10.8%
to $2.0 million in 1997, compared to $2.3 million in 1996. As a percentage of
total revenue, research and development expenses declined to 10.8% in 1997,
compared to 12.2% in 1996, due to a shift in development personnel toward
revenue generating computer software modifications. As a percentage of computer
software license fee revenue, research and development expenses increased to
39.6% in 1997, compared to 38.0% in 1996, as a result of reduced computer
software license fee revenue.
Sales and Marketing. Sales and marketing expenses increased 51.2% to $1.5
million in 1997, compared to $980,000 in 1996, primarily as a result of
increases in sales personnel and commissions associated with the increase in new
client computer software revenue. Also in 1997, the Company incurred additional
expenses associated with establishing a separate marketing department. The
marketing function was formerly performed by the sales department. As a
percentage of total revenue, sales and marketing expenses increased to 7.9% in
1997, compared to 5.3% in 1996.
Income (Loss) From Operations. As the result of the above factors, the
Company's income (loss) from operations declined by $1.4 million resulting in a
$1.3 million loss from operations in 1997, compared to income from operations of
$86,000 in 1996. The loss in 1997 resulted from the decline in revenue from
system upgrades, as well as expenses associated with opening new offices in the
United Kingdom and Australia, and hiring additional support, sales and marketing
personnel.
Other Income (Expense), Net. Net interest expense decreased by 3.2% to $2.0
million in 1997, compared to $2.1 million in 1996. This decrease was due to an
increase in interest income related to higher cash balances during 1997. See
"Liquidity and Capital Resources" and Notes 6(a) and 6(b) of Notes to
Consolidated Financial Statements.
Pro Forma Income Tax (Expense) Benefit. The pro forma effective tax rate
for the year ended December 31, 1997 was a benefit of 28.3% compared to a
benefit of 17.7% for the year ended December 31, 1996. Effective pro forma
income tax rates differ from the federal statutory rates because of the
following: (i) OID is not deductible for federal and state income tax purposes;
(ii) the effect of state income taxes; and (iii) the full valuation of net
losses of foreign subsidiaries. Also, pro forma effective rates vary between
periods because of the differing effects the OID and net losses of foreign
subsidiaries have on pro forma income before income taxes.
Pro Forma Net Income (Loss). As a result of the above factors, the
Company's pro forma net loss for the year ended December 31, 1997 increased by
$728,000 to $2.4 million from $1.7 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Computer Software. Computer software license fees decreased 10.0% to $5.9
million in 1996, compared to $6.6 million in 1995. While new client computer
software revenue increased by $470,000 during 1996, computer software license
fees relating to upgrades decreased by $1.1 million.
Computer Hardware. Computer hardware revenue decreased 46.0% to $7.4
million in 1996, compared to $13.6 million in 1995. Computer hardware revenue
relating to new client sales decreased 26.1% from $2.3 million in 1995 to $1.7
million in 1996. Computer hardware upgrades decreased by 50.9% from $11.4
million in 1995 to $5.6 million in 1996. Computer hardware revenue decreased in
1996 due to fewer client upgrades and reduction in the cost of hardware
components.
29
<PAGE> 31
Support. Support revenue increased 20.8% to $4.0 million in 1996, compared
to $3.3 million in 1995. This increase resulted from the addition of new clients
and the commencement of the Company's major account support program, which
provides dedicated services at a premium price.
Services. Services revenue decreased 12.0% to $1.2 million in 1996,
compared to $1.4 in 1995. This decrease was primarily due to a reduction in
custom software programming during 1996.
Total Revenue. Total revenue decreased 25.7% to $18.5 million in 1996,
compared to $24.9 million in 1995. New client revenue was consistent year to
year with $3.6 million in 1996 compared to $3.7 million in 1995. This decrease
in 1996 revenue was largely related to lower client system and component upgrade
revenue during 1996, which decreased by 41.2% from $16.5 million in 1995 to $9.7
million in 1996. Reduced new client sales revenue in 1995 contributed to a
reduction in system upgrades during 1996.
Cost of Computer Software. Cost of computer software decreased 27.6% to
$584,000 in 1996, compared to $808,000 in 1995. This decrease was primarily due
to lower computer software sublicense fees attributable to lower computer
software revenue and lower payroll costs due to a reduced employee head count in
the Company's installation department. Cost of computer software as a percentage
of total revenue remained the same at 3.2% for 1996 and 1995. Cost of computer
software as a percentage of computer software revenue decreased to 9.9% from
12.2% in 1995.
Cost of Computer Hardware. Cost of computer hardware decreased 45.3% to
$5.8 million in 1996, compared to $10.6 million in 1995. This decrease was
primarily due to the 46.0% decrease in hardware revenue from 1995. Cost of
computer hardware as a percentage of total revenue decreased to 31.3% from 42.5%
in 1995. Cost of computer hardware as a percentage of computer hardware revenue
increased to 78.8% from 77.8% in 1995.
Cost of Support. Cost of support increased 26.1% to $3.1 million in 1996,
compared to $2.5 million in 1995. This increase was due to an increase in the
number of employees required to support new clients added in 1995 and 1996. Cost
of support as a percentage of total revenue increased to 17.0% from 10.0% in
1995. Cost of support as a percentage of support revenue increased to 77.8% from
74.5% in 1995. These increases were generated by costs associated with
additional support personnel.
Cost of Services. Cost of services decreased 11.2% to $902,000 in 1996,
compared to $1.0 million in 1995. This decrease was related to a reduction in
product development personnel engaged in custom programming activities in 1996.
Cost of services as a percentage of total revenue increased to 4.9% from 4.1% in
1995. Cost of services as a percentage of services revenue increased to 75.9%
from 75.3% in 1995.
Total Cost of Sales and Services. Total cost of revenue decreased by 30.1%
to $10.4 million for the year ended December 31, 1996, compared to $14.9 million
in 1995. This decrease was primarily due to a decrease in the cost of computer
hardware.
General and Administrative. General and administrative expenses increased
49.0% to $4.8 million in 1996, compared to $3.2 million in 1995. This increase
was primarily due to additional personnel costs associated with an expanding
client base and projected growth. Also contributing to the increase were
additional computer equipment, facility and maintenance expenses and increased
bad debt expenses. The expense accruals for bad debt in 1996 were attributable
to a $240,000 reserve for outstanding invoices and advances to a former
distributor of the Company's products, and an additional $363,000 relating to
the Company's year-end analysis of outstanding accounts receivable. General and
administrative expenses as a percentage of total revenue increased to 25.8% from
12.9% in 1995, due to higher cost in proportion to growth of revenue.
Research and Development. Research and development expenses increased 4.1%
to $2.3 million in 1996, compared to $2.2 million in 1995. This increase in
development costs was principally
30
<PAGE> 32
due to purchased research and development relating to the conversion of MACS to
the UNIX and Windows NT operating systems. As a percentage of total revenue,
research and development expenses increased to 12.2% in 1996, compared to 8.7%
in 1995 due to the decrease in revenue during 1996. As a percentage of computer
software revenue, research and development expenses increased to 38.0% in 1996,
compared to 32.9% in 1995 due to reduced computer software revenue in 1996.
Sales and Marketing. Sales and marketing expenses increased by 87.3% to
$980,000 in 1996, compared to $523,000 in 1995. This increase primarily resulted
from the addition of technical sales support personnel and management to
facilitate new sales. In addition, there was a decrease in marketing funds
received from Hewlett-Packard (awarded based on a percentage of hardware
purchases each month) which are used to defray marketing and advertising
expenditures. Due to the substantial decrease in hardware purchases from 1995,
marketing funds received in 1996 decreased by $170,000. Sales and marketing
expenses as a percentage of total revenue increased to 5.3% from 2.1% in 1995.
Income (Loss) From Operations. As a result of the foregoing factors, the
Company's income (loss) from operations decreased by $4.0 million resulting in
$86,000 of income from operations in 1996 as compared to income from operations
of $4.1 million in 1995.
Other Income Expense, Net. Net interest expense increased 4.3% to $2.1
million in 1996, compared to $2.0 million in 1995. This increase was primarily
due to lower interest income during 1996 as a result of lower cash balances
throughout the year. See "Liquidity and Capital Resources" below and Notes 6(a)
and 6(b) of Notes to Consolidated Financial Statements.
Pro Forma Income Tax (Expense) Benefit. The pro forma effective tax rate
for 1996 was a benefit of 17.7% compared to a provision of 55.5% in 1995.
Effective pro forma income tax rates differ from the federal statutory rates
because of the following: (i) OID is not deductible for federal and state income
tax purposes and (ii) the effect of state income taxes.
Pro Forma Net Income (Loss). As a result of the above factors, the
Company's pro forma net income (loss) in 1996 declined by $2.6 million from pro
forma net income of $926,000 in 1995 compared to a loss of $1.7 million in 1996.
31
<PAGE> 33
QUARTERLY INFORMATION
The following table sets forth certain unaudited financial data for each of
the Company's last seven calendar quarters and such data expressed as a
percentage of the Company's total revenue for the respective quarters. The
information has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
quarterly information. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Computer software................. $1,103 $2,335 $ 978 $ 667 $ 2,077 $ 2,572 $ 3,967
Computer hardware................. 1,685 3,383 1,421 1,655 1,717 3,359 4,778
Support........................... 1,061 972 1,031 1,036 1,220 1,214 1,383
Services.......................... 302 180 641 201 517 984 962
------ ------ ------ ------- ------- ------- --------
Total revenue.............. 4,151 6,870 4,071 3,559 5,531 8,129 11,090
Cost of sales and services:
Computer software................. 318 348 376 462 571 703 656
Computer hardware................. 1,318 2,620 990 1,081 1,312 2,546 3,451
Support........................... 727 716 827 1,001 720 740 822
Services.......................... 279 255 272 299 427 579 601
------ ------ ------ ------- ------- ------- --------
Total cost of sales and
services................. 2,642 3,939 2,465 2,843 3,030 4,568 5,530
------ ------ ------ ------- ------- ------- --------
Gross profit........................ 1,509 2,931 1,606 716 2,501 3,561 5,560
Operating expenses:
General and administrative........ 821 1,275 1,006 1,464 1,407 1,510 1,729
Research and development.......... 424 459 561 567 485 576 577
Sales and marketing............... 350 391 325 416 521 554 579
------ ------ ------ ------- ------- ------- --------
Total operating expenses... 1,595 2,125 1,892 2,447 2,413 2,640 2,885
------ ------ ------ ------- ------- ------- --------
(Loss) income from operations....... (86) 806 (286) (1,735) 88 921 2,675
Other income (expense):
Interest expense:
Interest on outstanding debt...... (300) (300) (450) (450) (450) (450) (450)
Amortization of original issue
discount........................ (240) (240) (90) (90) (90) (90) (90)
Interest income................... 19 30 35 25 16 20 32
------ ------ ------ ------- ------- ------- --------
Total interest expense,
net...................... (521) (510) (505) (515) (524) (520) (508)
------ ------ ------ ------- ------- ------- --------
Net (loss) income................... (607) 296 (791) (2,246) (436) 401 2,167
Pro forma income tax benefit
(expense)......................... 172 (84) 224 636 215 (198) (1,070)
------ ------ ------ ------- ------- ------- --------
Pro forma net (loss) income......... $ (435) $ 212 $ (567) ($1,610) $ (221) $ 203 $ 1,097
====== ====== ====== ======= ======= ======= ========
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Computer software.................... 26.6% 34.0% 24.0% 18.8% 37.5% 31.7% 35.8%
Computer hardware.................... 40.5 49.3 34.9 46.5 31.0 41.3 43.1
Support.............................. 25.6 14.1 25.3 29.1 22.1 14.9 12.5
Services............................. 7.3 2.6 15.8 5.6 9.4 12.1 8.6
----- ----- ----- ----- ----- ----- -----
Total revenue................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales and services:
Computer software.................... 7.7 5.1 9.2 13.0 10.3 8.7 5.9
Computer hardware.................... 31.7 38.1 24.3 30.4 23.7 31.3 31.1
Support.............................. 17.5 10.4 20.3 28.1 13.0 9.1 7.4
Services............................. 6.7 3.7 6.8 8.4 7.7 7.1 5.4
----- ----- ----- ----- ----- ----- -----
Total cost of sales and
services.................... 63.6 57.3 60.6 79.9 54.7 56.2 49.8
----- ----- ----- ----- ----- ----- -----
Gross profit........................... 36.4 42.7 39.4 20.1 45.3 43.8 50.2
Operating expenses:
General and administrative........... 19.8 18.6 24.7 41.2 25.4 18.6 15.6
Research and development............. 10.2 6.7 13.8 15.9 8.8 6.8 5.2
Sales and marketing.................. 8.4 5.7 8.0 11.7 9.4 7.1 5.2
----- ----- ----- ----- ----- ----- -----
Total operating expenses...... 38.4 31.0 46.5 68.8 43.6 32.5 26.0
----- ----- ----- ----- ----- ----- -----
(Loss) income from operations.......... (2.0) 11.7 (7.1) (48.7) 1.7 11.3 24.2
Interest expense:
Interest on outstanding debt......... 7.2 4.4 11.1 12.6 8.1 5.5 4.1
Amortization of original issue
discount........................... 5.8 3.5 2.2 2.5 1.6 1.1 0.8
Interest income........................ (0.5) (0.4) (0.9) (0.7) (0.3) (0.2) (0.3)
----- ----- ----- ----- ----- ----- -----
Total interest expense, net... 12.5 7.5 12.4 14.4 9.4 6.4 4.6
----- ----- ----- ----- ----- ----- -----
Net (loss) income...................... (14.5) 4.2 (19.5) (63.1) (7.7) 4.9 19.6
Pro forma income tax benefit
(expense)............................ 4.1 (1.2) 5.5 17.9 3.9 (2.4) (9.6)
----- ----- ----- ----- ----- ----- -----
Pro forma net (loss) income............ (10.4)% 3.0% (14.0)% (45.2)% (3.8)% (2.5)% 10.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
SEASONALITY
The Company generally has realized lower revenue in the fourth quarter of
the year than in the other quarters. The Company believes that this has been due
primarily to the tendency of many of the Company's clients to avoid implementing
a new system or an upgrade of an existing system during the holiday season,
typically the busiest time of year for substantially all of the Company's
clients. Due to all of the foregoing factors, the Company believes that period
to period comparisons of its operating results are not necessarily meaningful
and that such comparisons cannot be relied upon as indicators of future
performance.
LIQUIDITY AND CAPITAL RESOURCES
On December 19, 1994, the Company entered into a Debenture Purchase
Agreement (the "Debenture Agreement") with the Lenders in connection with the
Convertible Debentures. Principal on the Convertible Debentures is payable in
two equal installments of $6.0 million on December 1, 1999 and December 1, 2000,
and bore interest at 10% through June 30, 1997 and began accruing interest at
15% thereafter. Interest is payable quarterly in arrears and commenced on March
31, 1995. The Debenture Agreement provides for a default rate of interest of 20%
on all principal amounts not paid within 15 days of the date due. At December
31, 1997, the Company was not in compliance with certain debt covenants. The
Lenders waived all applicable default remedies pertaining to the interest
payments they were entitled to enforce against the Company under the Debenture
Agreement and waived compliance by the Company with respect to such covenants
through the earlier of (i) the consummation of an initial public offering or
(ii) January 1, 2000. In order to maintain sufficient working capital for the
Company's needs, the Company has agreed with
33
<PAGE> 35
the Lenders to defer all interest payments becoming due and payable through the
earlier of (i) the consummation of an initial public offering or (ii) January 1,
2000.
On June 30, 1997, the Convertible Debentures became convertible at the
option of a majority in interest of the Lenders into the Convertible Preferred
Stock and the Redeemable Preferred Stock. The fair value of the conversion
features of the Convertible Debentures has been determined to be $3.5 million
based on the difference between the stated interest rates and the estimated
market rate of such Debentures upon the date of issuance. This amount is
included in additional paid-in capital in the accompanying consolidated balance
sheets, with the resulting original issue discount ("OID") on the loan being
amortized over the term of the note. Non-cash interest expense related to the
amortization of the OID was $960,000, $960,000 and $660,000 in 1995, 1996 and
1997, respectively. See Note 6(b) of Notes to Consolidated Financial Statements.
During the past three fiscal years and the nine month period ended
September 30, 1998, the Company has financed its operations and growth with
funds generated by operations. At September 30, 1998, the Company's primary
sources of liquidity consisted of cash, cash equivalents and short-term
investments totaling $3.6 million.
The Company's operating activities have provided cash for the nine months
ended September 30, 1998 and years ended December 31, 1997, 1996 and 1995 of
$4.4 million, $540,000, $87,000, and $3.2 million, respectively. For the nine
months ended September 30, 1998, the Company's operating cash was provided by
net income (excluding the non-cash expense relating to the amortization of OID),
continued deferral of interest payments due under the Convertible Debentures,
client deposits received in advance of recognized revenue, and increased
accounts payable and accrued expenses partially offset by increases to accounts
receivable and inventory. In 1997 and 1996, the Company's primary source of
operating cash was provided by the deferral of interest payments due under the
Convertible Debentures. In 1995, cash from operating activities was generated
primarily by the Company's net income.
Cash used in investing activities was approximately $522,000, $234,000 and
$251,000 for the nine months ended September 30, 1998 and in years ended
December 31, 1997 and 1996, respectively. This cash was used for capital
expenditures in the ordinary course of business. The Company's capital
expenditures relate primarily to purchases of computers, printers and software
to support the Company's operations, as well as furniture, fixtures and
leasehold improvements. The Company expects its rate of purchases of property
and equipment will increase as its employee base grows.
For the nine months ended September 30, 1998, cash used in financing
activities totaled $71,000, which consisted of distributions to stockholders.
Cash used in financing activities totaled $200,000 in 1997, which consisted of
repayment of advances from officers made during 1996. During 1996, financing
activities provided $225,000 through advances from officers and repayment of
employee loans. Cash used in financing activities totaled approximately $15.1
million during 1995, primarily due to distributions to stockholders totaling
approximately $15.3 million. The distributions during the year were comprised of
amounts totaling $12 million made in accordance with the terms of the
Convertible Debentures, and other distributions totaling $3.3 million based on
the Company's estimated net income for 1995. Historically, as an S Corporation,
the Company has distributed all profits earned during the year to its
shareholders. The Company made distributions in excess of shareholders' equity
because the cash was available for such purpose. Such distributions have not
affected the Company's ability to meet its current obligations.
As of September 30, 1998, the Company had working capital of approximately
$3.1 million as compared to working capital of approximately $16,000 and $1.2
million at December 31, 1997 and 1996, respectively. The change in working
capital from December 31, 1997 to September 30, 1998, resulted primarily from an
increase in current assets of $8.2 million due to cash generated from operations
and increases in accounts receivable and inventory, offset by an increase in
current liabilities of $5.1 million due to increases in accounts payable,
accrued expenses and deferred
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<PAGE> 36
revenue. Accounts receivable increased by approximately $4.4 million from
December 31, 1997 to September 30, 1998, and by $4.7 million as compared to
September 30, 1997. This increase was primarily attributable to three large
upgrade sales in September totaling $4.0 million and increasing sales by the
Company's UK office. Deferred revenue increased by approximately $2.2 million
from December 31, 1997 to September 30, 1998 and increased by $2.1 million from
September 30, 1997. This increase was primarily due to higher new client sales
activity in 1998. Deferred revenue represents amounts billed to clients for
which revenue may not be recognized. The $1.2 million decrease in working
capital during the year ended December 31, 1997 from December 31, 1996 primarily
resulted from a decrease in current assets of $560,000 due to lower accounts
receivable and an increase in current liabilities of $660,000 resulting from
increases in accounts payable, accrued expenses and deferred revenue.
The Company has been developing its software and new products which has
resulted in minimal working capital at December 31, 1997. The Company plans to
increase revenue and profitability by marketing software applications and
increasing sales in the United States, United Kingdom and Australia. During the
nine months ended September 30, 1998, the Company increased software revenue due
to certain major contracts that were entered into in 1998 and to system
upgrades. In addition, the Company received a waiver to defer the payment of
interest on the Convertible Debentures through the earlier of (i) the
consummation of an initial public offering or (ii) January 1, 2000. Based on the
new contracts and to system upgrades, the interest waiver received and the
Company's anticipated operating results, management believes there will be
sufficient funding to meet its required operating expenditures.
A portion of the estimated net proceeds of this Offering will be used to
provide the Company with working capital to support potential growth. The
Company believes that estimated net proceeds of this Offering remaining after
repayment of indebtedness and the Distribution, together with its current cash
balances and cash flow from operations, will be sufficient to meet its working
capital and capital expenditure requirements for at least the next eighteen
months.
The Company may, in the future, acquire businesses or products
complementary to the Company's business, or otherwise obtain the right to use
complementary technologies, although there can be no assurance that any such
acquisitions will be made. The need for cash to finance additional working
capital or to make acquisitions may cause the Company to seek additional equity
or debt financing. There can be no assurance that such financing will be
available, or that the Company's need for higher levels of working capital will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, prior to
January 1, 2000, computer systems and/or software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The original design of MACS featured a four
position century field which provided century independence. The only exception
to this feature was the GTS programs developed by a third-party provider and
incorporated into MACS to provide general ledger and accounts payable functions.
The Company's MACS products have been determined to be fully Year 2000
compliant, except for the GTS program. The Company performed tests of all major
functionality within the MACS family of software products, specifically those
areas which utilize date fields. GTS provided Year 2000 compliant code to the
Company in September 1998. With respect to the GTS programs, the Company has
identified all changes necessary to integrate the Year 2000 compliant code into
MACS. The Company has completed the internal functional specifications for the
necessary changes and
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expects them to be incorporated into a new version of MACS to be released in
early 1999. The Company anticipates total expenditures for time and materials to
implement such changes to be less than $40,000. In the event that the Company is
unable to remedy the Year 2000 issue with respect to the GTS programs prior to
January 1, 2000, the Company may be subject to liability in the event that any
defects occur in MACS.
The Company has also reviewed all material vendor systems for Year 2000
compliance and, except as indicated below, either confirmed that these systems
are Year 2000 compliant or obtained Year 2000 compliance statements from the
respective vendor. All of the Company's network software is Year 2000 compliant
except NT Server 4.0, Backoffice Server and Raptor Firewall. All of the
Company's desktop software is Year 2000 complaint except Windows 95, Visual C++,
Visual Basic and Word 6.0. With respect to such noncompliant software, the
Company expects to obtain updated revisions which are compliant early in 1999.
The Company anticipates total expenditures for time and materials to make such
systems Year 2000 compliant to be approximately $10,000. In addition, the
Company has reviewed all of its internal systems including its hardware and
software systems, its embedded systems, networks, accounting systems, and
development, testing, training and demonstration platforms for Year 2000
compliance. The Company has upgraded all internal systems to Year 2000 compliant
operating system versions where compliance statements were not provided for such
systems. There were no material costs incurred by the Company in connection with
testing its vendor or internal systems. All of the Company's non-IT systems are
Year 2000 compliant. Any failure of the Company or its suppliers or clients to
be Year 2000 compliant, however, could result in a material adverse effect on
the Company's business, financial condition and results of operations.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires all items to be recognized under
accounting standards as components of comprehensive income to be reported in a
separate financial statement. The Company does not believe that the adoption of
SFAS No. 130 will have a significant impact on the Company's financial
reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. The Company does not believe that the adoption of SFAS No. 131
will have a significant impact on the Company's financial reporting.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-5 (SOP 98-5) "Reporting on the Costs of
Start-Up Activities." Pursuant to the provisions of SOP 98-5, all costs
associated with start-up activities, including organizational costs, should be
expensed as incurred. Companies that previously capitalized such costs are
required to write-off the unamortized portion of such costs as a cumulative
effect of a change of accounting principle. The Company has an immaterial amount
of these costs and the adoption of SOP 98-5 will not have a significant impact
on the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires an entity to
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<PAGE> 38
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company does not believe that
the adoption of SFAS No. 133 will have a significant impact on the Company's
financial reporting.
FORWARD LOOKING INFORMATION
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that actual events or results may differ
materially from such forward-looking statements. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this Prospectus, including the matters set forth under "Risk
Factors," which could cause actual results to differ materially from those
indicated by such forward-looking statements.
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<PAGE> 39
BUSINESS
GENERAL
The Company is a leading provider of mission-critical, enterprise-wide
software solutions, and related hardware and services, to the non-store
marketing industry. The Company's clients in the non-store marketing industry
are traditional direct marketing companies and Internet-only retailers, as well
as manufacturers, fulfillment houses and retailers with significant non-store
sales channels. The Company's MACS family of software products is designed to
automate non-store commerce activities, including advertising analysis, sales,
telemarketing, ordering, merchandising, procurement, electronic and Internet
commerce, warehousing, shipping, accounting and systems operation. The MACS
products also provide managers and sales personnel with real-time operations,
inventory and customer data to improve both management decision making and
customer service.
Since its inception in 1988, management of the Company has concentrated on
providing software-based systems and services to leading non-store marketing
companies and to retailers, manufacturers and fulfillment houses with
significant non-store sales channels. By focusing on this market, management
believes that the Company has been able to develop a significant industry
expertise that has been incorporated in the functionality of the Company's
products and services. The Company's MACS II and MACS III products offer over
3,000 functional options, process up to 200,000 transactions per day and are
used primarily by companies with high-volume non-store commerce operations.
WebOrder, the Company's new Internet commerce solution, is a highly scalable
system that enables real-time interactive customer ordering, and automates
processing and back-office operations for companies selling products or services
over the Internet. WebOrder incorporates both the functionality and scalability
of MACS II and MACS III. The Company's solutions are used by more than 200
clients located primarily in North America, Europe and Australia.
INDUSTRY BACKGROUND
Historically, the non-store marketing industry in the United States
principally consisted of companies engaged in marketing and selling their
products and services through traditional direct marketing channels, such as
catalogs, direct mailings, print ads, telemarketing, television or radio.
Typically, the selling process involved marketers contacting and soliciting
potential customers through these traditional direct marketing channels. Those
customers ordered their products by mail, paid by check and received purchased
products by carrier thereafter. This process normally took four to six weeks due
to lengthy processing times and slow delivery via postal service. As the
non-store marketing industry matured, the sales process evolved to include
toll-free telephone numbers for ordering and customer service, faster delivery
methods and customers' increasing preference to pay by credit card. Until the
mid 1980s, the non-store marketing industry remained dominated by companies
selling exclusively through traditional direct marketing channels.
In the last decade, many companies selling exclusively through traditional
direct marketing channels achieved significant success due to their ability to
address growing customer demand for greater convenience and more personalized
service. As a result, many retailers which had previously sold only through
retail outlets entered the non-store marketing industry. Examples of such
retailers include Macy's, Bloomingdale's, Nordstrom and Saks Fifth Avenue, which
currently market and sell their products through retail outlets as well as
catalogs, direct mailings and other non-store marketing channels. The advantages
of non-store marketing for retailers include an increased ability to target
existing clients, better customer service and decreased costs of operations.
With the emergence and acceptance of the Internet as a business-to-business
and business-to-consumer sales channel and the rapid growth in interactive
Internet commerce, the non-store marketing industry has expanded to include a
much broader range of companies. In addition to the traditional non-store
marketers, direct sales over the Internet has become a new, important sales
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channel for a wide range of retailers and manufacturers who traditionally relied
predominantly on in-store sales, large in-house direct sales organizations,
independent distributors, or person-to-person solicitation. Also, the emergence
of Internet-only marketers has further expanded the non-store marketing
industry. Examples of these retailers, manufacturers and Internet-only marketers
include Amazon.com, Compaq, Cyberian Outpost, Dell and Egghead.com. The growth
in interactive Internet commerce coupled with increasing competition among
store-based and non-store-based retailers and marketers have significantly
increased the use of non-store, direct marketing strategies and expanded the
range of marketers and retailers deploying such strategies.
The Non-Store Marketing Industry Today
The non-store marketing industry encompasses those companies selling
products directly to customers through direct channels other than in-store
sales, such as catalogs, direct mail, TV infomercials, radio, print ads,
outbound telemarketing, the Internet and other non-store based channels.
According to a recent study sponsored by the DMA, these marketing channels
accounted for approximately $1.2 trillion in annual sales in the United States
in 1997.
According to the DMA, the fastest growing segment within the non-store
marketing industry is interactive marketing over the Internet. Companies using
this marketing channel distribute advertising over the Internet via Web-sites or
paid advertisements on targeted third-party sites or browsers and frequently
offer customers the convenience of purchasing merchandise directly through
Internet commerce applications. Since 1994, the interactive marketing segment
has experienced compound annual revenue growth of almost 250%, from
approximately $44 million in 1994 to approximately $1.9 billion in 1997. The DMA
forecasts that interactive sales over the Internet will increase by 74.7% per
year to reach approximately $31.3 billion by 2002. Expenditures for interactive
marketing are expected to increase 66.1% annually to reach $3.5 billion in 2002.
The Non-Store Marketing Software Market
As a result of the growth in Internet commerce and the increased use of
non-store marketing channels, many marketers need to enhance their information
technology solutions to accommodate these new sales channels. The Company
believes that such companies seek information technology solutions that can help
them effectively manage their order flow from web pages and other non-store
channels while simultaneously centralizing and automating their back-office
operations and managing all aspects of their non-store marketing operations.
These solutions must be able to integrate seamlessly with the other systems or
applications that these companies currently use, and must enable real-time
information flow to help managers target potential customers, analyze sales and
product strategies, enhance and access customer service records and synchronize
key data. Non-store marketing companies, Internet-only retailers and companies
complementing their existing sales strategies with non-store marketing channels
require systems that are flexible and that support innovative new marketing
initiatives and methods of operation which may be implemented in the future.
Since certain non-store marketing segments, particularly the Internet commerce
segment, are growing rapidly, non-store marketing systems must also be highly
scalable and efficient.
Current technology alternatives for the non-store marketing and sales
function are typically comprised of general purpose or retail-oriented
enterprise resource planning ("ERP") software and electronic commerce add-on
applications without real-time access to enterprise databases. This technology
solution is prevalent among companies that traditionally sell through
wholesalers, distributors, in-house sales forces or retail outlets. Another
common technology alternative consists of point solutions targeted to the
non-store marketing industry, but with limited breadth and depth of
functionality. These point solutions tend to be difficult to use and do not help
managers access and leverage the enterprise knowledge residing in company
databases. In-house technology solutions are also common in the non-store
marketing industry, especially among larger companies. These in-house solutions
are typically expensive to develop, modify and maintain and require a
sophisticated in-house software development staff. Also, technology development
is typically not the
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core strength of non-store marketing companies, and in-house software often
lacks the vision and perspective to keep up with technological change. As a
result, management of the Company believes that a significant opportunity exists
for third-party technology providers to offer enterprise-wide, best-of-breed
software solutions designed specifically for the non-store marketing and sales
function.
THE SMITH-GARDNER SOLUTION
The Company's principal software-based solution is the MACS family of
products ("MACS"). MACS is an enterprise-wide, mission-critical software
solution developed specifically for the non-store marketing industry. MACS helps
managers of non-store commerce companies operate their businesses more
effectively and efficiently by automating operations and making available
real-time information relating to nearly every facet of these companies'
operations. MACS incorporates analytical tools, best-of-breed methodologies,
in-depth functionality and enterprise-wide information flow. The Company also
provides extensive customer support services, custom development and integration
services, consulting, installation and training.
The Company's WebOrder product, a real-time interactive Internet commerce
solution first installed in November 1997, positions the Company to benefit from
the strong growth in the Internet commerce segment of the non-store marketing
industry. WebOrder provides all the back-office features needed to manage sales
transactions over the Internet including real-time customer access to back
office data such as inventory availability, order status and customer service
functions. WebOrder enables Internet marketers to effectively manage order flow
from Web pages and other non-store channels while simultaneously integrating
marketing, sales and back-office operations.
With the introduction of EuroMACS, the Company offers a solution targeted
at non-store marketing companies based abroad. EuroMACS is specifically designed
to address issues that are unique to these companies, such as value-added tax
requirements, multiple currencies, international document formats, local banking
and shipping carrier interfaces, and different mailing and address formats.
The Company's solutions are designed to provide its clients with the
following benefits:
Fully Integrated and Highly Functional Solutions. MACS supports all of the
major areas of the non-store marketing and sales functions including advertising
analysis, merchandising, sales, purchasing, accounting, telemarketing, ordering,
electronic and Internet commerce, warehousing, shipping, production and systems
operation. MACS enables real-time information flow that supports marketing and
database analytics and sophisticated management reports. MACS also eliminates
potential errors arising from the maintenance of multiple unsynchronized
databases. In addition to approximately 3,000 standard features, the Company's
software solutions offer approximately 1,500 customization options and enable
its users to tailor this solution to their changing business needs and processes
without disrupting the underlying data model and interrupting the business.
Versatility and Open Technology Environment. The MACS solutions use open
technology and readily integrate with many third-party systems and software
applications. While MACS runs on the HP3000, the solution is ODBC compliant,
which enables the exchange of data with other common computing platforms used by
manufacturers and retailers, such as IBM's AS400 and various other systems. MACS
has been successfully integrated with software solutions provided by third-party
vendors such as Island Pacific, Manhattan Associates, PeopleSoft and Great
Plains. The current MACS customer base is presently limited to buying MACS on
either HP 3000 computer systems or on any platform that supports Microsoft's NT
operating system. The development phase for MACS on UNIX operating system
platforms is expected to be completed by the end of 1999. The Company believes
that the entire non-store market can be addressed by its present platforms,
because NT platforms address the lower end of the market and the HP 3000
platform addresses the mid to large tier clients.
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High Volume Internet Commerce Capability. WebOrder provides an Internet
commerce solution which incorporates the scalability and functionality of MACS
II and MACS III and can accommodate the Internet commerce requirements of very
large retailers. WebOrder enables traditional retailers, manufacturers,
Internet-only marketers and other non-store marketing companies to add a high
volume Internet commerce channel to their marketing and sales activities without
changing their core ERP systems.
Processing Scalability and Reduced Operating Costs. MACS enables companies
to process up to 200,000 non-store orders per day, minimize overhead costs,
enhance decision support and data analytics, improve the efficiency and quality
of customer services and streamline overall operations. MACS can also reduce the
operating costs that would otherwise be associated with the ongoing maintenance
and updating of legacy, batch and mainframe systems.
STRATEGY
The Company's objective is to become the world's leading provider of
software solutions for the non-store marketing industry. The Company's strategy
to achieve this objective includes the following:
Capitalize on Internet Commerce Growth. The Company intends to expand its
marketing and sales of WebOrder to existing customers, new Internet retailers
and other Internet commerce participants. WebOrder, which was first installed in
November 1997, offers a sophisticated, highly scalable technology solution for
Internet commerce activities. Internet commerce is the fastest growing segment
in the non-store marketing industry and experienced a compound annual revenue
growth of nearly 250% from 1994 to 1997. To date, the Company has sold WebOrder
to more than 35 clients including companies such as Cyberian Outpost and Hickory
Farms.
Extend Product Offerings Across New Platforms. The Company is focusing its
product development resources on porting MACS functionality on to additional
platforms including Windows NT and UNIX. In addition, the Company has developed
interfaces with software solutions provided by other companies such as
PeopleSoft, Inc., Great Plains, Manhattan Associates, Inc. and Island Pacific,
and intends to continue to develop interfaces to additional third-party software
solutions. With the introduction of MACS for NT, MACS for UNIX and nMACS, the
Company believes that it can leverage its position as an industry leader and
grow its business across a broader base of technology platforms.
Develop Global Markets. The Company seeks to further develop its
international presence and sales. The Company opened offices in the United
Kingdom and Australia in mid-1997 and has since added approximately 25 employees
to its international operations. The Company plans to add additional offices in
Western Europe in the future. In January 1998, the Company first installed
EuroMACS, a MACS product specifically designed for non-store marketing companies
located abroad. The Company intends to leverage its strong domestic presence to
increase its sales in international markets, particularly in Europe and
Australia.
Increase Sales to Existing Clients. Historically, the Company has focused
primarily on sales to new clients and has not actively marketed its optional
product modules to existing clients. The Company is creating a product
management team responsible for marketing and selling to its existing clients
new MACS modules such as Point of Sale and Assembly. This team will also market
professional services to existing clients to meet the changing needs of such
clients.
Expand Direct Sales Force. The Company intends to increase the size of its
current sales force in order to expand its marketing of existing products and
modules. In addition, the Company has created separate sales teams and intends
to hire additional sales personnel to market and sell new products, such as
nMACS and WebOrder. The Company also intends to add offices in Western Europe
and to hire additional sales personnel to service international markets.
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Expand Service Offerings. The Company's consulting and service offerings
are critical components of its client-driven solution. The Company will continue
to expand its comprehensive consulting and client support services to facilitate
the timely installation, implementation and effective utilization of its
products. For example, the Company plans to offer regional training seminars to
its clients throughout the United States. The Company also is developing a
users-only Web site to provide its clients with the Company's internal knowledge
databases to resolve client issues.
Pursue Strategic Opportunities. The Company believes that the market for
software which automates non-store marketing operations is highly fragmented and
rapidly evolving, with many new product introductions and many large and small
industry participants. These factors create both the need and the opportunity to
effect strategic transactions, including acquisitions, alliances or other
partnerships, in order to increase the breadth of the Company's product
offerings, establish new sales and marketing channels and exploit evolving
market opportunities. While the Company presently has no commitments to effect
any such transactions, it intends to pursue such opportunities in order to
enhance further its competitive position as the marketplace evolves.
PRODUCTS
The MACS family of products offers an integrated, flexible, modular
solution for front and back-office operations, decision support analytics,
Internet commerce marketing and transaction processing functionality. MACS I,
the first version of MACS, was installed in 1990. The Company released MACS II
in June 1994, and completed the last version upgrade in July 1997. Compared to
MACS I, MACS II offered several new features and functions as well as an
expansion of its internal database. In June 1998, the Company released MACS III,
which incorporates approximately 300 new enhancements, and introduced several
new products and optional modules. Other products included in the MACS family
are WebOrder and EuroMACS, which were introduced by the Company in November 1997
and January 1998, respectively.
The following chart summarizes the current MACS products and typical users:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION OF FUNCTIONS TYPICAL USERS
- ------- ------------------------ -------------
<S> <C> <C>
MACS II/ Capable of automating and integrating all Non-store marketing companies and
MACS III major areas of non- store marketing companies traditional retailers selling through
that sell through catalogs, direct mail, non- store marketing channels, with
telemarketing, print ads, telephone, mail, daily transaction volumes of up to
television, radio and other non-store 200,000.
channels; includes over 3,000 functions
encompassing advertising, sales,
merchandising, purchasing, accounting,
telemarketing, ordering, electronic commerce,
warehousing, shipping, production and systems
operation; displays real-time management
information by maintaining mini data marts for
each functional area.
WEBORDER Web-based order fulfillment system that Non-store marketing companies,
incorporates all features and functions of retailers, wholesalers and
MACS II/MACS III; offers web customers manufacturers selling through the
real-time, secure information including Internet, with daily transaction
inventory availability, order status and volumes of up to 200,000.
customer service functions; helps Internet
marketers integrate their marketing, sales and
back office operations and manage nearly all
aspects of non-store marketing operations.
EUROMACS MACS modified to accommodate the needs of International-based non-store marketing
clients located abroad in areas relating to companies and traditional retailers
value-added tax requirements, international selling through non-store marketing
mailing address formats, and interfacing with channels, with daily transaction
international shipping carriers and banking volumes of up to 200,000.
institutions.
</TABLE>
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The prices of MACS II, MACS III, WebOrder and EuroMACS range from $30,000
to $2.7 million, depending on the number of users and CPUs required.
In addition to the current MACS products, there are a number of optional
modules available to MACS users. The following chart summarizes the functions
and benefits of the more widely used MACS modules:
<TABLE>
<CAPTION>
MODULE DESCRIPTION OF FUNCTIONS BENEFITS
------ ------------------------ --------
<S> <C> <C>
VISUALMACS Uses Windows-based, drag-and-drop, Ease and efficiency of use.
point-and-click technology with
multi-tasking capabilities in a
client/server environment.
POINT OF SALE Interfaces with catalog customer database Enables companies to run a store and a
and facilitates the display of separate non-store marketing company via one
store inventories; provides cash register centralized database.
processing and optional drop shipping of
unavailable items.
ASSEMBLY Facilitates the procurement of raw Enables non-store marketing companies
materials and creates bills of materials to to run light manufacturing operations.
track assembly process; tracks costs of
assembly (including labor and machine time)
and forecasts demand for raw materials.
CONTINUITY Enables negative option-type promotions and Streamlines operations of non-store
facilitates monthly club programs, customer marketing companies that sell books,
maintenance procedures and other incentive records, videos and other continuing-
programs. demand products.
INSTALLMENT Facilitates installment payments, returns Enables billing of customers' credit
BILLING and cancellations. cards in multiple installments.
OUTBOUND Uses existing selection criteria and MACS Enables companies to become more
TELEMARKETING database to create campaigns; automates proactive in selling to existing
customer service and solicitation customers and prospects.
functions.
</TABLE>
Pricing for the MACS modules is based on individual user requirements and
needs.
MACS operates in a HP Series 3000, MPE/iX environment. The HP3000 is a
scalable, fully upward compatible computer system in which all hardware upgrades
are performed at the CPU site. The main programming language used for MACS is
COBOL, although some functionality is written in C++ and Visual Basic. The data
structure used is the fully SQL-compatible Turbo Image DBMS.
All HP3000 systems provide high online transaction processing performance
and functionality and support major networking protocols such as OSI, TCP/IP,
SNA, and OSF/DCE. The Company has developed its own TCP/IP Application Program
Interface ("API"), which serves as the foundation to communicate directly
between MACS and the Internet. This socket-based API also has the ability to
communicate with other Windows-based applications. WebOrder requires a Microsoft
Internet information server and communicates with the HP3000 through the
Company's own API. The API enables MACS to communicate with other platforms
through an exchange of data from the HP3000 to other databases such as Oracle
and Microsoft Access.
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Products Under Development
The Company is currently developing a number of new products in response to
demands presented by companies in the non-store marketing industry including:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION OF FUNCTIONS TYPICAL USERS
------- ------------------------ -------------
<S> <C> <C>
MACS FOR UNIX Full-featured version of MACS III that Non-store marketing companies and
runs on a UNIX platform. traditional retailers selling through
non-store marketing channels and using
a UNIX platform.
MACS FOR NT Full-featured version of MACS III that Non-store marketing companies and
runs on a Windows NT platform. traditional retailers selling through
non-store marketing channels and using
a Windows NT platform.
NMACS Provides only basic functions of MACS and Small non-store marketing companies
runs on a Windows NT platform. processing up to approximately 1,000
orders per day.
</TABLE>
The Company expects to introduce these products during the next twelve to
eighteen months.
CLIENTS
The Company's clients include traditional direct marketing companies,
retailers and manufacturers with significant non-store marketing operations,
fulfillment houses and Internet-only retailers. The Company generally targets
leading non-store marketing companies in their respective industry segments. The
Company has sold MACS to more than 200 clients. The following is a
representative list of the Company's clients as of November 30, 1998 generally
categorized by industry segment:
<TABLE>
<S> <C>
APPAREL/SHOES GENERAL MERCHANDISE/GIFTS
Coldwater Creek, Inc. Brookstone, Inc.
Delias Hammacher Schlemmer
Huntington Clothiers, Inc. Lego Direct Marketing, Inc.
Nine West Group Levenger Tools
Nordstrom, Inc. Miles Kimball Company
COMPUTER SOFTWARE/HARDWARE TV HOME SHOPPING
Broderbund Software Arcadia
Creative Computers The Shopping Channel
Cyberian Outpost, Inc. Littlewoods
Egghead.com, Inc. QVC Network, Inc.
Micro Warehouse
Multiple Zones International Inc. OTHERS
KAO Infosystems Co.
EDUCATIONAL SUPPLIES/BOOKS Genesis Direct, Inc.
Marboro Books Corp. (Barnes & Noble) Maritz, Inc.
Rodale Press, Inc. United Methodist Publishing House
Time Life, Inc. United States Mint
FOOD AND BEVERAGE
Cushman Fruit Company
Ethel M. Chocolates
Hickory Farms, Inc.
Wine Enthusiast
</TABLE>
None of the Company's clients accounted for more than 10% of the Company's
revenue in 1997. In 1997, the Company's three largest clients, Genesis Direct,
Inc., Delias and KAO Infosystems Co., in the aggregate accounted for 17.3% of
the Company's revenue. In 1996, the Company's three largest clients, QVC
Network, Inc., Micro Warehouse and Coldwater Creek, Inc. accounted for 21.2% of
the revenue of the Company, with QVC Network, Inc. accounting for 10.7% of such
revenue. For
44
<PAGE> 46
the nine months ended September 30, 1998, the United States Mint was responsible
for approximately 11.8% and Multiple Zones was responsible for 10.4% of the
Company's revenue.
CLIENT SERVICES
Client Support
The Company believes that a high level of service and support is critical
to its success and an important competitive advantage. The Company's
installation teams consist of a project manager, a technical lead, two support
analysts and as many installers or trainers as are required for a given
installation. The installation teams configure the system for new clients, which
involves installing the hardware and software, setting all the proper control
switches, training the client's executives and managers, and resolving all
installation issues for up to three to six months after the client begins
processing orders through the system. Thereafter, the Company transitions the
client to its standard support services provided by the Company. The Company's
installation teams completed 32 installations of MACS products in 1997. The
Company will complete 44 installations in 1998, based on the Company's receipt
of a signed contract or a letter of intent accompanied by a cash deposit of at
least 10% of the purchase price under the proposed contract.
The Company's client support function is responsible for servicing its
clients after the initial implementation project is complete. The Company has
client support operations in the United States and the United Kingdom and
currently supports approximately 170 clients in over 15 countries. These
operations enable the Company to respond more quickly and effectively to the
needs of its multinational and international clients. Approximately 95% of
current MACS users participate in the Company's support services program.
The Company believes that a close and active service and support
relationship is important to client satisfaction and also provides the Company
with information regarding evolving client requirements. For example, the
Company assigns to each of its clients a client coordinator whose primary
responsibility is to act as a liaison between the client and the Company. In
addition, the Company provides telephone support from 8:00 a.m. to 9:00 p.m.
(EST) weekdays and 24 hours-a-day for emergencies and uses electronic bulletin
boards and other forms of electronic distribution to provide clients with the
latest information regarding the Company's products.
In general, the Company provides two kinds of support: standard and major
account. The Company's standard support services provide complete, full time
technical support. When a client calls the Company with a question or issue, it
is initially reviewed and analyzed by the client coordinator and then sent on to
the appropriate specialty team for resolution. More complex issues can then be
referred to one of the Company's technical support teams and, if necessary, to
the Company's programming unit. The Company provides its clients with telephone
support to give timely responses to systems issues. The Company continually
communicates with its clients through newsletters and seminars, and client
coordinators provide weekly reports to each client detailing the status of the
account. Event schedules, product enhancement requests and electronic mail are
available to clients on the Company's Internet web site as well.
The Company also offers major account support services, which provide
premier technical service for its larger clients through the assignment of a
dedicated account manager and team of support personnel. For these clients, the
Company maintains a copy of their production software environment on the
Company's client support system to enable the account manager to expedite the
resolution of all client issues. The Company believes that such services build a
strong strategic relationship which enhances the future business prospects of
the Company.
Support contracts are typically service agreements pursuant to which
clients pay a monthly fee based on a percentage of the total software license
fee. Installation and training are included in the initial license fee.
Depending on the services delivered, support services typically are priced at
17% of the total license fee per year and include, without charge, any new
version releases of software. Major account services are typically priced based
on the level of support services provided.
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<PAGE> 47
As of September 30, 1998, the Company employed 100 client support services
personnel, consisting of 27 implementation, 56 standard support and 17 major
account support personnel.
Consulting and Customization
The Company's consultants conduct site examinations and assist clients in
developing and implementing advanced MACS strategies. With significant
experience in the non-store marketing industry, the Company's consultants
provide practical and proven direction in developing strategies which apply
best-practice MACS methodologies that meet the client's requirements. Depending
on the client's needs, the Company offers:
- Requirements analysis and MACS software evaluation services;
- Advanced MACS methodology consulting;
- Benchmarking and other advanced strategy workshops involving clients and
industry experts;
- Integration services and technical consulting in areas such as data
conversion, system interfaces and database/network tuning;
- Project management services intended to lead the client through the
implementation activities required to achieve successfully the client's
business objectives; and
- Custom programming for system enhancements and system interfacing.
Consulting and customization services are delivered directly by the Company
but are also delivered in conjunction with third-party service providers such as
systems integrators and specialist consulting firms. Consulting and
customization services are typically delivered on a fixed price and
not-to-exceed basis or occasionally on a time and materials basis.
Training and Education
The Company offers a variety of standard and customized training and
education services, both at client sites and at the Company's headquarters in
Delray Beach, Florida. Upon the installation of MACS, the Company provides a two
week training course for each client's staff. The training curriculum is
delivered by specialists who utilize proven education techniques and advanced
technology. The Company also offers 48 courses per year for training in the
application of its MACS products through the MACS Academy. The Company also
offers a "train the trainer" program in which the Company trains client
employees designated as trainers within their organization. These trainers are
educated in both training techniques and the optimal use of the Company's
products. The Company believes its train-the-trainer methodology is a crucial
element in the success of its implementations, which often span multiple
departments, plants and countries. Continuing education and training is
delivered through standard courses with package prices or can be contracted for
on a time and materials basis.
SALES AND MARKETING
The Company markets and sells its products and services to new prospects
and existing clients primarily through its direct sales force. These personnel
are trained in the Company's products and service offerings and in the
operations of the Company's clients. The Company's personnel use a
"consultative" selling approach, because the sales process requires an
understanding of the non-store marketing industry as well as comprehensive
computer and systems expertise.
The Company's sales force is supported by marketing personnel who generate
and qualify leads through advertising and marketing campaigns, produce product
literature, periodic newsletters and direct mail campaigns, arrange attendance
at trade shows and conventions, and sponsor seminars. The marketing department
also supports the sales force with appropriate documentation or presentation and
demonstration materials for use during the sales process. The Company also
supports its direct sales and marketing force with a group of systems
engineering professionals, many of whom also possess vertical market and
practical MACS expertise.
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<PAGE> 48
As of September 30, 1998, the Company employed 28 sales and marketing
personnel (24 domestically and 4 internationally), consisting of 14 sales
representatives and 14 marketing and other support personnel.
The Company's method of marketing and selling to a new prospect consists of
identifying the prospect, qualifying the prospect and, if the prospect is
qualified, preparing and presenting a sales proposal. The prospecting process
includes placing advertisements in trade publications, acquiring mailing lists,
telemarketing, direct mailing, conducting seminars and participating in trade
shows to generate leads for the direct sales force. Once a prospect is
qualified, the appropriate direct sales personnel visit the prospect to
understand the prospect's specific requirements. This process usually results in
the preparation of a written proposal describing the hardware, software and
services that meet the prospect's requirements. While the Company's sales
personnel generally make the initial sales contact, large and complex
installations generally involve the use of the Company's professional services
group. This group works closely with the sales team to identify the optimal
configuration of MACS required for such prospects. This sales cycle typically
ranges from three to six months.
The Company has executed a hardware resale agreement with Client Systems,
Inc., a distributor of HP products. The Company also has a strategic
relationship with Hewlett-Packard consisting of cooperative marketing and sales
activities in the non-store market industry. Currently, the Company is one of
the leading resellers of the HP3000 products.
The MACS user community and the Company have organized an international
MACS users' group whose advisory committee plays an important role in helping
the Company develop and refine its MACS products and services strategies. In
addition, the Company hosts an annual MACS world conference which includes
presentations by the Company and clients concerning the features and
capabilities of the Company's products. The Company also participates in trade
conferences worldwide to promote global sales and use of the MACS products. All
of these conferences include workshops, round table discussions and special
sessions devoted to products, technologies and MACS methodologies. More than 250
attendees participated in the Company's 1998 MACS World Conference held in
Deerfield Beach, Florida.
RESEARCH AND DEVELOPMENT
The Company's research and development function is performed by the
business analysis, programming, quality control and advanced technologies teams.
The business analysis group performs the functional and technical requirements
for the enhancements that are requested either from the Company's clients or
internal product management group. The programming group is responsible for the
MACS software maintenance and enhancement process. The Company uses a version
and patch approach to software release control and uniformly maintains a current
version of each of its products, which is not subject to enhancements, and a
development version, which is regularly enhanced. The Company releases quarterly
patch updates of its current versions upon code corrections and believes that
this process maximizes the stability of its products, which is critical to the
day-to-day operations of a non-store marketing company. The quality control
group tests the software each time it passes through the business and
programming groups and performs regression testing prior to the release of any
patch updates or new releases. The advanced technologies group is responsible
for the identification and initial development of new technology opportunities.
The Company follows a structured development methodology to ensure the
timely and cost-effective production of high-quality software. The Company has a
formal process through which clients may have input as to modifications of the
Company's products and believes that this input helps it deliver a leading
industry solution to its current and prospective clients.
As of September 30, 1998, the research and development staff consisted of
56 employees. From time to time, the Company has also engaged outside
consultants in its product development efforts. Total expenses for research and
development in the fiscal years ended December 31, 1995, 1996 and
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<PAGE> 49
1997 were approximately $2.2 million, $2.3 million and $2.0 million,
respectively. No software development costs were capitalized in fiscal 1995,
1996 or 1997. The Company anticipates that it will continue to commit
substantial resources to product development in the future.
COMPETITION
The market for non-store commerce software is competitive, rapidly evolving
and highly sensitive to new product introductions and marketing efforts by
industry participants. This market is also highly fragmented and served by ERP
software providers, electronic commerce software providers, consulting firms and
point solution providers targeting the non-store marketing industry. The
Company's products also compete with information systems developed and serviced
internally by in-house MIS departments. Although the Company believes that none
of its competitors currently compete against the Company in all industry
segments, there can be no assurance that such competitors will not compete
against the Company in the future in additional industry segments. Many of the
Company's potential future competitors may have significantly greater financial,
technical and marketing resources, generate higher revenues and may have greater
name recognition than does the Company. In addition, as the Company expands into
new segments of the non-store marketing industry, such as Internet commerce, it
will face competition from other software companies, MIS departments and
unforeseen sources. Compared with the Company, these competitors may have
greater resources, operating experience, credibility and relationships in such
new segments. Although the Company believes that it currently competes favorably
in all industry segments and against all competitors, there can be no assurance
that it will do so in the future.
PROPRIETARY RIGHTS AND LICENSES
The Company primarily relies on a combination of copyright, trademark and
trade secret laws, unpatented proprietary know-how, license agreements,
non-disclosure and other contractual provisions and technical measures to
protect its proprietary rights in its products and technology. The Company
typically distributes its software products under software license agreements
which contain, among other things, provisions limiting the use, copying and
transfer of the licensed program. The licensees typically obtain a copy of the
Company's source code in connection with the licensee's use of the MACS
products. The Company has obtained a United States copyright registration for
the source code of its MACS II software.
The Company currently has operations in the United States, Australia and
the United Kingdom, and its products are licensed for use by clients in over 15
countries. The Company has registered MACS, MACSII and THE MACSIMUM as
trademarks in the United States. The Company also has applied for the
registration as trademarks in the United States of EUROMACS, MACSIII and
WEBORDER. The Company believes that international protection and enforcement of
intellectual property rights for software products in particular may be more
limited than in the United States. Specifically, intellectual property laws in
certain countries may not protect software companies from the loss of
intellectual property rights through reverse engineering.
The Company has entered into several agreements regarding the integration
of the intellectual property of third parties into its products. Parties to such
agreements include Cognos, First Logic, GTS and DISC.
The Company generally enters into confidentiality agreements with employees
and clients which limit rights and access to, and distribution of any
proprietary or confidential information. Furthermore, employees execute
agreements requiring disclosure and assignment to the Company of all of the
intellectual property rights associated with any ideas, concepts, techniques,
inventions, processes, or works of authorship relating to the business of the
Company and developed or created during the course of performing work for the
Company or its clients.
The Company does not believe that any of its products infringe the
proprietary rights of third parties. There can be no assurance that the steps
taken by the Company to protect its proprietary
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<PAGE> 50
rights will be adequate to prevent misappropriation of its technology or
development by others of similar technology. Because the software development
industry is characterized by rapid technological change, however, the Company
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements, industry
reputation and client support are more important to establishing and maintaining
a leadership position than the various legal protections available for its
technology.
LEGAL PROCEEDINGS
In November 1995, Robelle Consulting Ltd. ("Robelle") filed suit against
the Company and Allan J. Gardner in United States District Court for the
Southern District of Florida. Robelle alleges copyright and trademark
infringement, breach of contract, and unfair competition arising out of the
Company's distribution of two of Robelle's software products which had been
incorporated as part of MACS. Robelle seeks, among other relief, an
indeterminate amount of damages. In January 1998, Robelle was granted summary
judgment with respect to its copyright infringement claim for one of the Robelle
products, but was denied summary judgment as to its claim for statutory damages
for such infringement and denied several of its damages claims. The matter is
scheduled to be tried in April 1999. The Company believes that the only matter
that remains to be litigated is the amount of actual damages, which the Company
believes is an immaterial amount. The Company is unable to predict the outcome
of the matter at this time. However, management believes that an unfavorable
outcome in this matter would not have a material adverse effect on the Company's
business, financial condition or results of operations.
In February 1998, the Company filed a suit against Robelle in Circuit Court
in Palm Beach County, Florida. The Company alleges that Robelle wrongfully
terminated its VAR License Agreement with the Company and breached the terms
thereof. Robelle has denied any wrongdoing and the matter is in preliminary
stages of discovery, with the possible consolidation of this state court action
with the federal court action involving Robelle. The Company is unable to
predict the outcome of the matter at this time. However, management believes
that an unfavorable outcome in this matter would not have a material adverse
effect on the Company's business, financial condition or results of operations.
From time to time, the Company is involved in other legal proceedings
incidental to the conduct of its business. The Company believes that this other
litigation, individually or in the aggregate, to which it is currently a party
is not likely to have a material adverse effect on the Company's business,
financial condition or results of operations.
EMPLOYEES
As of September 30, 1998, the Company had a total of 228 full-time
employees in the United States: 56 in product development, 24 in sales and
marketing, 34 in training and professional services, 100 in client support
services and 14 in management, administration and finance. In addition, as of
September 30, 1998, the Company had 25 employees in the United Kingdom and 2
employees in Australia. None of the Company's employees are subject to a
collective bargaining agreement, and the Company has not experienced any work
stoppages. The Company believes that its employee relations are good.
FACILITIES
The Company is headquartered in Delray Beach, Florida, where it leases
approximately 46,000 square feet of office space pursuant to a lease which
expires in July 2001. The Company also leases office space in various other
locations in the United States, United Kingdom and Australia to house certain of
its marketing and sales activities. The Company is currently seeking additional
facilities domestically and internationally to accommodate additional marketing
and sales activities, and believes that it will be able to obtain such space on
commercially reasonable terms.
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<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages and their
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Allan J. Gardner....................... 53 Co-Chairman of the Board and Executive Vice
President -- Advanced Technologies
Wilburn W. Smith....................... 58 Co-Chairman of the Board and Executive Vice
President -- Sales
Gary G. Hegna.......................... 58 President, Chief Executive Officer and Director
Martin K. Weinbaum..................... 37 Chief Financial Officer, Vice
President -- Finance
Timothy Edkin.......................... 46 Vice President -- Product Development
Sharon Gardner......................... 32 Vice President -- Marketing
Deborah L. Longo....................... 39 Vice President -- Client Support Services
Jacqueline Morby....................... 61 Director Nominee
</TABLE>
Allan J. Gardner, a co-founder of the Company, has served in a variety of
capacities during his tenure with the Company. From December 1988 to April 1996,
Mr. Gardner served as Vice President and Secretary. From January 1997 to the
present, Mr. Gardner has served as Executive Vice President -- Advanced
Technologies. From December 1994 until the present, Mr. Gardner has served as a
director of the Company, becoming Co-Chairman of the Board in May 1996. During
his tenure with the Company, Mr. Gardner has also been the chief architect of
the Company's software products. From 1980 to 1988, Mr. Gardner was President of
BSA Incorporated ("BSA"), a catalog management software company. BSA was
acquired by Acxiom Corp. in 1986. Mr. Gardner served on Acxiom's Board of
Directors from 1986 to 1988. Since 1966, Mr. Gardner has worked in the data
processing industry, and since 1980 exclusively in the direct marketing segment
of the non-store marketing industry. Sharon Gardner, the Company's Vice
President -- Marketing, is Mr. Gardner's daughter.
Wilburn W. Smith, a co-founder of the Company, has served in a variety of
capacities during his tenure with the Company. From December 1988 to April 1996,
Mr. Smith has served as President and Treasurer of the Company. From November
1996 to the present, Mr. Smith has served as Executive Vice President - Sales.
From December 1994 to the present, he has served as a director of the Company,
becoming Co-Chairman of the Board in May 1996. Since his tenure with Bell Labs,
now known as Lucent Technologies, in the early 1960's, Mr. Smith has worked
exclusively in the direct marketing industry. Prior to his tenure with the
Company, Mr. Smith was a founder of Brook Smith Associates, the predecessor
company of BSA, and owned and managed several other direct marketing companies.
Gary G. Hegna has served as the President, Chief Executive Officer and a
director of the Company since April 1996. Mr. Hegna also serves as Chairman of
Smith-Gardner UK and Smith-Gardner Australia. From January 1992 to February
1996, Mr. Hegna served as the Chairman, President and Chief Executive Officer of
OpenConnect Systems, Inc., a software company based in Dallas, Texas. From
January 1987 to January 1992, Mr. Hegna served as President and Chief Executive
Officer of ICL North America, a Dallas based manufacturer of computer systems
and telecommunications equipment. Mr. Hegna has also served in various
management and executive roles for Xerox Corporation, Data General Corporation,
Prime Computer Incorporated and Encore Computer.
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<PAGE> 52
Martin K. Weinbaum has served as the Company's Vice President -- Finance
and Chief Financial Officer since January 1997, and the Company's Secretary and
Treasurer since May 1996. Since October 1997, Mr. Weinbaum has served as a
director of Smith-Gardner UK and Smith-Gardner Australia. From October 1994 to
March 1995, Mr. Weinbaum served as Controller of MediBar Medical Industries, a
diagnostic medical services provider located in Boca Raton, Florida. From
January 1994 to October 1994, Mr. Weinbaum served as the Chief Financial Officer
of Interactive Technologies Company, a pet food wholesale company located in
Fort Lauderdale, Florida. From November 1989 to December 1993, Mr. Weinbaum
served as the Vice President -- Finance and Chief Financial Officer of Aspen
Marine Group/Hawk Marine Power, a high performance engine and boat manufacturer
located in Greenback, Tennessee. From 1984 to 1988, Mr. Weinbaum, who is a
certified public accountant, engaged in public accounting with the firms of
Levitsky & Berney, P.C. and Coopers & Lybrand.
Timothy Edkin has served as the Company's Vice President -- Product
Development since July 1996. Mr. Edkin's responsibilities include coordinating
the design, development, testing and delivery of the Company's MACS software.
Prior to joining the Company, Mr. Edkin was a consultant to Computer Perfection,
a software support company located in Boca Raton, Florida, from October 1994 to
April 1996. From December 1982 to October 1994, Mr. Edkin served as the Director
of MIS-Support and Development of Business Application Software for Siemens, AG,
a telephone interconnect company located in Boca Raton, Florida.
Sharon Gardner has served as the Vice President -- Marketing of the Company
since September 1997. Ms. Gardner's responsibilities include coordinating the
Company's marketing, communications, advertising, training, documentation,
professional services and product management functions. From September 1990 to
September 1997, Ms. Gardner was the Company's Vice President -- Client Services.
From September 1985 to September 1990, Ms. Gardner served in marketing and
client services capacities in a catalog fulfillment house. Allan J. Gardner, the
Company's Co-Chairman, is Ms. Gardner's father.
Deborah L. Longo has served as the Company's Vice President -- Client
Support Services since August 1997. Ms. Longo's responsibilities include
coordinating the Company's client support and installation functions. From May
1994 to September 1997, Ms. Longo served as Director of Client Services for
MorTech, a software company located in Little Rock, Arkansas. From July 1986 to
May 1994, Ms. Longo held various positions including Group Director, Client
Services, with Acxiom Corp., a software company located in Ocean, New Jersey.
Jacqueline Morby has been nominated and has agreed to become a director of
the Company upon completion of this Offering. Since 1978, Ms. Morby has served
as Managing Director of TA Associates, Inc., the managing general partner of
each of the Lenders. Ms. Morby presently serves as a director of ANSYS, Inc.,
Boron, LePore & Associates, Inc., NxTrend Technologies, Inc., HVL, Inc. and
Pacific Life Insurance Company.
The Company currently intends to add two independent directors to its Board
of Directors (the "Board"). To date, the Company has not selected such
directors.
Upon the completion of this Offering, the Board will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Following this Offering and the appointment of the two independent directors,
the Board will consist of two Class I Directors (Ms. Morby and one of the two
independent directors to be appointed), two Class II Directors (Mr. Hegna and
one of the two independent directors to be appointed) and two Class III
Directors (Messrs. Smith and Gardner). At each annual meeting of shareholders, a
class of directors will be elected for a three-year term to succeed the director
or directors of the same class whose terms are then expiring. The initial terms
of the Class I Directors, Class II Directors and Class III Directors expire upon
the election and qualification of successor directors at the annual meeting of
shareholders held during the calendar years 1999, 2000 and 2001, respectively.
Each officer of the Company serves at the discretion of the Board.
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<PAGE> 53
BOARD COMMITTEES
Following the consummation of this Offering, the Board intends to establish
an Audit Committee and a Compensation Committee, each of which will be comprised
initially of the Company's independent directors. The Audit Committee will have
responsibility for reviewing audit plans and discussing audit work, internal
controls and related matters with the Company's independent public accountants,
reviewing the annual audit report and any accompanying recommendations and
nominating independent public accountants to perform the annual audit. The
Compensation Committee will have responsibility for reviewing the compensation
of the Company's executive officers, making recommendations to the Board and
administering the Plans. See "Management -- Stock Option Plans."
The Board may from time to time establish certain other committees to
facilitate the management of the Company.
DIRECTOR COMPENSATION
As compensation for serving on the Board, directors who are not also
employees of the Company will receive an annual fee of $5,000, $750 for each
meeting of the Board or any committee thereof in which they participate in
person, an initial grant of options to purchase 15,000 shares of Common Stock
pursuant to the 1998 Stock Option Plan at an exercise price of $4.53 per share
(or at the initial public offering price upon the consummation of this Offering
prior to July 1, 1999), and options to purchase 5,000 shares of Common Stock to
be awarded annually thereafter. See "Management -- Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, the Company had no
Compensation Committee or other committee of the Board performing similar
functions. Decisions concerning compensation of executive officers were made by
the Board of Directors of the Company consisting of Messrs. Gardner, Hegna and
Smith. It is contemplated that the Board will establish a Compensation Committee
consisting of non-employee directors following consummation of this Offering.
Messrs. Smith and Gardner each loaned $100,000 to the Company, which loans were
repaid in full in 1997. See "Certain Transactions."
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<PAGE> 54
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
paid or accrued by the Company for services rendered during the fiscal year
ended December 31, 1997 by the Company's Chief Executive Officer and the four
other most highly compensated executive officers of the Company (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION(1) SECURITIES
------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(2)
- --------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Gary G. Hegna............................. $225,000 $50,000 -- $ 475
President and Chief Executive Officer
Allan J. Gardner.......................... 250,000 -- -- --
Executive Vice President -- Advanced
Technologies
Wilburn W. Smith.......................... 250,000 -- -- --
Executive Vice President -- Sales
Timothy Edkin............................. 107,811 3,000 20,375(3) 539
Vice President -- Product Development
Sharon Gardner............................ 104,965 5,000 361(3) --
Vice President -- Marketing
</TABLE>
- ---------------
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in such column. The aggregate amount
of perquisites and other personal benefits provided to each Named Executive
Officer is less than 10% of the total annual salary and bonus of such
officer.
(2) Represents cash payments to the respective Named Executive Officer under the
Company's Profit Sharing Plan.
(3) Consists of options issued under the 1996 Stock Option Plan at an exercise
price of $2.53 per share.
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<PAGE> 55
Option Grants in Last Fiscal Year
The following table sets forth certain information for the fiscal year
ended December 31, 1997, with respect to grants of stock options to each of the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(2)
UNDERLYING EMPLOYEES OR BASE EXPIRATION ------------------------
NAME OPTIONS IN FISCAL YEAR PRICE(1) DATE 5% 10%
- ---- ---------- -------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gary G. Hegna........ -- -- -- -- -- --
Allan J. Gardner..... -- -- -- -- -- --
Wilburn W. Smith..... -- -- -- -- -- --
Timothy Edkin........ 20,375 13% $2.53/sh. (3) $84,578.32 $134,676.84
Sharon Gardner....... 361 * $2.53/sh. (4) 2,075.75 3,305.28
</TABLE>
- ---------------
* Less than 1% of total options granted.
(1) The exercise price of all outstanding options was based on the fair market
value of the Common Stock underlying each such option on the date of grant.
Such value was determined by the Board of Directors of the Company.
(2) The dollar amounts under these columns represent the potential realizable
value of each option granted, assuming that the market price of the Common
Stock appreciates in value from the date of grant at the 5.0% and 10.0%
annual rates of appreciation presented and therefore are not intended to
forecast possible future appreciation, if any, of the price of the Common
Stock.
(3) Of the 20,375 options, 20,000 expire on January 6, 2007, 122 expire on April
15, 2007, 109 expire on July 15, 2007, 72 expire on October 15, 2007 and 72
expire on December 15, 2007.
(4) Of the 361 options, 114 expire on April 15, 2007, 103 expire on July 15,
2007, 72 expire on October 15, 2007 and 72 expire on December 15, 2007.
Option Holdings and Fiscal Year End Option Values
The following table sets forth information regarding stock options held by
the Named Executive Officers at December 31, 1997.
OPTION HOLDINGS AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary G. Hegna................. 185,295 308,825 $185,295 $308,825
Allan J. Gardner.............. -- -- -- --
Wilburn W. Smith.............. -- -- -- --
Timothy Edkin................. 1,313 22,063 1,313 22,063
Sharon Gardner................ 17,500 22,861 17,500 22,861
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values are based on the estimated fair market value
of the Common Stock as of December 31, 1997 of $3.53 per share.
(2) Assuming an initial public offering price of $9.00 per share, the values of
in-the-money options upon the commencement of this Offering will be as
follows: Gary G. Hegna (Exercisable -- $1,198,859,
Unexercisable -- $1,998,098); Timothy Edkin (Exercisable -- $8,495;
Unexercisable -- $142,748); Sharon Gardner (Exercisable -- $113,225;
Unexercisable -- $147,911).
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<PAGE> 56
STOCK OPTION PLANS
Under the 1996 Stock Option Plan, 850,000 shares of Common Stock are
reserved for issuance upon the exercise of stock options granted thereunder.
Under the 1998 Stock Option Plan (together with the 1996 Stock Option Plan, the
"Plans"), 1,000,000 shares of Common Stock are reserved for issuance upon the
exercise of stock options granted thereunder. The Plans are designed as a means
to attract, retain and motivate directors and key employees. The Board intends
to establish a committee (the "Compensation Committee") consisting of two or
more independent directors to administer and interpret the Plans.
Options are granted under the respective Plans on such terms and at such
prices as determined by the Board or the Compensation Committee. Each option is
for a term of not less than five years or more than ten years, as determined by
the Board or the Compensation Committee. However, in the event of a change of
control (as such term is defined in the respective Plans), all outstanding
options become immediately exercisable. Options granted under the Plans are not
transferable other than by will or by the laws of descent and distribution.
The Company has outstanding options to purchase an aggregate of 785,536
shares of Common Stock under the 1996 Stock Option Plan at September 30, 1998.
The exercise price of options to purchase 776,300 shares of such Common Stock is
$2.53 per share, while the exercise price of options to purchase the remaining
9,236 shares of such Common Stock is $4.53 per share (or the initial public
offering price upon the consummation of this Offering prior to July 1, 1999).
Under the 1998 Stock Option Plan, 1,000,000 shares of Common Stock are
reserved for issuance upon the exercise of stock options granted thereunder. The
Company has granted under the 1998 Stock Option Plan options to purchase an
aggregate of 538,003 shares of Common Stock at an exercise price of $4.53 per
share (or the initial public offering price upon the consummation of this
Offering prior to July 1, 1999). The 538,003 options have been granted to
executive officers of the Company as follows: 200,000 options to Mr. Hegna,
72,124 options to Mr. Weinbaum, 109,534 options to Ms. Gardner, 76,512 options
to Mr. Edkin and 79,833 options to Ms. Longo. Such options become exercisable at
the rate of 25% on the first anniversary of the date of grant and at the rate of
6.25% per quarter thereafter.
401(K) PLAN AND PROFIT SHARING PLAN
The Company currently maintains a 401(k) employee savings retirement plan
(the "401(k) Plan") which is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The 401(k) Plan covers Company
employees who, as of the enrollment eligibility dates under the 401(k) Plan, are
at least 18 years of age and elect to participate in the 401(k) Plan. All
Company contributions to the 401(k) Plan vest immediately. Benefits will
normally be distributed to an employee upon (i) the employee reaching age
59 1/2; (ii) the employee's retirement; (iii) the employee's death or
disability; (iv) the termination of the employee's employment with the Company;
(v) the termination of the 401(k) Plan or (vi) a requested withdrawal due to
financial hardship. The Company also maintains a profit sharing plan (the
"Profit Sharing Plan"). Pursuant to the Profit Sharing Plan, the Company has
discretion to issue cash awards and/or stock options to employees at the end of
each quarter based on a percentage of their salary.
EMPLOYMENT CONTRACTS
The Company has no employment agreements with any of its executive
officers. However, the Company has entered into standard non-competition
agreements with each of its executive officers except for Messrs. Smith and
Gardner who have executed separate non-competition agreements. The standard
agreements provide that during such executive officer's employment with the
Company, such executive officer will not (i) engage, directly or indirectly, in
activities which are competitive with the business of the Company or (ii)
solicit, directly or indirectly, any employees or customers of the Company to
terminate their relationship with the Company. As to Messrs. Smith and Gardner,
each has agreed to not compete with the Company or solicit any employees of the
Company for three years following termination of employment with the Company.
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<PAGE> 57
CERTAIN TRANSACTIONS
CONVERSION OF DEBENTURES
On December 19, 1994, the Company sold Convertible Debentures in an
aggregate principal amount of $12.0 million to the Lenders pursuant to a
Debenture Purchase Agreement (the "Debenture Purchase Agreement"), by and among
the Company, Wilburn Smith, Allan Gardner and the Lenders. Under the terms of
the Debenture Purchase Agreement, interest accrued on the unpaid principal
balance of the Convertible Debentures at the rate of 10% per annum through June
30, 1997, and thereafter at the rate of 15% per annum until December 1, 2000
(the "Maturity Date"), or such earlier date on which the Convertible Debentures
are converted into shares of Preferred Stock of the Company. Interest is payable
on the last day of each calendar quarter and the principal balance is payable in
two equal installments of $6.0 million on December 1, 1999 and the Maturity
Date. The Debenture Purchase Agreement also provides for mandatory prepayment of
the entire outstanding principal balance and accrued interest upon certain
specified events including the consummation of an initial public offering of the
Company's Common Stock. The Company may prepay the outstanding principal amount
of the Convertible Debentures and accrued interest, in whole but not in part,
without penalty, at any time upon sixty days' prior written notice, subject to
the Lenders' conversion rights described below.
The Debenture Purchase Agreement provides that Lenders holding a majority
interest in the Convertible Debentures may, at any time after June 30, 1997,
require the Company to convert all outstanding Convertible Debentures into
22,556.14 shares of the Company's Convertible Preferred Stock and one share of
Redeemable Preferred Stock of the Company for each $1,000 in principal amount of
the Convertible Debentures being converted (the "Debenture Conversion"). The
Convertible Preferred Stock may be converted into shares of Common Stock at any
time upon the vote of the majority of holders of such shares at a conversion
rate of 100 shares of Common Stock for each share of Convertible Preferred Stock
(the "Conversion Rate"), subject to adjustments upon certain events. In
addition, the Convertible Preferred Stock shall be converted at the Conversion
Rate upon the closing of an underwritten public offering of Common Stock which
results in net proceeds to the Company of at least $20.0 million. Furthermore,
the Company is required to redeem all shares of Redeemable Preferred Stock upon
the closing of any initial public offering, at a redemption price of $1,000 per
share (the "Redemption Price"), subject to adjustments upon certain events. See
"Description of Capital Stock -- Preferred Stock." Notwithstanding the
expiration of these rights upon completion of the Offering, the Company and the
Lenders currently anticipate that Jacqueline Morby, the Managing Director of TA
Associates, Inc., will be elected as a director of the Company. Upon the
Debenture Conversion and prior to the consummation of the Offering, the Company
is also required to increase the number of members of its Board of Directors
from three to five, and the Lenders have the right to designate one person for
election to the Board and to require that Wilburn Smith and Allan Gardner vote
their shares of Common Stock to elect such person.
The Lenders have agreed to convert all of the Convertible Debentures into
Convertible Preferred Stock and Redeemable Preferred Stock subject to and upon
the consummation of the Offering. Accordingly, the Lenders are thereafter
required to convert the Convertible Preferred Stock into 2,255,614 shares of
Common Stock at the Conversion Rate, and the Company is required to redeem all
of the Redeemable Preferred Stock at the Redemption Price. Subject to and upon
the consummation of the Offering, the Lenders will receive (i) in the aggregate
2,255,614 shares of Common Stock upon the Lenders' payment of the Conversion
Rate and (ii) $12.0 million plus accrued interest under the Convertible
Debentures upon the Company's redemption of all Redeemable Preferred Stock. See
"Use of Proceeds."
In connection with the sale of the Convertible Debentures, Mr. Smith and
Mr. Gardner each received a $5.7 million distribution and Mr. Quigley received a
$600,000 distribution from the Company in 1995.
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<PAGE> 58
Other Related Party Transactions
On December 31, 1996, Wilburn Smith and Allan Gardner each loaned $100,000
to the Company. These loans, including all accrued interest, were repaid in full
in 1997.
The Promissory Notes will be issued by the Company to the Existing
Shareholders in an aggregate amount representing the estimated individual income
tax liability for each of the Existing Shareholders for the period beginning
January 1, 1998 and ending on the earlier of the date of the consummation of
this Offering or a voluntary S Corporation revocation (the "Termination Date").
At September 30, 1998, the estimated Distribution would have been approximately
$600,000.
In addition, the Existing Shareholders and the Company have entered into an
Agreement for Tax Indemnification (the "Tax Indemnification Agreement")
immediately prior to the consummation of this Offering. The Tax Indemnification
Agreement provides that the Existing Shareholders will indemnify the Company
from and against any and all taxes of the Company (i) for any periods ending
prior to the Termination Date for which it is determined that the Company was
not an S Corporation, and (ii) for any and all taxes arising from adjustments to
the Company's tax returns which increase the Company's tax liability for a
taxable period ending after such Termination Date and decrease the Existing
Shareholders' tax liability for a taxable period ending prior to such
Termination Date.
Any future transactions between the Company and its officers, directors and
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions with such persons
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies approved by such outside directors.
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<PAGE> 59
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of the Company's Common Stock as of December 15, 1998, and
as adjusted to reflect the sale of the shares offered hereby, and the conversion
of all of the outstanding shares of Redeemable Preferred Stock of the Company
into shares of Common Stock, by: (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of the Common Stock; (ii)
each director of the Company;(iii) each Named Executive Officer; (iv) all
executive officers and directors of the Company as a group; and (v) each other
Selling Shareholder. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(2) NUMBER OF AFTER OFFERING(2)
-------------------- SHARES -------------------
NAME AND ADDRESS(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------- ---------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Allan J. Gardner...................... 2,500,000 33.3% 200,000 2,300,000 20.0%
Wilburn W. Smith...................... 2,500,000 33.3% 200,000 2,300,000 20.0%
Thomas Quigley (3).................... 351,100 4.6% 10,000 341,100 2.9%
Gary G. Hegna (4)..................... 339,708 4.3% -- 339,708 2.9%
Martin K. Weinbaum (5)................ 14,637 * -- 14,637 *
Timothy Edkin (6)..................... 12,202 * -- 12,202 *
Sharon Gardner (7).................... 27,634 * -- 27,634 *
Deborah L. Longo (8).................. 7,521 * -- 7,521 *
TA Associates, Inc. (9)............... 2,171,028 28.9% -- 2,171,028 18.8%
Chestnut Capital International III
Limited Partnership(10)............. 84,586 1.1% -- 84,586 *
All directors and executive officers
as a group (7 persons).............. 5,752,802 71.8% -- 5,342,802 44.5%
</TABLE>
- ---------------
* Less than 1.0% of outstanding shares.
(1) Unless otherwise indicated, the address of each of the parties listed is
1615 South Congress Avenue, Delray Beach, Florida 33445-6368.
(2) Pursuant to the rules of the Commission, certain shares of the Company's
Common Stock that a beneficial owner has the right to acquire within 60 days
of the date of this Prospectus pursuant to the exercise of stock options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such owner but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. The
2,171,028 shares of Common Stock issuable to TA Associates, Inc. and the
84,586 shares of Common Stock issuable to Chestnut Capital International III
Limited Partnership in connection with the Concurrent Transactions are
considered outstanding for the purpose of calculating percentage ownership
of the listed parties.
(3) Includes 88,000 shares of Common Stock subject to options which are
exercisable prior to February 15, 1999.
(4) Consists of 339,708 shares of Common Stock subject to options which are
exercisable prior to February 15, 1999.
(5) Consists of 14,637 shares of Common Stock subject to options which are
exercisable prior to February 15, 1999.
(6) Consists of 12,202 shares of Common Stock subject to options which are
exercisable prior to February 15, 1999.
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<PAGE> 60
(7) Consists of 27,634 shares of Common Stock subject to options which are
exercisable prior to February 15, 1999.
(8) Consists of 7,521 shares of Common Stock subject to options which are
exercisable prior to February 15, 1999.
(9) Includes (i)1,127,807 shares of Common Stock owned by Advent VII L.P., (ii)
671,420 shares of Common Stock owned by Advent Atlantic and Pacific II
Limited Partnership, (iii) 242,103 shares of Common Stock owned by Advent
Industrial II Limited Partnership, (iv) 112,781 shares of Common Stock owned
by Advent New York L.P., and (v) 16,917 shares of Common Stock owned by TA
Venture Investors, L.P. Advent VII L.P., Advent Atlantic and Pacific II
Limited Partnership, Advent Industrial II Limited Partnership, Advent New
York L.P., and TA Venture Investors, L.P. are part of an affiliated group of
investment partnerships referred to, collectively, as the TA Associates
Group. The general partner of Advent VII, L.P. is TA Associates VII, L.P.
The general partner of each of Advent New York L.P., and Advent Industrial
II Limited Partnership is TA Associates VI, L.P. The general partner of
Advent Atlantic and Pacific II Limited Partnership is TA Associates AAP II
Partners, L.P. The general partner of each of TA Associates VII, L.P., TA
Associates VI, L.P. and TA Associates AAP II Partners, L.P. is TA
Associates, Inc. In such capacity, TA Associates, Inc. exercises sole voting
and investment power with respect to all of the shares held of record by the
named investment partnerships, with the exception of those shares held by TA
Venture Investors, L.P.; individually no stockholder, director or officer of
TA Associates, Inc. is deemed to have or share such voting or investment
power. Principals and employees of TA Associates, Inc. (including Ms. Morby,
a director of the Company) comprise the general partners of TA Venture
Investors, L.P. In such capacity, Ms. Morby may be deemed to share voting
and investment power with respect to the 16,917 shares held of record by TA
Venture Investors, L.P. Ms. Morby disclaims beneficial ownership of all
shares held of record by TA Venture Investors, L.P. with the exception of
2,447 shares.
(10) Includes 84,586 shares of Common Stock held by Chestnut Capital
International III Limited Partnership. Messrs. Jonathan J. Flemming,
Michael F. Schiaro, Peter A. Schober and John A. Turner are the general
partners of MVP Capital Limited Partnership ("MVP"). MVP has voting and
investment power to act for Chestnut Capital International III L.P.
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<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $0.01 par value per share, and 10,000,000 shares of Preferred
Stock, $0.01 par value per share.
The following summary description of the Company's capital stock is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to the Company's Articles of Incorporation and Bylaws filed
as exhibits to the registration statement of which this Prospectus is a part.
COMMON STOCK
As of September 30, 1998, there were 5,263,100 shares of Common Stock
outstanding held by the three Selling Shareholders. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of the
shares of Common Stock offered hereby and the conversion of all of the
outstanding shares of the Company's Preferred Stock into Common Stock, there
will be 11,518,714 shares of Common Stock outstanding upon the consummation of
this Offering. In addition, as of September 30, 1998, there were outstanding
stock options to purchase an aggregate of 1,324,379 shares of Common Stock.
Except as described below under "Description of Capital Stock -- Certain
Anti-takeover Effects," 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. 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 any 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 of the Company, subject to the prior rights of any outstanding
Preferred Stock. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights, nor are they entitled to the benefit of any
sinking fund. The outstanding shares of Common Stock are, and the shares offered
by the Company in this offering will be, when issued and paid for, validly
issued, fully paid and nonassessable. The rights, powers, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future.
PREFERRED STOCK
As of the date of this Prospectus, there are no shares of Preferred Stock
outstanding, (the "Preferred Stock"). In connection with the consummation of the
Offering, the outstanding Convertible Debentures will be automatically converted
into 22,556.14 shares of Convertible Preferred Stock and 12,000 shares of
Redeemable Preferred Stock. Simultaneously in connection therewith, the
22,556.14 shares of Convertible Preferred Stock will be converted into 2,255,614
shares of Common Stock, and the 12,000 shares of Redeemable Preferred Stock will
be redeemed by the Company for an aggregate redemption amount of $12.0 million.
As a result, upon the consummation of the Offering, there will be no shares of
Preferred Stock outstanding. For a summary of the material terms of the
outstanding Preferred Stock, see Note 7 of Notes to Consolidated Financial
Statements.
The Board of Directors is authorized, subject to any 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.
Each such series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights. The shareholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in
60
<PAGE> 62
order to eliminate delays associated with a shareholder vote on specific
issuances. The rights of the holders of Common Stock will be subject to the
rights of holders of any Preferred Stock issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could adversely affect the
voting power or other rights of the holders of Common Stock, and could make it
more difficult for a third-party to acquire, or discourage a third-party from
attempting to acquire, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock, other than as required in the Concurrent Transactions.
REGISTRATION RIGHTS
Following the consummation of the Offering, the Lenders will hold 2,255,614
shares of Common Stock which will be "restricted" securities within the meaning
of the Securities Act and may not be sold in the absence of registration under
the Securities Act or an exemption therefrom. Pursuant to a Registration Rights
Agreement dated December 19, 1994, by and between the Company and the Lenders,
the Company granted to the Lenders registration rights with respect to the
2,255,614 shares of Common Stock (the "Registrable Shares") to be held by the
Lenders upon consummation of the Offering. On any two occasions where fifty
percent in interest of the Lenders notify the Company in writing of their intent
for public sale of any portion of the Registrable Shares with an aggregate
anticipated offering price of at least $5.0 million, the Company shall use its
best efforts to register such securities under the Securities Act. In addition,
in the event that the Company may register its stock, the Company shall use its
best efforts to register the Registrable Shares. The Company may in certain
circumstances defer such registrations, and any underwriters with respect to
such sale shall have the right, subject to certain limitations, to limit the
number of shares included in such registrations. All of the expenses incurred in
connection with such registrations and offerings (other than underwriting and
selling commissions) and the reasonable fees and expenses of not more than one
independent counsel for the Lenders in an amount not to exceed $10,000 shall be
borne by the Company. The Company has agreed to indemnify the Lenders against
liabilities under the Securities Act in certain circumstances in connection with
any such registration.
LIMITATION OF LIABILITY AND INDEMNIFICATION
To the fullest extent permitted by the Florida Business Corporation Act
(the "Florida Act"), the Company's Articles of Incorporation provide that
directors of the Company shall not be personally liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director.
Generally, the Florida Act permits indemnification of a director or officer upon
a determination that he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The Articles of Incorporation and the Bylaws of the Company provide for the
indemnification of the Company's directors and officers and any person who is or
was serving at the request of the Company as a director, officer, employee,
partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan to the
fullest extent authorized by, and subject to the conditions set forth in the
Florida Act against all expenses, liabilities and losses (including attorneys'
fees, judgments, fines, ERISA taxes, excise taxes, or penalties, charges,
expenses and amounts paid or to be paid in settlement), except that the Company
will indemnify a director or officer in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Company's Board of Directors. The indemnification provided
under the Bylaws includes the right to be paid by the Company the expenses
(including attorneys' fees) in advance of any proceeding for which
indemnification may be had in advance of its final disposition, provided that
the payment of such expenses (including attorneys' fees) incurred by a director
or officer in advance of the final disposition of a proceeding
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<PAGE> 63
may be made only upon delivery to the Company of an undertaking by or on behalf
of such director or officer to repay all amounts so paid in advance if it is
ultimately determined that such director or officer is not entitled to be
indemnified. Pursuant to the Bylaws, if a claim for indemnification is not paid
by the Company within 60 days after a written claim has been received by the
Company, the claimant may at any time thereafter bring an action against the
Company to recover the unpaid amount of the claim and, if successful in whole or
in part, the claimant will be entitled to be paid also the expense of
prosecuting such action.
The Company has also applied for director and officer liability insurance
on behalf of its directors and officers.
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Articles of Incorporation and Bylaws contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by the Board of Directors. In addition certain provisions of
Florida law may hinder or delay an attempted takeover of the Company other than
through negotiation with the Board of Directors. These provisions could have the
effect of discouraging certain attempts to acquire the Company or remove
incumbent management even if some or a majority of the Company's shareholders
were to deem such an attempt to be in their best interest, including attempts
that might result in the shareholders' receiving a premium over the market price
for the shares of Common Stock held by shareholders.
Classified Board of Directors; Removal; Vacancies. The Articles of
Incorporation provide that the Board of Directors is divided into three classes
of directors serving staggered three-year terms. The classification of directors
has the effect of making it more difficult for shareholders to change the
composition of the Board of Directors in a relatively short period of time. The
Articles of Incorporation further provides that directors may be removed only
for cause and then only by the affirmative vote of the holders of at least
two-thirds of the entire voting power of all the then-outstanding shares of
stock of the Company entitled to vote generally in the election of directors,
voting together as a single class. In addition, vacancies and newly created
directorships resulting from any increase in the size of the Board of Directors
may be filled only by the affirmative vote of a majority of the directors then
in office (even if such directors do not constitute a quorum) or by a sole
remaining director. The foregoing provisions could prevent shareholders from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
Advance Notice Provisions for Shareholder Proposals and Shareholder
Nominations of Directors. The Bylaws establish an advance notice procedure with
regard to the nomination, other than by the Board of Directors, of candidates
for election to the Board of Directors and with regard to certain matters to be
brought before an annual meeting of shareholders of the Company. Although the
Bylaws do not give the Company's Board of Directors any power to approve or
disapprove shareholder nominations for the election of directors or any other
business desired by shareholders to be conducted at an annual meeting, the
Bylaws (i) may have the effect of precluding a nomination for the election of
directors or precluding the conduct of certain business at a particular meeting
if the proper procedures are not followed or (ii) may discourage or deter a
third-party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
and its shareholders.
Special Shareholders' Meetings. Under the Articles of Incorporation and the
Bylaws, special meetings of the shareholders, unless otherwise prescribed by
statute, may be called only (i) by the Board of Directors or by the Chairman or
President of the Company or (ii) by shareholders of the Company upon the written
request of the holders of at least 80% of the securities of the Company
outstanding and entitled to vote generally in the election of directors.
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<PAGE> 64
Limitations on Shareholder Action by Written Consent. The Articles of
Incorporation also provide that any action required or permitted to be taken at
a shareholders' meeting may be taken without a meeting, without prior notice and
without a vote, if the action is taken by persons who would be entitled to vote
at a meeting and who hold shares having voting power equal to not less than the
greater of (a) 80% of the voting power of all shares of each class or series
entitled to vote on such action or (b) the minimum number of votes of each class
or series that would be necessary to authorize or take the action at a meeting
at which all shares of each class or series entitled to vote were present and
voted.
Provisions of Florida Law. The Company is governed by two Florida statutes
that may deter or frustrate takeovers of Florida corporations. The Florida
Control Share Act generally provides that shares acquired in excess of certain
specified thresholds will not possess any voting rights unless such voting
rights are approved by a majority of a corporation's disinterested shareholders.
The Florida Affiliated Transactions Act generally requires supermajority
approval by disinterested shareholders of certain specified transactions between
a public corporation and holders of more than 10% of the outstanding voting
shares of the corporation (or their affiliates). Florida law also authorizes the
Company to indemnify the Company's directors, officers, employees and agents
under certain circumstances and to limit the personal liability of corporate
directors for monetary damages, except where the directors (i) breach their
fiduciary duties and (ii) such breach constitutes or includes certain violations
of criminal law, a transaction from which the directors derived an improper
personal benefit, certain unlawful distributions or certain other reckless,
wanton or willful acts or misconduct.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the securities
of the Company. Upon completion of this Offering, the Company will have
outstanding 11,518,714 shares of Common Stock (assuming no exercise of the
underwriters' over-allotment option or options outstanding under the Company's
stock option plans). Of these shares, the 4,410,000 shares sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless they are
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act (which sales would be subject to certain limitations
and restrictions described below). The remaining 7,108,714 shares are
"restricted shares" under Rule 144 (the "Restricted Shares"). The Restricted
Shares may be sold in the public market only if registered under the Securities
Act or if they qualify for an exemption from registration under Rule 144, Rule
144(k) or Rule 701 promulgated under the Securities Act. The Company and the
holders of all remaining 7,108,714 shares have agreed not to offer, pledge,
sell, offer to sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for shares of Common Stock until 180 days after the date of this
Prospectus, subject to certain exceptions. These exceptions consist of (i) the
prior written consent of BT Alex. Brown Incorporated, (ii) grants or awards of
shares of Common Stock authorized under the Plans at the time of the
effectiveness of the Registration Statement, (iii) bona fide pledges to persons
who agree to be bound by the restrictions to which the pledgor is subject, (iv)
bona fide gifts or similar transfers or devises for estate planning, charitable
and other related purposes, in any such case only to persons who agree to be
bound by the restrictions to which the transferor is subject, and (v) as
consideration for future acquisitions. As a result of the contractual
restrictions described herein and the provisions of Rule 144, Rule 144(k) and
Rule 701, the Restricted Shares will be available for sale in the public market
as follows: (i) no shares will be available for immediate sale on the date of
this
63
<PAGE> 65
Prospectus, and (ii) approximately 7,108,714 shares will become eligible for
sale 180 days after the date of this Prospectus (assuming no release from the
lock-up agreements) upon expiration of lock-up agreements, subject to the
restrictions of Rule 144 applicable to affiliates of the Company. Although BT
Alex. Brown Incorporated has no intention of waiving the lock-up restriction, in
the event of such waiver, 7,108,714 shares of Common Stock may be sold beginning
90 days after the effective date of the Offering.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for a least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (approximately 115,187 shares
immediately after the Offering) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks preceding the required filing of a
Form 144 with respect to such sale. Sales under Rule 144 are subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice filing provisions of Rule 144. Unless otherwise restricted,
"144(k) shares" may therefore be sold immediately upon the completion of the
Offering. Under Rule 701 under the Securities Act, persons who purchase shares
upon exercise of options granted prior to the Offering are entitled to sell such
shares 90 days after the Offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the volume limitation or notice
filing provisions of Rule 144.
After the completion of this Offering, the Company intends to file a
Registration Statement on Form S-8 (the "Form S-8") under the Securities Act to
register the 1,850,000 shares of Common Stock reserved for issuance under the
1996 Stock Option Plan and the 1998 Stock Option Plan. After the date of such
filing, if not otherwise subject to a lock-up agreement, shares purchased
pursuant to such plans and options generally would be available for resale in
the public market upon vesting and exercise of options or awards, subject to the
restrictions of Rule 144 applicable to affiliates of the Company. See
"Management--Stock Option Plans."
Prior to this Offering, there has been no public market for the Common
Stock and no determination can be made as to the effect, if any, that the sale
or availability for sale of additional shares of the Common Stock will have on
the market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of the shares in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise capital through sale of its equity securities.
64
<PAGE> 66
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives, BT
Alex. Brown Incorporated and SoundView Technology Group, Inc. (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Shareholders the following respective numbers of shares of Common Stock
at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
BT Alex. Brown Incorporated.................................
SoundView Technology Group, Inc.............................
---------
Total............................................. 4,410,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of the Common Stock offered hereby
if any of such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 661,500
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
each of them shown in the above table bears to , and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the shares are being offered.
To facilitate the Offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with the Offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such over-
allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the syndicate of Underwriters, also may reclaim
selling concessions allowed to an Underwriter or dealer, if the syndicate
repurchases shares distributed by that Underwriter or dealer.
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters, the Company and the Selling Shareholders regarding
certain liabilities, including liabilities under the Securities Act.
Allan J. Gardner, Wilburn W. Smith and certain other holders of the Common
Stock have agreed not to pledge, offer, sell or otherwise dispose of, subject to
certain exceptions, any of such shares of
65
<PAGE> 67
Common Stock for a period of 180 days after the date of this Prospectus. These
exceptions consists of: (i) the prior written consent of BT Alex. Brown
Incorporated, (ii) grants or awards of shares of Common Stock authorized under
the Plans at the time of the effectiveness of the Registration Statement, (iii)
bona fide gifts or similar transfers or devises for estate planning, charitable
and other related purposes, in any such case only to persons who agree to be
bound by the restrictions to which the transferor is subject, and (iv) as
consideration for future acquisitions.
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations among the Company, the Selling
Shareholders and the Representatives. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company, the Selling Shareholders and
the Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Akerman, Senterfitt & Eidson, P.A., Miami, Florida. Certain legal
matters in connection with the sale of the Common Stock offered hereby will be
passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in auditing and accounting.
66
<PAGE> 68
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, certain items of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to such Registration Statement and the exhibits and schedules
thereto. The summaries in this Prospectus of additional information included in
the Registration Statement or any exhibit thereto are qualified in their
entirety by reference to such information or exhibit. The Registration
Statement, including all exhibits thereto and amendments thereof, has been filed
with the Commission through EDGAR.
The Registration Statement and the exhibits and schedules thereto, may be
inspected, without charge, at the public reference facility maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Seven World
Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such materials can also be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005 or on the Commission's site on the Internet at
http://www.sec.gov.
67
<PAGE> 69
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997
and (unaudited) September 30, 1998 and (unaudited)
proforma balance sheet as of September 30, 1998........... F-3
Consolidated Statements of Operations for the three-year
period ended December 31, 1997 and (unaudited) for the
nine months ended September 30, 1997 and 1998............. F-4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity (deficit) for the three-year period
ended December 31, 1997 and (unaudited) nine months ended
September 30, 1998........................................ F-5
Consolidated Statements of Cash Flows for the three-year
period ended December 31, 1997 and (unaudited) for the
nine months ended September 30, 1997 and 1998............. F-6
Notes to Consolidated Financial Statements.................. F-7 -- F-20
Schedule of Valuation and Qualifying Accounts............... F-21
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Smith-Gardner & Associates, Inc.:
We have audited the consolidated financial statements of Smith-Gardner &
Associates, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Smith-Gardner & Associates, Inc. and subsidiaries as of December 31, 1996 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
April 24, 1998, except as to the
eighth paragraph of note 8 which is
as of June 30, 1998 and note 14(b)
which is as of September 8, 1998
F-2
<PAGE> 71
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PROFORMA
-------------------------- SEPTEMBER 30, PROFORMA[1(L)] SEPTEMBER 30,
1996 1997 1998 ADJUSTMENTS 1998
------------ ----------- ------------- --------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 60,217 168,590 3,566,943 -- 3,566,943
Accounts receivable, net of
allowance for doubtful
accounts of $936,347 in 1996,
$469,227 in 1997 and
(unaudited) $515,080
in 1998....................... 2,689,739 1,845,225 6,105,197 -- 6,105,197
Inventory....................... 12,866 219,963 700,981 -- 700,981
Prepaid expenses and other
current assets................ 165,449 135,382 164,458 -- 164,458
------------ ----------- ----------- ----------- -----------
Total current assets.......... 2,928,271 2,369,160 10,537,579 -- 10,537,579
Deferred offering costs........... -- -- 374,360 -- 374,360
Property and equipment, net....... 683,590 685,319 969,815 -- 969,815
Other assets...................... 54,330 80,576 76,441 -- 76,441
------------ ----------- ----------- ----------- -----------
$ 3,666,191 3,135,055 11,958,195 -- 11,958,195
============ =========== =========== =========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................ $ 280,027 548,350 3,282,317 -- 3,282,317
Accrued expenses................ 1,055,227 1,420,990 1,817,947 -- 1,817,947
Deferred revenue................ 160,388 383,378 2,375,367 -- 2,375,367
Advances due to officers........ 200,000 -- -- -- --
------------ ----------- ----------- ----------- -----------
Total current liabilities..... 1,695,642 2,352,718 7,475,631 -- 7,475,631
Convertible debt.................. 10,470,000 11,130,000 11,400,000 (11,400,000) --
Accrued interest payable.......... 1,200,000 2,700,000 4,050,000 -- 4,050,000
------------ ----------- ----------- ----------- -----------
Total liabilities............. 13,365,642 16,182,718 22,925,631 (11,400,000) 11,525,631
Redeemable preferred stock,
10,000,000 shares authorized:
Redeemable convertible
participating preferred stock,
$.01 par value; none issued... -- -- -- -- --
Redeemable preferred stock,
$1,000 par value, none issued
and (unaudited) proforma
issued and outstanding 12,000
shares........................ -- -- -- 12,000,000 12,000,000
Commitments and contingencies
(notes 4 and 12)
Stockholders' deficit:
Common stock, $0.01 par value.
Authorized 50,000,000 shares;
issued and outstanding
5,263,100 shares and
(unaudited) proforma issued
and outstanding 7,518,714
shares...................... 52,631 52,631 52,631 22,556 75,187
Additional paid-in capital...... 3,481,562 3,481,562 3,500,582 (22,556) 3,478,026
Accumulated deficit............. (13,233,644) (16,581,856) (14,520,649) (600,000) (15,120,649)
------------ ----------- ----------- ----------- -----------
Total stockholders' deficit... (9,699,451) (13,047,663) (10,967,436) (600,000) (11,567,436)
------------ ----------- ----------- ----------- -----------
$ 3,666,191 3,135,055 11,958,195 -- 11,958,195
============ =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 72
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Computer software................... $ 6,593,819 5,932,255 5,083,442 4,416,392 8,615,378
Computer hardware................... 13,641,345 7,370,088 8,144,206 6,489,102 9,852,980
Support............................. 3,343,216 4,037,966 4,100,488 3,064,321 3,816,666
Services............................ 1,350,417 1,188,468 1,324,074 1,123,136 2,463,658
----------- ----------- ----------- ----------- -----------
Total revenue..................... 24,928,797 18,528,777 18,652,210 15,092,951 24,748,682
----------- ----------- ----------- ----------- -----------
Cost of sales and services:
Computer software................... 807,721 584,493 1,504,002 1,042,021 1,929,781
Computer hardware................... 10,607,022 5,804,615 6,009,813 4,928,800 7,309,016
Support............................. 2,490,514 3,141,395 3,271,268 2,270,114 2,282,286
Services............................ 1,016,342 902,077 1,104,195 805,611 1,606,872
----------- ----------- ----------- ----------- -----------
Total cost of sales and
services........................ 14,921,599 10,432,580 11,889,278 9,046,546 13,127,955
----------- ----------- ----------- ----------- -----------
Gross profit...................... 10,007,198 8,096,197 6,762,932 6,046,405 11,620,727
Operating expenses:
General and administrative.......... 3,205,785 4,775,430 4,567,292 3,101,864 4,645,885
Research and development............ 2,166,225 2,254,206 2,010,858 1,443,874 1,637,973
Sales and marketing................. 523,382 980,371 1,482,061 1,065,822 1,652,919
----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 5,895,392 8,010,007 8,060,211 5,611,560 7,936,777
----------- ----------- ----------- ----------- -----------
Income (loss) from operations..... 4,111,806 86,190 (1,297,279) 434,845 3,683,950
Other income (expense):
Interest expense:
Interest on outstanding debt...... (1,200,000) (1,200,000) (1,500,000) (1,050,000) (1,350,000)
Amortization of original
issue discount.................... (960,000) (960,000) (660,000) (570,000) (270,000)
Interest income..................... 128,542 41,814 109,067 84,433 67,867
----------- ----------- ----------- ----------- -----------
Net income (loss)................. $ 2,080,348 (2,031,996) (3,348,212) (1,100,722) 2,131,817
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic............................... $ 0.39 (0.39) (0.64) (0.21) 0.40
=========== =========== =========== =========== ===========
Diluted............................. $ 0.34 (0.39) (0.64) (0.21) 0.37
=========== =========== =========== =========== ===========
Weighted average shares used in
calculating net income (loss) per
share:
Basic............................. 5,263,100 5,263,100 5,263,100 5,263,100 5,263,100
=========== =========== =========== =========== ===========
Diluted........................... 7,518,714 5,263,100 5,263,100 5,263,100 7,518,714
=========== =========== =========== =========== ===========
Pro forma data:
Net income (loss) before income
tax (expense) benefit............. $ 2,080,348 (2,031,996) (3,348,212) (1,100,722) 2,131,817
Pro forma provision for income tax
(expense) benefit (unaudited)..... (1,154,543) 359,819 948,427 311,835 (1,053,186)
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)
(unaudited)....................... $ 925,805 (1,672,177) (2,399,785) (788,887) 1,078,631
=========== =========== =========== =========== ===========
Pro forma basic and diluted net
(loss) income per share
(unaudited)....................... $ (0.46) $ 0.32
=========== ===========
Weighted average shares outstanding
used in calculating pro forma
basic and diluted net (loss)
income per share (unaudited)...... 5,263,100 7,518,714
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 73
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997 AND (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
RETAINED TOTAL
REDEEMABLE COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
PREFERRED ------------------- PAID-IN (ACCUMULATED EQUITY
STOCK SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
---------- --------- ------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994..... $ -- 5,263,100 $52,631 3,481,562 1,968,004 5,502,197
Net income for the year ended
December 31, 1995.......... -- -- -- -- 2,080,348 2,080,348
Shareholders distribution.... -- -- -- -- (15,250,000) (15,250,000)
---- --------- ------- --------- ----------- -----------
Balance, December 31, 1995..... -- 5,263,100 52,631 3,481,562 (11,201,648) (7,667,455)
Net loss for the year ended
December 31, 1996.......... -- -- -- -- (2,031,996) (2,031,996)
---- --------- ------- --------- ----------- -----------
Balance, December 31, 1996..... -- 5,263,100 52,631 3,481,562 (13,233,644) (9,699,451)
Net loss for the year ended
December 31, 1997.......... -- -- -- -- (3,348,212) (3,348,212)
---- --------- ------- --------- ----------- -----------
Balance, December 31, 1997..... -- 5,263,100 52,631 3,481,562 (16,581,856) (13,047,663)
Net income for the nine
months ended September 30,
1998 (unaudited)........... -- -- -- -- 2,131,817 2,131,817
Non-cash compensation expense
(unaudited)................ -- -- -- 19,020 -- 19,020
Shareholders distribution.... -- -- -- -- (70,610) (70,610)
---- --------- ------- --------- ----------- -----------
Balance, September 30, 1998
(unaudited).................. $ -- 5,263,100 $52,631 3,500,582 (14,520,649) (10,967,436)
==== ========= ======= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 74
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net income (loss).......................... $ 2,080,348 (2,031,996) (3,348,212) (1,100,722) 2,131,817
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 131,638 184,772 232,548 172,516 237,492
Amortization of original issue
discount............................... 960,000 960,000 660,000 570,000 270,000
Non-cash compensation expense............ -- -- -- -- 19,020
Bad debt expense (recovery).............. 219,350 771,567 485,185 (65,293) 45,852
Change in assets and liabilities:
Accounts receivable.................... 1,829,057 (156,177) 359,329 1,271,854 (4,305,825)
Inventory.............................. (168,748) 292,086 (207,097) (206,874) (481,018)
Prepaid expenses and other current
assets............................... (46,374) 249,524 30,067 (94,345) (29,076)
Other assets........................... -- (4,330) (26,246) (17,631) 4,135
Accrued interest payable............... -- 1,200,000 1,500,000 1,050,000 1,350,000
Accounts payable....................... (1,908,950) (581,374) 268,323 455,925 2,733,966
Other accrued expenses................. (489,281) (194,900) 552,243 33,386 396,957
Deferred revenue....................... 622,043 (602,363) 36,510 104,721 1,991,989
------------ ---------- ---------- ---------- ----------
Net cash provided by operating
activities......................... 3,229,083 86,809 542,650 2,173,537 4,365,309
------------ ---------- ---------- ---------- ----------
Cash flows used in investing activities:
Capital expenditures....................... (360,126) (251,192) (234,277) (189,302) (521,986)
------------ ---------- ---------- ---------- ----------
Net cash used in investing
activities......................... (360,126) (251,192) (234,277) (189,302) (521,986)
------------ ---------- ---------- ---------- ----------
Cash flows (used in) provided by financing
activities:
Distributions to stockholders.............. (15,250,000) -- -- -- (70,610)
Increase in cash overdraft................. 122,973 -- -- -- --
Advances from officers..................... -- 200,000 -- -- --
Proceeds from repayment of employees
loans.................................... 74,000 24,600 -- -- --
Repayment of advances from officers........ (2,600) -- (200,000) -- --
Deferred offering costs.................... -- -- -- -- (374,360)
------------ ---------- ---------- ---------- ----------
Net cash (used in) provided by
financing activities............... (15,055,627) 224,600 (200,000) -- (444,970)
------------ ---------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents................... (12,186,670) 60,217 108,373 1,984,235 3,398,353
Cash and cash equivalents at beginning of
year....................................... 12,186,670 -- 60,217 60,217 168,590
------------ ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year..... $ -- 60,217 168,590 2,044,452 3,566,943
============ ========== ========== ========== ==========
Supplemental cash flow information:
Cash paid during the year for interest..... $ 1,200,000 -- -- -- --
============ ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 75
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) SEPTEMBER 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Smith-Gardner & Associates, Inc. (the "Company") was incorporated on
December 13, 1988 under the laws of the state of Florida. The Company primarily
licenses a computer software package it designed and developed to automate
companies that sell through catalogs, media advertisement, direct mail or
broadcast advertisements, and also sells the computer hardware required to use
the software. The Company also provides consulting, training, programming and
technical support services.
The Company opened two satellite offices in Sydney Australia (SGA Pty.) and
Cambridge, England (SGA Ltd.) in September 1997 and June 1997, respectively.
These offices are separately incorporated and are wholly owned subsidiaries of
the Company.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its two wholly owned subsidiaries SGA Pty. and SGA Ltd. All significant
intercompany balances and transactions have been eliminated in consolidation.
(D) INVENTORY
Inventory consists of computer hardware. It is stated at the lower of cost
or market as determined on a specific identification basis.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets which range
from five to seven years. Leasehold improvements are amortized on the
straight-line basis over the shorter of the lease term or estimated useful life
of the asset.
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" effective January 1, 1996. The Company
reviews its long-lived assets (property and equipment) for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. There were no impaired assets at December 31, 1996 and 1997.
(F) SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs under Statement of
Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed" ("FAS 86"). Under FAS 86, the
costs associated with software development are required to be capitalized after
technological feasibility has been established. Technological feasibility was
F-7
<PAGE> 76
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
established when the product design and working model of the software product
was completed and confirmed by testing the software product. Costs incurred by
the Company subsequent to the establishment of technological feasibility have
been insignificant and, as a result, the Company has not capitalized any
development costs.
(G) REVENUE RECOGNITION
Prior to 1997, the Company followed the provisions of Statement of Position
(SOP) 91-1. Revenue from computer hardware and software sales was recognized
upon installation, substantial fulfillment of all obligations under the sales
contract and when collectibility was probable. Revenues related to consulting,
training and technical support were recognized upon completion of the services.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued SOP 97-2, Software Revenue Recognition, which superseded SOP
91-1. The Company adopted SOP 97-2 for software transactions entered into in
1997. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on vendor
specific objective evidence (VSOE) of the relative fair values of the elements.
VSOE is determined by the price charged when the element is sold separately. For
an element not yet being sold separately, VSOE is determined using managements
best estimate based on development costs to date of the element. The revenue
allocated to hardware and software products generally is recognized upon
installation and substantial fulfillment of all obligations under the sales
contract. The revenue allocated to postcontract customer support is consistent
with fees charged for renewals and is recognized ratably over the term of the
support. Revenue allocated to service elements is recognized as the services are
performed. The adoption of SOP 97-2 did not have a material impact on the
Company's results of operations.
At December 31, 1996 and 1997, the Company had deferred revenue recorded in
the accompanying consolidated balance sheets related to customer support and
services paid in advance.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value of
certain financial instruments. Cash and cash equivalents, accounts receivable,
inventory and prepaid expenses and other current assets, as well as accounts
payable, accrued expenses and other current liabilities, as reflected in the
consolidated financial statements, approximate fair value because of the
short-term maturity of these instruments. The estimated fair value of the
Company's long-term debt instrument approximates the carrying amount as the
interest rate approximates the Company's current borrowing rate for similar debt
instruments of comparable maturity.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(I) INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code (the "Code"). Accordingly, the taxable income (loss)
of the Company is reported on the individual income tax returns of the
stockholders. The only states in which the Company does business in that do not
recognize S corporation status are California and New Jersey. The Company
F-8
<PAGE> 77
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
started doing business in these states in 1997. The 1997 California and New
Jersey income tax expense is immaterial to the consolidated financial statements
for the year ended December 31, 1997. Therefore the consolidated statements of
operations do not include federal or state income tax expense.
For the foreign entities, there is no charge for corporation tax or
provision for deferred tax, due to the availability of accumulated tax losses of
approximately $212,850 as of December 31, 1997.
The Company intends to terminate its S corporation status prior to the
planned public stock offering discussed in note 14(a). In connection with this
termination, the Company will record income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
The pro unaudited forma net (loss) income presented in the consolidated
statements of operations reflects the pro forma effects for income taxes as if
the Company had been a taxable entity for all periods presented.
(J) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company has presented net income (loss) per share pursuant to SFAS No.
128, Earnings Per Share and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share. SFAS
128 specifies new standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997. The
adoption of SFAS 128 in 1997 did not have a significant impact on the Company's
reported EPS.
In accordance with Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin No. 98, certain common stock and common stock equivalents
issued for nominal consideration prior to the initial filing of a registration
statement relating to an IPO are treated as outstanding for the entire period.
The Company had no nominal issuances during this period.
Basic net income (loss) per share was computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding for
each period presented. Diluted net income (loss) per share was computed by
giving effect to common stock equivalents as if they were outstanding for the
entire period. Incremental shares and adjustments to net income (loss) are
determined using the if converted and treasury stock methods as follows for the
year ended December 31, 1995:
<TABLE>
<S> <C>
Net income (loss) per share................................. $2,080,348
Plus: interest expense...................................... 1,200,000
Less: preferred stock dividends............................. (719,541)
----------
$2,560,807
==========
Weighted average shares outstanding......................... 5,263,100
Common stock equivalents.................................... 2,255,614
----------
$7,518,714
==========
</TABLE>
Common stock equivalents were not considered for the years ended December
31, 1996 and 1997 since their effect would be antidilutive.
F-9
<PAGE> 78
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(K) PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME (LOSS) PER SHARE
COMPUTATIONS (UNAUDITED)
The pro forma net income (loss) presented in the consolidated statements of
operations reflects the pro forma effects for income taxes as if the Company had
been a taxable entity for the periods presented.
Pro forma basic and diluted net loss per share for the year ended December
31, 1997 was computed by dividing pro forma net income (loss) by the weighted
average number of shares of common stock outstanding. Common stock equivalents
were not considered since their effect would be antidilutive.
Pro forma basic net (loss) income per share for the nine months ended
September 30, 1998 was computed in the same manner. Pro forma diluted net income
per share reflects the impact of common stock equivalents as determined by the
if converted and treasury stock methods as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Pro forma net (loss) income per share....................... $(2,399,785) 1,078,631
Add: interest expense....................................... 1,500,000 1,350,000
----------- ---------
$ (899,785) 2,428,631
=========== =========
Weighted average shares outstanding......................... 5,263,100 7,518,714
=========== =========
</TABLE>
The pro forma basic and diluted net income per share for the nine months
ended September 30, 1998 reflects the conversion of preferred stock as described
in note 1(l).
(L) UNAUDITED PROFORMA ADJUSTMENTS AND PROFORMA CONSOLIDATED BALANCE SHEET
The proforma adjustments and proforma consolidated balance sheet at
September 30, 1998 reflect the conversion of the convertible debt to redeemable
convertible participating preferred stock and redeemable preferred stock and the
simultaneous conversion of the convertible participating preferred stock to
common stock which occurs, upon the closing of an initial public offering, as
described in note 6(a). The adjustment to accumulated deficit reflects the
write-off of unamortized original issue discount on the convertible debt at
September 30, 1998.
(M) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries, which began
operations in 1997, is their respective local currencies. The translation of the
applicable foreign currencies into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using average rates of exchange prevailing
during the year. Adjustments resulting from the translation of foreign currency
financial statements for the years ended December 31, 1997 and for the nine
months ended September 30, 1998 were ($5,000) and $9,500, respectively. Such
amounts were recorded in the consolidated statements of operations for each
period.
The Company does not enter into transactions that may result in foreign
currency risk. All transactions are made based on the Company's local currency.
Therefore, the Company does not utilize hedging instruments.
F-10
<PAGE> 79
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(N) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(O) RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform to the 1997
presentation.
(P) YEAR 2000 (UNAUDITED)
Management believes their internal computer systems are Year 2000
compliant. The Year 2000 issue results from computer programs being written
using two digits rather than four to define the applicable year. The Company's
products have been determined by the Company to be Year 2000 compliant except
for the GTS accounting module which is integrated in the MACS family of
products. GTS provided Year 2000 compliant code to the Company in September
1998. With respect to the GTS programs, the Company has identified all changes
necessary to integrate the year 2000 compliant code into MACS. The Company has
completed the internal functional specifications for the necessary changes and
expects them to be incorporated into a new version of MACS to be released in
early 1999. If the Company is unable to remedy the year 2000 issue with respect
to the GTS programs prior to January 1, 2000, the Company may be subject to
liability in the event any defects occur in MACS.
The Company has also reviewed its internal support systems and to the
extent possible, its vendors' systems to confirm Year 2000 compliance. Any
failure of the Company or its suppliers or clients to be "Year 2000" compliant
could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company has expensed all costs
associated with these systems changes as the costs are incurred.
(Q) UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of September 30, 1998, the
unaudited consolidated statements of operations and cash flows for the nine
months ended September 30, 1997 and 1998 and the unaudited consolidated
statement of redeemable preferred stock and stockholders' deficit for the nine
months ended September 30, 1998 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. Operating results for the nine months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 1998.
(2) LIQUIDITY
The Company has been developing its software and new products which has
resulted in losses for the years ended December 31, 1996 and 1997. In addition,
at December 31, 1997 the Company had minimal working capital in the amount of
$16,442.
The Company plans to increase sales and profitability by marketing software
applications and increasing sales in the United States, United Kingdom and
Australia. During the nine months ended September 30, 1998, the Company had
increased software revenue due to some major contracts that were entered into in
1998 (unaudited). In addition, the Company received a waiver to defer the
payment of interest on its convertible debt through the earlier of (i) the
consummation of an initial
F-11
<PAGE> 80
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
public offering or (ii) January 1, 2000. Based on the new contracts, the
interest waiver received and the Company's anticipated operating results,
management believes there will be sufficient funding to meet its required
operating expenditures. In addition, if necessary, the Company will reduce its
planned capital expenditures and other operating expenses in order to meet its
obligations.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Office equipment............................................ $ 948,563 1,144,364
Office furnishings and fixtures............................. 110,264 131,553
Leasehold improvements...................................... 15,016 32,179
---------- ---------
1,073,843 1,308,096
Less accumulated depreciation and amortization.............. 390,253 622,777
---------- ---------
$ 683,590 685,319
========== =========
</TABLE>
(4) OPERATING LEASES
During 1994, the Company entered into an agreement to lease office
facilities under a noncancelable operating lease commencing January 1995 and
expiring December 2001 with an option to renew for one five-year term. The lease
contains certain incentives including rent abatements, rent discounts, leasehold
improvement reimbursements, cash allowances and scheduled base rent increases
over the term of the lease. Generally accepted accounting principles require
that the full costs of a lease be recognized ratably over the term of the lease.
Accordingly, the Company has recorded a deferred credit ($248,219 and $235,440
at December 31, 1996 and 1997, respectively) to reflect the excess of rent
expense over cash payments (see note 5). In addition to the base rent payment,
the Company pays a monthly allocation of the building's operating expenses.
During 1997, the Company also entered into lease agreements for office
facilities in the United Kingdom and Sydney which expire in 2003.
Future minimum lease payments under these office facilities leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.............................................. $ 505,176
1999.............................................. 503,234
2000.............................................. 522,302
2001.............................................. 542,348
2002 and thereafter.................................... 108,362
----------
Total minimum lease payments................................ $2,181,422
==========
</TABLE>
Rental expense, including operating leases with lease terms of less than
one year, was $552,893, $597,905 and $669,543 during 1995, 1996 and 1997,
respectively.
F-12
<PAGE> 81
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Sales tax payable.......................................... $ 20,513 92,011
Sales tax contingencies.................................... 614,783 614,783
Deferred rent.............................................. 248,219 235,440
Accrued payroll............................................ 4,831 95,215
Accrued legal.............................................. -- 109,000
Accrued vacation........................................... 99,978 132,162
Other...................................................... 66,903 142,379
---------- ---------
$1,055,227 1,420,990
========== =========
</TABLE>
(6) CONVERTIBLE DEBT
(A) DEBENTURE PURCHASE AGREEMENT
On December 19, 1994, the Company entered into a Debenture Purchase
Agreement (the "Agreement") with various partnerships (the "Lenders") in
connection with the private placement of $12,000,000 convertible subordinated
debentures (the "Debentures"). Principal on the Debentures is payable in two
equal installments of $6,000,000 on December 1, 1999 and December 1, 2000, and
bore interest at 10 percent through June 30, 1997 and bears interest at 15
percent through maturity. A portion of this borrowing was attributed to its
conversion feature due to the difference between the stated rates and the
estimated market rate at the time of issuance. [See note 6(b).] Interest is
payable quarterly in arrears and commenced on March 31, 1995. The Agreement
provides for a default rate of interest of 20 percent on all principal amounts
not paid within 15 days of the date due. At December 31, 1997, the Company was
not in compliance with certain debt covenants. The Lenders waived any remedies
on default against the Company as outlined in the Agreement and waived
compliance by the Company with respect to such covenants through the earlier of
(i) the consummation of an initial public offering or (ii) January 1, 2000. The
Company has agreed with the Lenders to defer all quarterly interest payments due
or payable in order to maintain sufficient working capital for the Company's
needs through the earlier of (i) the consummation of an initial public offering
or (ii) January 1, 2000.
On June 30, 1997 the Debentures became convertible at the option of a
majority in interest of the Lenders into 22,556.14 shares of the Company's
redeemable convertible participating preferred stock and one share of redeemable
participating preferred stock for each $1,000 of principal outstanding. The
redeemable convertible participating preferred stock is convertible to common
stock at the rate of 100 shares of common stock for each share of preferred
stock. See note 6(b) for valuation of conversion features. See redemption
features of preferred stock in note 7.
There have been no conversions in respect to these Debentures to date. No
partial conversions of the Debentures are permitted. The amount of redeemable
preferred stock received upon conversion shall be reduced by the amount of
debenture principal prepaid prior to conversion. With respect to the common
stock issuable upon conversion of the redeemable convertible participating
preferred stock, holders of the Debentures have (i) certain registration rights
regarding a public offering of the Company's common stock; and (ii) the right of
first refusal and the right of participation regarding the sales of certain
common stock to third parties.
Principal on the Debentures may be prepaid in whole, but not in part, by
the Company at any time and is subject to mandatory prepayment upon the
consummation of (i) the substantial sale of
F-13
<PAGE> 82
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's assets or capital stock; (ii) an initial public offering of the
Company's common stock under the Securities Act of 1933; or (iii) the merger or
consolidation of the Company with another entity.
(B) ORIGINAL ISSUE DISCOUNT
The fair value of the conversion feature of the $12,000,000 debentures
discussed in note 6(a) was determined to be $3,481,562 based on the difference
between the stated interest rates and the market rate of such debentures
estimated to be 18 percent on the date of issuance. The amount is included in
additional paid-in capital in the accompanying consolidated balance sheets, with
the resulting original issue discount (OID) on the convertible debt being
amortized over the term of the note to achieve an 18 percent effective interest
rate. Convertible debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Stated principal balance.................. $12,000,000 12,000,000 12,000,000
Unamortized OID........................... (2,490,000) (1,530,000) (870,000)
----------- ---------- ----------
Convertible debt.......................... $ 9,510,000 10,470,000 11,130,000
=========== ========== ==========
</TABLE>
(7) PREFERRED STOCK
In connection with the issuance of $12,000,000 of Debentures [see note
6(a)], the Company amended its Articles of Incorporation by designating
22,556.14 shares of authorized preferred stock as redeemable convertible
participating preferred stock (the "redeemable convertible preferred stock").
Holders of the redeemable convertible preferred stock are entitled to receive
(i) dividends at the same rate as dividends are paid with respect to the common
stock based on the number of shares of common stock into which such shares of
redeemable convertible preferred stock is then convertible; and (ii) $31.90 per
share cumulative dividend per year through November 30, 1999 ($15.95 per share
for the year ended December 1, 2000) less the amount of common stock dividends
paid.
The redeemable convertible preferred stock is redeemable at the option of
the Company between December 1, 2000 and December 1, 2001 at the fair market
value per share.
Each share of redeemable convertible preferred stock entitles the holder to
such number of votes per share as shall equal the number of shares of common
stock into which such share of redeemable convertible preferred stock is then
convertible. Shares of redeemable convertible preferred stock are convertible
into shares of common stock at the option of holders of a majority in interest
of the redeemable convertible preferred stock or automatically upon the closing
of an underwritten public offering of the Company's common stock pursuant to an
effective registration statement under the Securities Act of 1933 in which the
net proceeds equal or exceeds $20,000,000. Shares of redeemable convertible
preferred stock are currently convertible into shares of common stock at an
initial conversion rate of 100 shares of common stock for each share of
preferred stock, whereby each share of convertible preferred stock is valued for
conversion purposes at $532.00 per share.
In addition, as part of the aforementioned amendment to its articles of
incorporation, the Company designated 12,000 shares of authorized preferred
stock as redeemable preferred stock. The holders of the redeemable preferred
stock are not entitled to receive any cash dividends nor any voting rights or
powers. The redeemable preferred stock may be redeemed at any time at the option
F-14
<PAGE> 83
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company and are subject to mandatory redemption upon the closing date of
an initial public offering or upon any conversion of the Debentures resulting
from the Company's voluntary prepayment. At the election of the holders of a
majority of the redeemable preferred stock, the Company shall redeem one-half of
all shares of redeemable preferred stock on December 1, 1999 and the remaining
shares on December 1, 2000. Regardless of the nature of redemption, all
redeemable preferred stock is redeemed at a redemption price of $1,000 per
share.
The redeemable preferred stockholders have liquidation preference of $1,000
per share to any convertible preferred and common stockholder. The convertible
preferred and common stockholders share ratably in the proceeds from any
liquidation of assets.
(8) EMPLOYEE BENEFIT AND STOCK OPTIONS PLANS
The Company maintains an employee retirement savings plan (the "Plan")
under Internal Revenue Code Section 401(k). The Plan is available to all
full-time employees over 21 years of age with more than three months of
employment. Effective April 1994, the Company provides matching contributions
which vest to the employees immediately and range from 10 percent to 35 percent,
depending on years of service of the matchable deferrals of each participant
entitled to matching contributions, not to exceed 2.8 percent of the
participant's compensation. There was $22,907, $39,069 and $46,573 provided by
the Company in matching contributions for the years ended December 31, 1995,
1996 and 1997, respectively.
SGA Ltd., also maintains an employee benefit plan (the "Ltd. Plan"). This
is an employee-directed plan which allows the employee to set aside from 1 to 5
percent of their salary to be deposited to a fund of their choice. SGA Ltd. will
match the employee's contribution up to 5 percent. Provisions of the Ltd. Plan
are substantially the same as the Plan.
On April 1, 1996 the Company adopted a stock-option plan. Under this plan,
the Company may grant options for up to 800,000 shares of common stock. An
option's maximum term is ten years. Each option vests as follows: 25 percent one
year after the date of grant and the balance in successive equal quarterly
installments of 6.25 percent each, at the end of each of the next 12 calendar
quarters subsequent to the date of grant. During 1996 and 1997, 214,000 and
155,000 options, respectively, were granted to employees. Of these options,
50,586 were exercisable at December 31, 1997. In addition, on April 1, 1996,
under the stock-option plan 494,120 options to purchase common stock were
granted to an executive officer of the Company. The options vest as follows:
82,353 shares one year after the grant date; 20,588 shares at the end of each of
the next 12 calendar quarters subsequent to the vesting commencement date;
82,355 shares upon the earlier to occur of (a) March 21, 2006, or (b) the market
value of the Company's outstanding stock has equaled or exceeded $100 million
for 30 days; and the remaining 82,356 shares upon the earlier to occur of (a)
March 21, 2006 or (b) the market value of the Company's outstanding stock has
equaled or exceeded $150 million for 30 days. At December 31, 1997, the officer
had 144,117 of exercisable options, none of which were exercised. The fair
market value of the underlying stock related to these options was estimated to
be $2.53 and $3.53 as of the grant dates in 1996 and 1997, respectively. The
Company applies APB Opinion No. 25 in accounting for its stock-option plan.
Stock compensation expense is recognized at the date options are vested when the
excercise price is lower than fair market value at the date of grant. There was
no compensation expense recorded in 1996 and 1997. Had the Company determined
compensation cost based on fair value at the grant date for its stock options
under Statement No. 123, the Company's net loss for the year ended December 31,
1997 would have increased by $311,525. There would have been no effect for the
year ended December 31, 1996.
F-15
<PAGE> 84
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average fair market value per share of options granted to
employees was estimated at $1.60 and (unaudited) $2.54, for the year ended
December 31, 1997 and nine months ended September 30, 1998, respectively. The
fair value of each option was estimated at the date of grant using the minimum
value method with the following assumptions used:
<TABLE>
<S> <C>
Expected life......................... 5 years
Dividends............................. None
Interest rate......................... 6% in 1996 and 5.45% in 1997
and 4.76% at September 30, 1998 (unaudited)
</TABLE>
Stock option activity since inception is indicated as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
EXERCISE CONTRACTUAL
SHARES PRICE LIFE (YEARS)
------- -------- ------------
<S> <C> <C> <C>
Outstanding at inception........................... -- $ --
Granted.......................................... 708,120 2.53
Forfeited........................................ (77,000) 2.53
-------
Balance outstanding at December 31, 1996........... 631,120 2.53
Granted.......................................... 155,000 2.53
Forfeited........................................ (34,000) 2.53
-------
Balance outstanding at December 31, 1997........... 752,120 2.53
=======
Exercisable at December 31, 1997................... 194,703 $ 2.53 8.79
=======
</TABLE>
In April 1998, the board of directors increased the amount of authorized
options to be granted in the future from 800,000 to 850,000.
In 1998, an additional 50,523 shares were granted and 6,746 shares were
forfeited: 30,926 shares were granted at $2.53 per share and 19,597 shares were
granted at $4.53 per share or in the event of an initial public offering prior
to July 1, 1999, at the initial public offering price. As options are vested,
compensation expense for these shares will be recorded for the difference
between the exercise price and the fair market value on the date of grant.
Effective June 30, 1998, the Company adopted an additional stock-option
plan (1998 Stock-Option Plan). Under this plan the Company may grant options for
up to 1,000,000 shares of common stock. The Company has granted 587,041 options
on under the 1998 Stock-Option Plan at an exercise price of $4.53 per share or
in the event of an initial public offering prior to July 1, 1999, the initial
public offering price.
The amount of compensation expense in the future reflected to options
issued as of October 15, 1998 is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998.............................................. $34,721
1999.............................................. 43,612
2000.............................................. 34,447
2001.............................................. 23,494
2002.............................................. 1,513
</TABLE>
F-16
<PAGE> 85
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED PARTY TRANSACTIONS
Due to officers represents noninterest-bearing loans amounting to $200,000.
These amounts were repaid by the Company in 1997.
In connection with the issuance of convertible debt (see note 6), certain
of the Company's senior executives entered into noncompete agreements, which
expire upon the third anniversary date of the termination of the executives'
employment.
(10) INCOME TAXES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
----------- ------- ------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income taxes as reported............. $ -- -- -- -- --
Pro forma adjustment (unaudited)..... (1,154,543) 359,819 948,427 311,835 (1,053,186)
----------- ------- ------- ------- ----------
Pro forma income tax (expense)
benefit (unaudited)................ $(1,154,543) 359,819 948,427 311,835 (1,053,186)
=========== ======= ======= ======= ==========
</TABLE>
The unaudited proforma income tax (expense) benefit presented on the
consolidated statements of operations represent the estimated taxes that would
have been recorded had the Company been a C corporation for income tax purposes
for each of the periods presented. The proforma income tax (expense) benefit is
as follows (unaudited):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
----------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Pro forma (unaudited):
Current:
Federal....................... $(1,130,042) 62,798 897,416 356,432 (855,177)
Foreign....................... -- -- -- -- --
State......................... (228,669) 12,609 187,580 54,207 (173,392)
Deferred:
Federal....................... 172,413 229,124 (108,897) (98,586) (24,617)
State......................... 31,755 55,288 (27,672) (218) --
----------- ------- -------- ------- ----------
Total pro forma.......... $(1,154,543) 359,819 948,427 311,835 (1,053,816)
=========== ======= ======== ======= ==========
</TABLE>
F-17
<PAGE> 86
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax (expense) benefit calculated using the
statutory federal income tax rate and the pro forma income tax (expense) benefit
is as follows (unaudited):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1995 1996 1997 1997 1998
----------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Income tax (expense) benefit
using statutory tax rate....... $ (707,318) 690,879 1,138,392 374,246 (724,817)
Effect of:
State and local income taxes,
net of federal income tax... $ (129,963) 44,812 105,539 35,635 (114,439)
Change in valuation allowance.. $ -- -- (61,263) (1,865) (94,452)
Difference between US and
non-US tax rates............ $ -- -- (27,221) (1,155) (28,405)
Original issue discount
amortization................ $ (326,400) (326,400) (224,400) (193,800) (91,800)
Change in effective tax
rates....................... $ 13,462 (43,379) 22,256 102,564 8,150
Other, net..................... $ (4,324) (6,093) (4,876) (3,790) (7,423)
----------- -------- --------- -------- ----------
Pro forma effective tax
(expense) benefit......... $(1,154,543) 359,819 948,427 311,835 (1,053,186)
=========== ======== ========= ======== ==========
</TABLE>
The Company will issue promissory notes to its existing shareholders in an
aggregate amount representing the estimated individual tax liability for each of
the existing shareholders for the period beginning January 1, 1998 and ending on
the earlier of the date of an initial public offering or voluntary S corporation
revocation.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company currently derives substantially all of its revenue from sales
of its MACS family of products and related services and hardware. Any factor
adversely affecting the sale of the Company's MACS products or other new
products, could have a material affect on the Company's business, financial
condition and results of operations.
The Company sells its products primarily to customers located in the United
States. Continuing relationships are maintained with most customers through
product-support arrangements and sales of system upgrades.
During 1995, 1996 and 1997, the Company purchased approximately 80 percent,
74 percent and 65 percent, respectively, of its computer hardware from Hewlett
Packard. At December 31, 1996 and 1997, the Company owed this supplier
approximately $79,000 and $98,000, respectively. The Company's software products
are designed for use only on Hewlett Packard equipment. Accordingly, any adverse
change in the product pricing or the operations of Hewlett Packard could
significantly effect the operating results of the Company. However, the Company
is currently in the process of engineering its product to operate on multiple
platforms.
No single customer accounted for more than 10 percent of total revenue for
the year ended December 31, 1997 and 1995. One customer accounted for 10.7
percent of total revenue for the year ended December 31, 1996. In addition,
there were accounts receivable from two customers at December 31, 1996, each of
which exceeded 10 percent of total accounts receivable for approximately
$1,043,000. These amounts were collected during the year ended December 31,
1997.
F-18
<PAGE> 87
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company estimates an allowance for doubtful accounts generally based on
an analysis of collections in prior years, the credit worthiness of its
customers as well as general economic conditions. Consequently, an adverse
change in those factors could effect the Company's estimate of its bad debts.
(12) COMMITMENTS AND CONTINGENCIES
(A) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. If the plaintiff's claims are probable, the
appropriate amount is accrued in the consolidated financial statements. In the
opinion of management, the ultimate disposition of matters not accrued will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During 1995, the Company settled a litigation claim for $265,000 plus legal
expenses. This litigation related to a claim by a former customer for alleged
breach of contract.
(B) COMMITMENTS
The Company has committed to fund the operations of SGA Ltd. and SGA Pty.
for a period of at least one year. The Company does not believe this to be a
risk since the costs associated with operating these subsidiaries are not
significant.
(C) TAX LIABILITY
The Internal Revenue Service ("IRS") is currently auditing the Company's
tax returns for fiscal 1995. One issue the IRS is reviewing is whether the
issuance of the Convertible Debentures in December 1994 resulted in the Company
failing to qualify as an S corporation. In the event the IRS determines that the
Company did not qualify as an S corporation or fiscal 1995 or any fiscal year
thereafter, the Company would be subject to a significant tax liability. The
shareholders have agreed to indemnify the Company for any tax liability of the
Company. To the extent the shareholders are unable to fulfill such
indemnification and satisfy all outstanding tax liability to which the Company
is subject, the Company's business, financial condition or results of operations
could be materially adversely affected.
(13) LINE OF CREDIT AND PURCHASE-OPTION AGREEMENT
On December 20, 1996, the Company entered into a Line of Credit and
Purchase Option Agreement (the "Agreement") with Infocam, Limited ("Infocam").
Infocam was located in the United Kingdom and served as a distributor of the
Company's products. Under this Agreement, the Company had the exclusive option
to purchase Infocam for a period of one year. The line of credit agreement was
subject to a maximum of $250,000 and was payable on demand at a per-annum
interest rate of prime plus one point (9.25 percent at December 31, 1996). This
line of credit was terminated as of June 9, 1997. As of December 31, 1996 and
1997, $50,089 and $0, respectively, was due to the Company under this Agreement.
In addition, as of December 31, 1996, the Company had a noninterest-bearing note
receivable due from Infocam of $10,000 which was due and payable upon demand and
a trade receivable of $180,631. The Company fully reserved for all amounts due
at December 31, 1996. These amounts were subsequently written-off in 1997.
F-19
<PAGE> 88
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUBSEQUENT EVENTS
(A) PLANNED INITIAL PUBLIC OFFERING
The Company intends to conduct an initial public offering (IPO) with an
investment banking firm estimated to be completed in January 1999. There is no
assurance that the IPO will occur.
(B) AUTHORIZATION OF COMMON AND PREFERRED STOCK
In September 1998, the Company increased the capital stock to 50,000,000
shares of common stock at $.01 par value per share and 10,000,000 shares of
preferred stock at $.01 par value per share. The consolidated financial
statements retroactively effect these increases in authorized capital stock.
(15) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 requires all
items to be recognized under accounting standards as components of comprehensive
income to be reported in a separate financial statement. The Company does not
believe that the adoption of SFAS No. 130 will have a significant impact on the
Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. The Company does not believe that the adoption of SFAS No. 131
will have a significant impact on the Company's financial reporting.
In March 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5)
"Reporting on the Costs of Start-Up Activities." Pursuant to the provisions of
SOP 98-5, all costs associated with start-up activities, including organization
costs, should be expensed as incurred. Companies that previously capitalized
such costs are required to write-off the unamortized portion of such costs as a
cumulative effect of a change of accounting principle. The Company has an
immaterial amount of these costs and the adoption of SOP 98-5 will not have a
significant impact on the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company does not believe that the adoption
of SFAS No. 133 will have a significant impact on the Company's financial
reporting.
F-20
<PAGE> 89
SMITH-GARDNER & ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE CHARGED BALANCE
AT TO AT END
BEGINNING BAD DEBT OF
OF YEAR EXPENSE DEDUCTIONS YEAR
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Description:
Reserves and allowances deducted from assets accounts:
1995:
Allowance for doubtful accounts....................... $175,505 261,615 (104,710)(a) 332,410
======== ======= ======== =======
Description:
Reserves and allowances deducted from assets accounts:
1996:
Allowance for doubtful accounts....................... $332,410 765,676 (161,739)(a) 936,347
======== ======= ======== =======
Description:
Reserves and allowances deducted from assets accounts:
1997:
Allowance for doubtful accounts....................... $936,347 102,816 (569,936)(a) 469,227
======== ======= ======== =======
</TABLE>
- ---------------
(a) Charges to the reserve account collectible amounts written off and
recoveries which occurred during the year.
F-21
<PAGE> 90
[Company logo]
Smith-Gardner's more than 200 clients include traditional direct marketing
companies, Internet-only retailers, manufacturers, fulfillment houses and
retailers with significant non-store sales channels.
[Hickory Farms logo] [Miles Kimball logo] [Genesis Direct]
[MicroWarehouse logo] [Levenger logo] [The United Methodist Publishing House
logo]
[Delia's logo] [Cyberian Outpost logo]
[Frontgate logo] [Nordstrom logo] [The Shopping Channel logo]
[Hammacher Schlemmer logo] [Wine Enthusiast logo]
[Rodale Press logo] [Coldwater Creek logo]
[Harold's logo] [Five Mountain Gems logo]
[My Twinn logo] [Creative Computers logo]
<PAGE> 91
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. 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 DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 15
Dividend Policy........................... 15
S Corporation Distribution and Conversion
to C Corporation Status................. 16
Capitalization............................ 17
Dilution.................................. 18
Selected Consolidated Financial Data...... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 38
Management................................ 50
Certain Transactions...................... 56
Principal and Selling Shareholders........ 58
Description of Capital Stock.............. 60
Shares Eligible for Future Sale........... 63
Underwriting.............................. 65
Legal Matters............................. 66
Experts................................... 66
Additional Information.................... 67
Index to Combined Financial Statements.... F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,410,000 Shares
[LOGO]
Smith-Gardner & Associates, Inc.
Common Stock
-------------------
PROSPECTUS
-------------------
BT Alex. Brown
SoundView Technology
Group
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth fees and expenses payable by the Company (other
than underwriting discounts and commissions) in connection with the issuance and
distribution of the Common Stock being registered. All amounts are estimated
except for the Securities and Exchange Commission registration fee, the National
Association of Securities Dealers, Inc. ("NASD") filing fee and the NASDAQ
National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Securities and Exchange Commission registration fee......... $ 11,800
NASD filing fee............................................. 5,000
Nasdaq National Market listing fees......................... 46,360
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 250,000
Printing and engraving expenses............................. 150,000
Registrar and transfer agent fees........................... 3,000
Directors and officers insurance annual premium............. 5,000
Miscellaneous expenses...................................... 28,900
--------
Total............................................. $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and the Company's Bylaws provide
that the Company shall, to the fullest extent permitted by law, indemnify all
directors of the Company, as well as any officers or employees of the Company to
whom the Company has agreed to grant indemnification.
Section 607.0850(1) of the Florida Business Corporation Act (the "FBCA")
provides that a Florida corporation, such as the Company, shall have the power
to indemnify any person who was or is a party to any proceeding (other than an
action by, or in the right of, the corporation), by reason of the fact that he
is or was a director, officer, employee, or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee,
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against liability
incurred in connection with such proceeding, including any appeal thereof, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 607.0850(2) of the FBCA provides that a Florida corporation shall
have the power to indemnify any person, who was or is a party to any proceeding
by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses and amounts paid in
settlement not exceeding, in the judgment of the board of directors, the
estimated expense of litigating the proceeding to conclusion, actually and
reasonably incurred in connection with the defense or settlement of such
proceeding, including any appeal thereof. Such indemnification shall be
authorized if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have been adjudged to
be liable unless, and only to the extent that, the
II-1
<PAGE> 93
court in which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper.
Section 607.850 of the FBCA further provides that: (i) to the extent that a
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in defense of any proceeding referred to in subsection (1)
or subsection (2), or in defense of any proceeding referred to in subsection (1)
or subsection (2), or in defense of any claim, issue, or matter therein, he
shall be indemnified against expense actually and reasonably incurred by him in
connection therewith; (ii) indemnification provided pursuant to Section 607.0850
is not exclusive; and (iii) the corporation may purchase and maintain insurance
on behalf of a director or officer of the corporation against any liability
asserted against him or incurred by him in any such capacity or arising out of
his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 607.0850.
Notwithstanding the foregoing, Section 607.0850 of the FBCA provides that
indemnification or advancement of expenses shall not be made to or on behalf of
any director, officer, employee or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute: (i) a violation of the
criminal law, unless the director, officer, employee or agent had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (ii) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (iii) in the case of a
director, a circumstance under which the liability provisions regarding unlawful
distributions are applicable; or (iv) willful misconduct or a conscious
disregard for the best interests of the corporation in a proceeding by or in the
right of the corporation to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder.
Section 607.0831 of the FBCA provides that a director of a Florida
corporation is not personally liable for monetary damages to the corporation or
any other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless: (i) the director breached
or failed to perform his duties as a director; and (ii) the director's breach
of, or failure to perform, those duties constitutes: (A) a violation of criminal
law, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful; (B) a
transaction from which the director derived an improper personal benefit, either
directly or indirectly; (C) a circumstance under which the liability provisions
regarding unlawful distributions are applicable; (D) in a proceeding by or in
the right of the corporation to procure a judgment in its favor or by or in the
right of a shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; or (E) in a proceeding by or in the right of
someone other than the corporation or a shareholder, recklessness or an act or
omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights, safety, or
property.
In addition, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
directors, officers and controlling persons of the Company against certain
liabilities, including liabilities under the Securities Act, under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-2
<PAGE> 94
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended.*
3.2 Form of Articles of Incorporation of the Company, as
amended.**
3.3 By-Laws of the Company, as amended.*
4.1 Form of Certificate of Common Stock.**
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.**
10.1 Smith-Gardner & Associates, Inc.'s Stock Option Plan.*
10.2 Form of Stock Option Agreement pursuant to Smith-Gardner &
Associates, Inc.'s Stock Option Plan.*
10.3 Smith-Gardner & Associates, Inc.'s 1998 Stock Option Plan.*
10.4 Form of Stock Option Agreement pursuant to Smith-Gardner &
Associates, Inc.'s 1998 Stock Option Plan.*
10.5 Smith-Gardner & Associates, Inc.'s 401(k)/Profit Sharing
Plan.**
10.6 Debenture Purchase Agreement dated December 19, 1994.*
10.7 Form of Convertible Debenture Due 2000 issued to Advent VII
L.P.*
10.8 Form of Convertible Debenture Due 2000 issued to Advent
Atlantic and Pacific II L.P.*
10.9 Form of Convertible Debenture Due 2000 issued to Advent
Industrial II L.P.*
10.10 Form of Convertible Debenture Due 2000 issued to Advent New
York L.P.*
10.11 Form of Convertible Debenture Due 2000 issued to Chestnut
Capital International.*
10.12 Form of Convertible Debenture Due 2000 issued to TA Venture
Investors Limited.*
10.13 Registration Rights Agreement dated December 19, 1994.*
10.14 Non-Competition Agreement by and between Smith-Gardner &
Associates, Inc. and Wilburn Smith.*
10.15 Non-Competition Agreement by and between Smith-Gardner &
Associates, Inc. and Allan Gardner.*
10.16 Form of Non-Compete Agreement executed by Smith-Gardner &
Associates, Inc.'s key employees.*
10.17 Lease Agreement dated July 1, 1994, by and between Arbous
Associates, Ltd. and Smith-Gardner & Associates, Inc.**
10.18 Agreement dated March 17, 1998, by and between Client
Systems, Inc. and Smith-Gardner & Associates, Inc.*
10.19 Agreement dated February 8, 1994, by and between Cognos
Corporation and Smith-Gardner & Associates, Inc.*
10.20 Agreement dated December 29, 1989, by and between Dynamic
Information Systems Corporation and Smith-Gardner &
Associates, Inc.*
10.21 Tax Indemnification Agreement.*
11.1 Statement of Computation of Per Share Earnings.*
21.1 Subsidiaries of Smith-Gardner & Associates, Inc.**
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Akerman, Senterfitt & Eidson, P.A. (included in
its opinion filed as Exhibit 5.1).**
23.3 Consent of Jacqueline C. Morby to become a director.*
24.1 Power of Attorney (included as part of the Signature Page to
this Registration Statement).***
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
(b) Financial Statement Schedules.
Schedules have been omitted because the information required to be set
forth therein is not applicable or is included elsewhere in the Financial
Statements or notes thereto.
II-3
<PAGE> 95
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as may be required by the underwriter
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Smith-Gardner & Associates, Inc., has duly caused this Amendment No. 1 to
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Delray Beach, State of
Florida on this 18th day of December, 1998.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ GARY G. HEGNA
------------------------------------
Gary G. Hegna
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GARY G. HEGNA President, Chief Executive December 18, 1998
- --------------------------------------------------- Officer and Director
Gary G. Hegna (Principal Executive
Officer)
* Vice President -- Finance, December 18, 1998
- --------------------------------------------------- Chief Financial Officer,
Martin K. Weinbaum Secretary and Treasurer
(Principal Financial and
Accounting Officer)
* Executive Vice President -- December 18, 1998
- --------------------------------------------------- Advanced Technologies and
Allan Gardner Co-Chairman of the Board
* Executive Vice President -- December 18, 1998
- --------------------------------------------------- Sales and Co-Chairman of the
Wilburn Smith Board
</TABLE>
- ---------------
* Pursuant to a Power of Attorney granted to Gary G. Hegna by such person.
II-5
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended.*
3.2 Form of Articles of Incorporation of the Company, as
amended.**
3.3 By-Laws of the Company, as amended.*
4.1 Form of Certificate of Common Stock.**
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.**
10.1 Smith-Gardner & Associates, Inc.'s Stock Option Plan.*
10.2 Form of Stock Option Agreement pursuant to Smith-Gardner &
Associates, Inc.'s Stock Option Plan.*
10.3 Smith-Gardner & Associates, Inc.'s 1998 Stock Option Plan.*
10.4 Form of Stock Option Agreement pursuant to Smith-Gardner &
Associates, Inc.'s 1998 Stock Option Plan.*
10.5 Smith-Gardner & Associates, Inc.'s 401(k)/Profit Sharing
Plan.**
10.6 Debenture Purchase Agreement dated December 19, 1994.*
10.7 Form of Convertible Debenture Due 2000 issued to Advent VII
L.P..*
10.8 Form of Convertible Debenture Due 2000 issued to Advent
Atlantic and Pacific II L.P.*
10.9 Form of Convertible Debenture Due 2000 issued to Advent
Industrial II L.P.*
10.10 Form of Convertible Debenture Due 2000 issued to Advent New
York L.P.*
10.11 Form of Convertible Debenture Due 2000 issued to Chestnut
Capital International.*
10.12 Form of Convertible Debenture Due 2000 issued to TA Venture
Investors Limited.*
10.13 Registration Rights Agreement dated December 19, 1994.*
10.14 Non-Competition Agreement by and between Smith-Gardner &
Associates, Inc. and Wilburn Smith.*
10.15 Non-Competition Agreement by and between Smith-Gardner &
Associates, Inc. and Allan Gardner.*
10.16 Form of Non-Compete Agreement executed by Smith-Gardner &
Associates, Inc.'s key employees.*
10.17 Lease Agreement dated July 1, 1994, by and between Arbous
Associates, Ltd. and Smith-Gardner & Associates, Inc.**
10.18 Agreement dated March 17, 1998, by and between Client
Systems, Inc. and Smith-Gardner & Associates, Inc.*
10.19 Agreement dated February 8, 1994, by and between Cognos
Corporation and Smith-Gardner & Associates, Inc.*
10.20 Agreement dated December 29, 1989, by and between Dynamic
Information Systems Corporation and Smith-Gardner &
Associates, Inc.*
10.21 Tax Indemnification Agreement.*
11.1 Statement of Computation of Per Share Earnings.*
21.1 Subsidiaries of Smith-Gardner & Associates, Inc.**
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Akerman, Senterfitt & Eidson, P.A. (included in
its opinion filed as Exhibit 5.1).**
23.3 Consent of Jacqueline C. Morby to become a director.*
24.1 Power of Attorney (included as part of the Signature Page to
this Registration Statement).***
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SMITH GARDNER AND ASSOCIATES, INC.
Original Articles of Incorporation filed
with the Florida Department of State on
December 8, 1988
On December 15, 1994, the Board of Directors and the shareholders of
Smith Gardner and Associates, Inc., duly adopted the following Amended and
Restated Articles of Incorporation pursuant to the provisions of Sections
607.0704, 607.1003 and 607.1007 of the Florida Business Corporation Act:
ARTICLE I
NAME
The name of the Corporation is Smith-Gardner & Associates, Inc.
(hereinafter called the "CORPORATION").
ARTICLE II
PRINCIPAL OFFICE
The address of the principal office and the mailing address of the
Corporation is 1615 South Congress Street, Delray Beach, Florida 33445.
ARTICLE III
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock that
this Corporation shall have authority to issue is thirty million (30,000,000),
consisting of (i) twenty-five million (25,000,000) shares of common stock, par
value $0.01 per share (the "COMMON STOCK") and (ii) five million (5,000,000)
shares of preferred stock, par value $0.01 per share (the "PREFERRED STOCK").
The designations and the preferences, limitations and relative rights
of the Common Stock and the Preferred Stock of the Corporation are as follows:
<PAGE> 2
A. PROVISIONS RELATING TO THE COMMON STOCK
1. VOTING RIGHTS.
(a) Except as otherwise required by law or as may be provided
by the resolutions of the Board of Directors authorizing the issuance of any
class or series of Preferred Stock, as provided in Section B of this Article III
all rights to vote and all voting power shall be vested exclusively in the
holders of the Common Stock.
(b) The holders of the Common Stock shall be entitled to one
vote per share on all matters submitted to a vote of shareholders, including,
without limitation, the election of directors.
2. DIVIDENDS. Except as otherwise provided by law or as may be provided
by the resolutions of the Board of Directors authorizing the issuance of any
class or series of Preferred Stock, as provided in Section B of this Article
III, the holders of the Common Stock shall be entitled to receive when, as and
if provided by the Board of Directors, out of funds legally available therefor,
dividends payable in cash, stock or otherwise.
3. LIQUIDATING DISTRIBUTIONS. Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, and after
payment or provision for payment of the debts and other liabilities of the
Corporation, and except as may be provided by the resolutions of the Board of
Directors authorizing the issuance of any class or series of Preferred Stock,
as provided in Section B of this Article III, the remaining assets of the
Corporation shall be distributed pro-rata to the holders of the Common Stock.
B. PROVISIONS RELATING TO THE PREFERRED STOCK
1. GENERAL. The Preferred Stock may be issued from time to time in one
or more classes or series, the shares of each class or series to have such
designations, powers, preferences, rights, qualifications, limitations and
restrictions thereof as are stated and expressed herein and in the resolution or
resolutions providing for the issue of such class or series adopted by the Board
of Directors as hereinafter prescribed.
2. PREFERENCES. Authority is hereby expressly granted to and vested in
the Board of Directors to authorize the issuance of the Preferred Stock from
time to time in one or more classes or series, to determine and take necessary
proceedings fully to effect the issuance and redemption of any such Preferred
Stock, and, with respect to each class or series of the Preferred Stock, to fix
and state by the resolution or resolutions from time to time adopted providing
for the issuance thereof the following:
(a) whether or not the class or series is to have voting
rights, full or limited, or is to be without voting rights;
-2-
<PAGE> 3
(b) the number of shares to constitute the class or series and
the designations thereof;
(c) the preferences and relative, participating, optional or
other special rights, if any, and the qualifications, limitations or
restrictions thereof if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be
redeemable and if redeemable the redemption price or prices, and the time or
times at which and the terms and conditions upon which, such shares shall be
redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be
subject to the operation of retirement of sinking funds to be applied to the
purchase or redemption of such shares for retirement, and if such retirement or
sinking fund or funds be established, the annual amount thereof and the terms
and provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash,
stock of the Corporation, or other property, the conditions upon which and the
times when such dividends are payable, the preference to or the relation to the
payment of the dividends payable on any other class or classes or series of
stock, whether or not such dividend shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof that the
holders of any class or series thereof shall be entitled to receive upon the
voluntary or involuntary dissolution of, or upon any distribution of the assets
of, the Corporation;
(h) whether or not and the circumstances under which the
shares of any class or series shall be convertible into, or exchangeable for,
the shares of any other class or classes or of any other series of the same or
any other class or classes of the Corporation and the conversion price or prices
or ratio or ratios or the rate or rates at which such conversion or exchange may
be made, with such adjustments, if any, as shall be stated and expressed or
provided for in such resolution or resolutions; and
(i) such other special rights and protective provisions with
respect to any class or series as the Board of Directors may deem advisable.
The shares of each class or series of the Preferred Stock may vary from
the shares of any other class or series thereof in any or all of the foregoing
respects. The Board of Directors may increase the number of shares of Preferred
Stock designated for any existing class or series by a resolution adding to such
class or series authorized and unissued shares of the Preferred Stock not
designated for any other class or series. The Board of Directors may decrease
the number of shares of the Preferred Stock designated for any existing class or
series by a resolution, subtracting from such class or series unissued shares of
the
-3-
<PAGE> 4
Preferred Stock designated for such class or series and the shares so subtracted
shall become authorized, unissued and undesignated shares of the Preferred
Stock.
C. SHARE RECLASSIFICATION.
On the date of filing of these Amended and Restated Articles of
Incorporation with the Department of State of the State of Florida, each issued
and outstanding share of the Corporation's previously authorized common stock,
par value $1.00 per share (the "OLD COMMON STOCK"), shall thereby and thereupon
be classified and converted into ten thousand (10,000) validly issued, fully
paid and nonassessable shares of Common Stock reflecting a conversion ratio of
10,000:1. Each certificate that heretofore represented shares of Old Common
Stock shall now represent the number of shares of Common Stock into which the
shares of Old Common Stock represented by such certificate were reclassified
and converted; PROVIDED, HOWEVER, that each person holding of record a stock
certificate or certificates that represented shares of Old Common Stock shall
receive, upon surrender of each such certificate or certificates, a new
certificate or certificates evidencing and representing the number of shares of
Common Stock to which such person is entitled.
ARTICLE IV
DIRECTORS
The Board of Directors of the Corporation shall consist of at least one
Director, with the exact number of Directors to be fixed from time to time in
the manner provided in the Company's Bylaws.
ARTICLE V
REGISTERED OFFICE AND REGISTERED AGENT
The street address of the Corporation's registered office in the State
of Florida is 1615 South Congress Street, Delray Beach, Florida 33445 and the
name of its registered agent at such address is Wilburn W. Smith.
ARTICLE VI
INDEMNIFICATION
This Corporation shall indemnify and shall advance expenses on behalf
of its Officers and Directors to the fullest extent not prohibited by law either
now or hereafter.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the undersigned has executed these Amended and
Restated Articles of Incorporation this 15th day of December, 1994.
SMITH GARDNER AND ASSOCIATES, INC
/s/ Wilburn W. Smith
--------------------------------------
Wilburn W. Smith, President
-5-
<PAGE> 6
ACCEPTANCE OF APPOINTMENT OF REGISTERED AGENT
The undersigned, having been named the Registered Agent of
SMITH-GARDNER & ASSOCIATES, INC., hereby accepts such designation and is
familiar with, and accepts, the obligations of such position, as provided in
Florida Statutes SECTION 607.0505.
/s/ Wilburn W. Smith
----------------------------------
WILBURN W. SMITH, Registered Agent
Dated: December 15, 1994.
-6-
<PAGE> 7
CERTIFICATE
OF THE
PRESIDENT
OF
SMITH GARDNER AND ASSOCIATES, INC.
Pursuant to the provisions of Section 607.1007(4) of the Florida
Business Corporation Act, the undersigned hereby certifies as follows:
(a) The Amended and Restated Articles of Incorporation of Smith Gardner
and Associates, Inc. (the "Corporation") attached hereto contain amendments to
the Corporation's Articles of Incorporation that require shareholder approval.
(b) The Corporation has one class of capital stock currently
outstanding and the amendments set forth in the Corporation's Amended and
Restated Articles of Incorporation were duly adopted by the holders of more than
a majority of the Corporation's Common Stock, which is the Corporation's only
outstanding capital stock, by written consent dated as of December 15, 1994,
pursuant to Section 607.0704 of the Florida Business Corporation Act. The number
of votes cast for the amendments by the holders of the Common Stock was
sufficient for approval.
SMITH GARDNER AND ASSOCIATES, INC.
By: /s/ Wilburn W. Smith
---------------------------------
Wilburn W. Smith, President
<PAGE> 8
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
SMITH-GARDNER & ASSOCIATES, INC.
Pursuant to the provisions of Sections 607.1003, 607.0601 and 607.0602
of the Florida Business Corporation Act (the "Act"), the undersigned corporation
has adopted the following Articles of Amendment to its Articles of
Incorporation:
1. The name of the corporation is SMITH-GARDNER & ASSOCIATES, INC. (the
"Corporation").
2. Article III of the Corporation's Articles of Incorporation is hereby
amended by the addition of Sections D and E as follows:
"D. CONVERTIBLE PREFERRED STOCK. Twenty-two Thousand Five
Hundred Fifty Seven (22,557) of the Corporation's authorized Preferred
Stock are hereby designated as "Redeemable Convertible Participating
Preferred Stock" (hereinafter referred to as "Convertible Preferred
Stock"), all of which shares shall rank equally and be identical in all
respects. The relative rights, preferences, restrictions and other
matters relating to the Convertible Preferred Stock are as follows:
1. DIVIDENDS.
(a) The holders of the Convertible Preferred Stock
shall not be entitled to receive, and the Corporation shall be bound to
pay, cumulative dividends in an amount per share determined by (i)
accruing dividends at the per annum rate of $31.90 for each calendar
year or portion thereof that any shares of the Convertible Preferred
Stock are outstanding through November 30, 1999 and at the per annum
rate of $15.95 from December 1, 1999 and through December 1, 2000, (ii)
compounding such dividends on each calendar year end (or through any
date on which such dividends are to be paid) at the rate of 6% per
annum until paid, and (iii) reducing the product of clauses (i) and
(ii) by the aggregate amount of dividends per share paid on each share
of Convertible Preferred Stock under Section D.1(b) below. The accruing
cumulative dividends provided for in this Section D.1(a) shall be paid
in full upon any liquidation under Section D.2, any redemption under
Section D.3 and any conversion under Section D.5.
(b) In addition to the accruing cumulative dividends
provided for in Section D.1(a) above, the holders of the Convertible
Preferred Stock shall also
1
<PAGE> 9
be entitled to receive, out of funds legally available therefor,
dividends at the same rate as dividends, are paid with respect to the
Common Stock (treating each share of Convertible Preferred Stock as
being equal to the number of shares of Common Stock into which each
such share of Convertible Preferred Stock could be converted pursuant
to the provisions of Section D.5 hereof with such number determined as
of the record date for the determination of holders of Common Stock
entitled to receive such dividend).
2. PREFERENCE ON LIQUIDATION. In the event of any liquidation,
dissolution or winding up of the Corporation, the holders of the
Convertible Preferred Stock shall be entitled to (a) receive in cash
and prior and in preference to any distribution of any assets, capital,
surplus or earnings of the Corporation to the holder of any other
capital stock of the corporation (other than the Redeemable Preferred
Stock) the amount of any accumulated unpaid cumulative dividends under
Section D.1(a) above; and (b) share in any distribution of any of the
assets, capital, surplus or earnings of the Corporation ratably with
the holders of the Common Stock of the Corporation (after the payment
in full of the liquidation preference on the Redeemable Preferred
Stock), based upon the amount which such Convertible Preferred Stock
would have been entitled to receive in connection with such
liquidation, dissolution or winding up if such share had been converted
into Common Stock at the Conversion Price (as defined in Section D.5
below) in effect on such date, TOGETHER with an amount equal to all
declared but unpaid dividends on the Convertible Preferred Stock as
provided in Section D.1 above, if any.
3. REDEMPTION.
(a) At the election of the Corporation, the
Corporation may redeem all, but not less than all, of the shares of
Convertible Preferred Stock then outstanding at any time between
December 1, 2000 and December 1, 2001, so long as: (i) the
Corporation has not completed a public offering of its capital stock
under the Securities Act of 1933, as amended, on or prior to such
date; and (ii) the Redeemable Preferred Stock shall have been
redeemed in full on or prior to such date. If the Corporation elects
to redeem the Convertible Preferred Stock, it shall give written
notice of such election at least 90 days prior to the date of
redemption, together with the Corporation's estimate of the Fair
Market Value of the Convertible Preferred Stock and the date of
redemption, to the holders of the Convertible Preferred Stock and
all shares of Convertible Preferred Stock will be redeemed on, or
within 90 days after, the date specified for redemption in the
Company's notice (the "Redemption Date") for a per share cash
purchase price equal to the Fair Market Value (as determined in
Section D.3(d) below) of the Convertible Preferred Stock plus any
accumulated and unpaid dividends (the "Redemption Price"). On or
after the Redemption Date, each holder of shares of Convertible
Preferred Stock called for redemption shall surrender the
2
<PAGE> 10
certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive
payment of the Redemption Price.
(b) From and after the Redemption Date, unless there shall
have been a default in payment or tender by the Corporation of the
Redemption Price, all rights of the holders with respect to such
redeemed shares of Convertible Preferred Stock (except the right to
receive the Redemption Price in accordance with the terms hereof upon
surrender of their certificate) shall cease and such shares shall not
thereafter be transferred on the books of this Corporation or be deemed
to be outstanding for any purpose whatsoever; PROVIDED, HOWEVER, that
the holders of the Convertible Preferred Stock shall, in the event of
an offering by the Corporation of equity securities or securities
convertible into or exchangeable for equity securities, a sale of all
or any substantial portion of the assets or outstanding capital stock
of the Corporation or a merger or consolidation of the Corporation with
or into another corporation or entity, in any such case occurring
within two years of the Redemption Date, be entitled upon the
consummation of such transaction to receive the excess of: (i) the
consideration which such holders would have been entitled to receive on
their Convertible Preferred Stock had it been outstanding on such date
or, in the event of a securities offering, been sold in such offering
(in each case, on an as converted basis); over (ii) the aggregate
Redemption Price previously received by such holders.
(c) If the funds of the Corporation legally available for
redemption of shares of Convertible Preferred Stock on the Redemption
Date are insufficient to redeem the total number of shares of
Convertible Preferred Stock, the Corporation shall use those funds
which are legally available to redeem the maximum possible number of
such shares ratably among the holders of such shares to be redeemed.
At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Convertible Preferred
Stock, such funds will immediately be used to redeem the balance of the
shares which the Corporation has become obligated to redeem on the
Redemption Date but which it has not redeemed at the Redemption Price
together with any accrued interest thereon as provided below. If any
shares of Convertible Preferred Stock are not redeemed because the
Corporation failed to pay or tender to pay the aggregate Redemption
Price on all outstanding shares of Convertible Preferred Stock, all
shares which have not been redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein, and the
Corporation shall pay interest on the unpaid portion of the Redemption
Price for the unredeemed portion at a per annum rate equal to twenty
percent (20%) or the maximum rate of interest permitted under
applicable law, whichever is less.
3
<PAGE> 11
(d) If the holders of a majority in interest of the
Convertible Preferred Stock do not object in writing to the
Corporation's estimate of the Fair Market Value of the Convertible
Preferred Stock within fifteen (15) days after receipt of the
Corporation's written notice of redemption, such estimate shall be the
Fair Market Value for purposes of determining the Redemption Price of
the Convertible Preferred Stock. If the holders of the Convertible
Preferred Stock do timely object to the Corporation's estimate of Fair
Market Value, the Corporation and such holders shall seek for a ten
(10) day period thereafter to negotiate the Fair Market Value in good
faith. If the Corporation and the holders of a majority in interest of
the Convertible Preferred Stock are unable to agree upon such Fair
Market Value by the end of such period, each of the Corporation and the
holders (acting by a majority in interest) shall, within ten (10) days
thereafter, select an unaffiliated investment banking firm of
nationally recognized standing in the software industry to appraise the
Fair Market Value of the Convertible Preferred Stock. Each such firm
will deliver its appraisal of the Fair Market Value within fifteen (15)
days thereafter, and if the lower appraisal is at least 90% of the
higher appraisal, the arithmetic mean of the two shall be the Fair
Market Value. If the two appraisals vary by more than 10%, the two
firms shall promptly select a third investment banking firm of
nationally recognized standing in the software industry. Such third
firm shall, within ten (10) days thereafter, deliver its appraisal of
the Fair Market Value of the Convertible Preferred Stock, the two
appraisals which are closest together in value shall be averaged and
such amount shall be the Fair Market Value for purposes of determining
the Redemption Price. The Fair Market Value of the Convertible
Preferred Stock shall be determined: (i) without regard to the illiquid
nature of such stock or for any discount attributable to the minority
interest represented by such stock; (ii) with the Corporation valued as
a going concern (including all net working capital); and (iii) on the
basis of what a willing buyer would pay to a seller under no
compunction to sell. All costs of the appraisals hereunder shall be
borne by the Corporation.
4. VOTING. Except as otherwise provided herein or as required
by law, the shares of the Convertible Preferred Stock shall be voted together
with the Corporation's Common Stock as a single voting group at any annual or
special meeting of the stockholders of the Corporation, or may act by written
consent as a single voting group with the Corporation's Common Stock, and shall
otherwise have the same voting rights of the Common Stock. Each share of
Convertible Preferred Stock shall entitle the holder thereof to such number of
votes per share as shall equal the number of shares of Common Stock into which
such share of Convertible Preferred Stock is then convertible.
5. CONVERSION RIGHTS. The holders of Convertible Preferred
Stock shall have conversion rights as follows:
4
<PAGE> 12
(a) VOLUNTARY CONVERSION. Each share of Convertible Preferred
Stock shall be converted immediately upon the written election to so convert by
holders of a majority in interest of the Convertible Preferred Stock into shares
of Common Stock, initially at a conversion price equal to $5.32 per share of
Common Stock, which price shall be adjusted as hereinafter provided (and, as so
adjusted, is hereinafter sometimes referred to as the "Conversion Price"), with
each share of Convertible Preferred Stock being valued for such purpose at
$532.00. Shares of Convertible Preferred Stock shall, at the option of each
holder, also be subject to conversion into Common Stock at the effective
Conversion Price in connection with any exercise by the holders of some or all
of the Convertible Preferred Stock of their rights under Section 9.3 of that
certain Debenture Purchase Agreement dated December 19, 1994 by and among the
holders of the Corporation's Convertible Debentures issued thereunder, the
Corporation and the Founders (as defined therein) (the "Debenture Purchase
Agreement"). If the holders of Convertible Preferred Stock elect to convert
Convertible Preferred Stock at a time when there are any declared and unpaid
dividends or other amounts due on such shares, such dividends shall be paid in
full by the Corporation in connection with such conversion.
(b) AUTOMATIC CONVERSION. Each share of Convertible Preferred
Stock outstanding shall automatically be converted into the number of shares of
Common Stock into which such shares are convertible at the then effective
Conversion Price immediately upon the closing of an underwritten public offering
pursuant to an effective registration statement under the Securities Act of 1933
covering the offer and sale of Common Stock of the Corporation to the public in
which the proceeds received by the Corporation, net of underwriting discounts
and commissions, equal or exceed $20,000,000 or such lesser amount as shall be
mutually agreed to by the Company and the holders of the then outstanding
Convertible Preferred Stock (a "Qualified Public Offering").
(c) CONVERSION PROCEDURES. Any holder of Convertible Preferred
Stock desiring to convert such shares into shares of Common Stock and any holder
of Convertible Preferred Stock whose shares are automatically converted into
shares of Common Stock shall surrender the certificate or certificates
representing the Convertible Preferred Stock being converted, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly executed stock
powers relating thereto), at the principal executive office of the Corporation
or the offices of the transfer agent for the Convertible Preferred Stock or such
office or offices in the continental United States of an agent for conversion as
may from time to time be designated by notice to the holders of the Convertible
Preferred Stock by the Corporation, accompanied, in the case of a voluntary
conversion, by written notice of conversion. Such notice of conversion shall
specify (i) the number of shares of Convertible Preferred Stock to be converted,
(ii) the name or names in which such holder wishes the certificate or
certificates for Common Stock and for any Convertible Preferred Stock not to be
so converted to be issued, and (iii) the address to which such holder
5
<PAGE> 13
wishes delivery to be made of such new certificates to be issued upon such
conversion. Upon surrender of a certificate representing Convertible Preferred
Stock for conversion, the Corporation shall issue and send by hand delivery, by
courier or by first class mail (postage prepaid) to the holder thereof or to
such holders designee, at the address designated by such holder, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled upon conversion. In the event that there shall have been
surrendered a certificate or certificates representing Convertible Preferred
Stock, only part of which are to be converted, the Corporation shall issue and
send to such holder or such holders designee, in the manner set forth in the
preceding sentence, a new certificate or certificates representing the number of
shares of Convertible Preferred Stock which
shall not have been converted.
(d) EFFECTIVE DATE OF CONVERSION. The issuance by the
Corporation of shares of Common Stock upon a conversion of Convertible
Preferred Stock into shares of Common Stock made at the option of the holder
thereof pursuant to Section D.5(a) hereof shall be effective as of the date of
the surrender of the certificate or certificates for the Convertible Preferred
Stock to be converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto). The
issuance by the Corporation of shares of Common Stock upon a conversion of
Convertible Preferred Stock into Common Stock pursuant to Section D.5(b) hereof
shall be deemed to be effective simultaneously with the closing of the Qualified
Public Offering. On and after the effective date of conversion, the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such shares of
Common Stock.
(e) FRACTIONAL SHARES. The Corporation shall not be obligated
to deliver to holders of Convertible Preferred Stock any fractional share of
Common Stock issuable upon any conversion of such Convertible Preferred Stock,
but in lieu thereof may make a cash payment in respect thereof in any manner
permitted by law.
(f) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion of Convertible Preferred Stock as
herein provided, free from any preemptive rights or other obligations, such
number of shares of Common Stock as shall from time to time be issuable upon the
conversion of all the Convertible Preferred Stock then outstanding. The
Corporation shall prepare and shall use its best efforts to obtain and keep in
force such governmental of regulatory permits or other authorizations as may be
required by law in order to enable the Corporation lawfully to issue and deliver
to each holder of record of Convertible Preferred Stock such number of shares of
its Common Stock as shall from time to time be sufficient to effect the
conversion of all Convertible Preferred Stock then outstanding and convertible
into shares of Common Stock.
6
<PAGE> 14
(g) ADJUSTMENTS TO CONVERSION PRICE. The conversion price
in effect from time to time shall be subject to adjustment from and after
December 19, 1994 and through the earlier of (i) the consummation by the
Corporation of a Qualified Public Offering and (ii) the effective date of the
conversion of all of the then outstanding Convertible Preferred Stock and
regardless of whether any shares of Convertible Preferred Stock are then issued
and outstanding as follows:
(I) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Upon the
issuance of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, the subdivision of
outstanding shares of Common Stock into a greater number of shares of
Common Stock, or the combination of outstanding shares of Common Stock
into a smaller number of shares of Common Stock, the Conversion Price
shall, simultaneously with the happening of such dividend, subdivision
or split be adjusted by multiplying the then effective Conversion Price
by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after such event. An adjustment made pursuant
to this Section D.5(g)(I) shall be given effect, upon payment of such a
dividend or distribution, as of the record date for the determination
of stockholders entitled to receive such dividend or distribution (on a
retroactive basis) and in the case of a subdivision or combination
shall become effective immediately as of the effective date thereof.
(II) SALE OF COMMON STOCK. In the event the Corporation shall
at any time, or from time to time, issue, sell or exchange any shares
of Common Stock (including shares held in the Corporations treasury but
excluding up to 395,722 shares of Common Stock issued to officers,
directors, employees, consultants or agents of the Corporation or upon
the exercise of options or other rights issued to such officers,
directors, employees, consultants or agents (the "Excluded Shares")),
for a consideration per share less than the Conversion Price in effect
immediately prior to the issuance, sale or exchange of such shares,
then, and thereafter successively upon each such issuance, sale or
exchange, the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares shall forthwith be reduced to
an amount determined by multiplying such Conversion Price by a
fraction:
(A) the numerator of which shall be (i) the number of
shares of Common Stock of all classes outstanding immediately
prior to the issuance of such additional shares of Common Stock
(excluding treasury shares but including all shares of Common
Stock issuable upon conversion or exercise of any outstanding
Preferred Stock options, warrants, rights or convertible
securities (including
7
<PAGE> 15
Convertible Debentures)), plus (ii) the number of shares of Common
Stock which the net Aggregate consideration received by the Corporation
for the total number of such additional shares of Common Stock so
issued would purchase at the Conversion Price (prior to adjustment),
and
(B) the denominator of which shall be (i) the number
of shares of Common Stock of all classes outstanding immediately prior
to the issuance of such additional shares of Common Stock (excluding
treasury shares but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock, options,
warrants, rights or convertible securities (including the Convertible
Debentures)), plus (ii) the number of such additional shares of Common
Stock so issued.
(III) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event
the Corporation shall at any time or from time to time, issue options, warrants
or rights to subscribe for shares of Common Stock, (other than any options or.
warrants for Excluded Shares), or issue any securities convertible into or
exchangeable for shares of Common Stock, for a consideration per share
(determined by dividing the Net Aggregate Consideration (as determined below) by
the aggregate number of shares of Common Stock that would be issued if all such
options, warrants, rights or convertible securities were exercised or converted
to the fullest extent permitted by their terms) less than the Conversion Price
in effect immediately prior to the issuance of such options or rights or
convertible or exchangeable securities, the Conversion Price in effect
immediately prior to the issuance of such options, warrants or rights or
securities shall be reduced to an amount determined by multiplying such
Conversion Price b a fraction:
(A) the numerator of which shall be (i) the number of
shares of Common Stock of all classes outstanding immediately prior
to the issuance of such options, rights or convertible securities
(excluding treasury shares but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred
Stock, options, warrants, rights or convertible securities (including
the Convertible Debentures), plus (ii) the number of shares of Common
Stock which the total amount of consideration received by the
Corporation for the issuance of such options, warrants, rights or
convertible securities plus the minimum amount set forth in the terms
of such security as payable to the Corporation upon the exercise or
conversion thereof (the "Net Aggregate Consideration") would purchase
at the Conversion Price prior to adjustment, and
8
<PAGE> 16
(B) the denominator of which shall be (i) the number
of shares of Common Stock of all classes outstanding
immediately prior to the issuance of such options, warrants,
rights or convertible securities (excluding treasury shares
but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock,
options, warrants, rights or convertible securities (including
the Convertible Debentures)), plus (ii) the aggregate number
of shares of Common Stock that would be issued if all such
options, warrants, rights or convertible securities were
exercised or converted.
(IV) EXPIRATION OR CHANGE IN PRICE. If the consideration per
share provided for in any options or rights to subscribe for shares of
COMMON Stock or any securities exchangeable for or convertible into
shares of Common Stock, changes at any time, the Conversion Price in
effect at the time of such change shall be readjusted to the Conversion
Price which would have been in effect at such time had such options or
convertible securities provided for such changed consideration per
share (determined as provided in Section D.5(g)(III) hereof), at the
time initially granted, issued or sold; PROVIDED, that such adjustment
of the Conversion Price will be made only as and to the extent that the
Conversion Price effective upon such adjustment remains less than or
equal to the Conversion Price that would be in effect if such options,
rights or securities had not been issued. No adjustment of the
Conversion Price shall be made under this Section D.5 upon the issuance
of any additional shares of Common Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights
in any convertible securities if an adjustment shall previously have
been made upon the issuance of such warrants, options or other rights.
Any adjustment of the Conversion Price shall be disregarded if, as, and
when the rights to acquire shares of Common Stock upon exercise or
conversion of the warrants, options, rights or convertible securities
which gave rise to such adjustment expire or are canceled without
having been exercised, so that the Conversion Price effective
immediately upon such cancellation or expiration shall be equal to the
Conversion Price in effect at the time of the issuance of the expired
or canceled warrants, options, rights or convertible securities, with
such additional adjustments as would have been made to that Conversion
Price had the expired or canceled warrants, options, rights or
convertible securities not been issued.
(h) OTHER ADJUSTMENTS. In the event the Corporation shall make
or issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a non-cash dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event
9
<PAGE> 17
lawful and adequate provision shall be made so that the holders of Convertible
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the number of securities of the
Corporation which they would have received had their Convertible Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date (as that term is hereafter defined), retained such securities
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this Section D.5 as applied to
such distributed securities.
If the Common Stock issuable upon the conversion of the Convertible
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section D.5), then and in each such event the holder of each
share of Convertible Preferred Stock shall have the right thereafter to convert
such share into the kind and amount of shares of stock and other securities and
property receivable upon such' reorganization, reclassification or other change,
by holders of the number of shares of Common Stock into which such shares of
Convertible Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
(i) MERGERS AND OTHER REORGANIZATIONS. If at any time or from
time to time there shall be a capital reorganization of the Common Stock (other
than a subdivision, combination, reclassification or exchange of shares provided
for elsewhere in this Section D.5) or a merger or consolidation of the
Corporation with or into another corporation or the sale of all or substantially
all of the Corporation's properties and assets to any other person, then, as a
part of and as a condition to the effectiveness of such reorganization, merger,
consolidation or sale, lawful and adequate provision shall be made so that the
holders of the Convertible Preferred Stock shall thereafter be entitled to
receive upon conversion of the Convertible Preferred Stock the number of shares
of stock or other securities or property of the Corporation or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of Common Stock deliverable upon conversion would have been entitled on
such capital reorganization, merger, consolidation, or sale. In any such case,
appropriate provisions shall be made with respect to the rights of the holders
of the Convertible Preferred Stock after the reorganization, merger,
consolidation or sale to the end that the provisions of this Section D.5
(including without limitation provisions for adjustment of the Conversion Price
and the number of shares purchasable upon conversion of the Convertible
Preferred Stock) shall thereafter be applicable, as nearly as may be, with
respect to
10
<PAGE> 18
any shares of stock, securities or assets to be deliverable thereafter upon the
conversion of the Convertible Preferred Stock.
(j) NOTICES. In each case of an adjustment or readjustment of
the Conversion Price, the Corporation with furnish each holder of Convertible
Preferred Stock or any Convertible Debentures with a certificate, prepared by
the chief financial officer of the Corporation, showing such adjustment or
readjustment, and stating in detail the facts upon which such adjustment or
readjustment is based; PROVIDED, HOWEVER, that the Corporation shall be entitled
to deliver any such notices to the representative of the holders as set forth in
Section 14.6 of the Debenture Purchase Agreement.
6. RESTRICTIONS AND LIMITATIONS. So long as the Convertible
Preferred Stock remains outstanding, the Corporation shall not without the
affirmative vote or written consent of the holders of a majority in interest of
the then outstanding shares of the Convertible Preferred Stock (adjusted
appropriately for stock splits, stock dividends and the like):
(i) Redeem, purchase or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purpose), any share or
shares of stock other than redemption of the Redeemable Preferred Stock
in accordance with the terms thereof or pursuant to Section D.2 or
Section D.3 hereof; PROVIDED, HOWEVER, that this restriction shall not
apply to the repurchase or redemption of shares of Common Stock issued
pursuant to stock repurchase or similar agreements under which the
Company has the option to repurchase such shares upon the occurrence of
certain events, including the termination of employment and involuntary
transfers by operation of law, provided that (unless the purchase is
approved by unanimous vote of the Board of Directors of the
Corporation) the repurchase price paid by the Corporation does not
exceed the purchase price paid to the Corporation for such shares;
(ii) Authorize or issue, or obligate itself to issue, any
other equity security senior to the Convertible Preferred Stock as to
liquidation preferences, redemptions, or dividend rights or with any
special voting rights (other than the Redeemable Preferred Stock);
(iii) Increase or decrease (other than by conversion as
permitted hereby) the total number of authorized shares of Convertible
Preferred Stock or Redeemable Preferred Stock;
(iv) Pay any dividends on any of its capital stock or
otherwise make any payments to any holders of its Common Stock,
except as otherwise expressly permitted in the Debenture Purchase
Agreement;
11
<PAGE> 19
(v) Authorize any merger or consolidation of the Corporation
with or into any other corporation or entity (except into or with a
wholly-owned subsidiary of the Corporation or in connection with an
acquisition which is permitted under the terms of the Debenture
Purchase Agreement), authorize the liquidation, dissolution or winding
up of the Corporation or authorize the sale of substantially all of the
assets of the Corporation;
(vi) Amend the Amended and Restated Articles of Incorporation
or By-Laws of the Corporation or take any other action or enter into
any other agreements which could prohibit or conflict with the
Corporation's obligations hereunder with respect to the holders of the
Convertible Preferred Stock; or
(vii) Increase the number of authorized directors on the
Corporation's Board of Directors to in excess of seven.
7. NO REISSUANCE OF CONVERTIBLE PREFERRED STOCK. No share or
shares of the Convertible Preferred Stock acquired by the Corporation by reason
of redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Convertible Preferred Stock accordingly.
8. NOTICES OF RECORD DATE. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other Corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to the representative of the
holders of Convertible Preferred Stock as set forth in Section 14.6 of the
Debenture Purchase Agreement at least twenty (20) days prior to the record date
specified therein, a notice specifying (a) the date of such record date for the
purpose of such dividend or distribution and a description of such dividend or
distribution, (b) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (c) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up.
12
<PAGE> 20
E. REDEEMABLE PREFERRED STOCK. Twelve Thousand (12,000) of the
Corporation's authorized Preferred Stock are hereby designated as "Redeemable
Preferred Stock" (hereinafter referred to as "Redeemable Preferred Stock"), all
of which shares shall rank equally and be identical in all respects. The
relative rights, preferences, restrictions and other matters relating to the
Redeemable Preferred Stock are as follows:
1. DIVIDENDS The holders of Redeemable Preferred Stock shall
not be entitled to receive any cash dividends.
2. PREFERENCE ON LIQUIDATION.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, the holders of the Redeemable Preferred Stock shall
be entitled to receive in cash and prior and in preference to any
distribution of any assets, capital, surplus or earnings of the
Corporation to the holders of any other capital stock of the
Corporation (including the Convertible Preferred Stock and the Common
Stock), the amount of $1,000.00 per share for each share of Redeemable
Preferred Stock then held by them (adjusted for any stock split,
combination, consolidation, or stock distributions or stock dividends
with respect to the Redeemable Preferred Stock) (the "Liquidation
Preference Amount"). If the assets and funds thus distributed among the
holders of the Redeemable Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the
holders of the Redeemable Preferred Stock.
(b) The following shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section E.2 (with
each such event being referred to herein as a "Corporate Disposition"):
(i) a consolidation or merger of this Corporation with or into any
other corporation or corporations (other than a wholly-owned subsidiary
or in connection with an acquisition permitted under the Debenture
Purchase Agreement); (ii) the sale, transfer or other disposition of
all or substantially all of the assets of this Corporation; or (iii)
the effectuation by the Corporation or its shareholders of a
transaction or series of related transactions in which more than 50% of
the voting power of the Corporation is disposed of (other than as
permitted under the Debenture Purchase Agreement).
3. REDEMPTION.
(a) MANDATORY REDEMPTION. All, but not less than all, of the
outstanding shares of Redeemable Preferred Stock may be voluntarily
13
<PAGE> 21
redeemed at any time by the Corporation and shall be subject to
mandatory redemption immediately upon the closing date (a "Redemption
Date") of an initial public offering or immediately after any
conversion of the Debentures issued pursuant to the Debenture Purchase
Agreement in response to a voluntary prepayment of the Debentures by
the Company for a cash price per share equal to the Liquidation
Preference amount (the "Redemption Price").
(b) OPTIONAL REDEMPTION. At the election of the holders of a
majority of the then outstanding Redeemable Preferred Stock, the
Corporation shall redeem one-half of all shares of Redeemable Preferred
Stock then outstanding on December 1, 1999, and the Corporation shall
redeem all of the remaining shares of Redeemable Preferred Stock
outstanding on December 1, 2000. On or prior to November 1, 1999, the
Corporation shall give written notice by mail, postage prepaid, to the
holders of the then outstanding Redeemable Preferred Stock at the
address of each such holder appearing on the books of the Corporation
or given by such holder to the Corporation for the purpose of notice.
Such notice shall set forth the date specified for redemption and the
Redemption Price (as defined above) and shall further state that (i)
any holder of Redeemable Preferred Stock who intends to request
redemption of its Redeemable Preferred Stock pursuant to this Section
3(b) must give written notice to the Corporation of its request for
redemption on or before November 15, 1999, and (ii) no redemption will
occur unless the Corporation receives requests for redemption from the
holders of a majority of the shares of Redeemable Preferred Stock then
outstanding. If the Corporation receives requests for redemption on or
prior to November 15, 1999 from the holders of a majority of the
Redeemable Preferred Stock then outstanding, it shall give written
notice by mail postage prepaid, to the holders of the Redeemable
Preferred Stock that one-half of all shares of Redeemable Preferred
Stock then outstanding will be redeemed on December 1, 1999 and the
remaining shares of Redeemable Preferred Stock outstanding will be
redeemed on December 1, 2000 (each a "Redemption Date") for a per share
cash price equal to the Redemption Price. The notice shall further call
upon such holders to surrender to the Corporation on or before the
applicable Redemption Date at the place designated in the notice such
holder's certificate or certificates representing the shares to be
redeemed. On or after the applicable Redemption Date, each holder of
shares of Redeemable Preferred Stock called for redemption shall
surrender the certificate evidencing such shares to the Corporation.
(c) TERMINATION OF RIGHTS. From and after any applicable
Redemption Date, unless there shall have been a default in payment or
tender by the Corporation of the Redemption Price, all rights of the
holders with respect to such redeemed shares of Redeemable Preferred
Stock (except the right to receive the Redemption Price upon surrender
of their certificate)
14
<PAGE> 22
shall cease and such shares shall not thereafter be transferred on the
books of this Corporation or be deemed to be outstanding for any
purpose whatsoever.
(d) INSUFFICIENT FUNDS. If the funds of the corporation
legally available for redemption of shares of Redeemable Preferred
Stock on the applicable Redemption Date are insufficient to redeem the
total number of shares of Redeemable Preferred Stock on such Redemption
Date, the Corporation shall use those funds which are legally available
to redeem the maximum possible number of such shares ratably among the
holders of such shares to be redeemed. At any time thereafter when
additional funds of the Corporation are legally available for the
redemption of shares of Redeemable Preferred Stock, such funds will
immediately be used to redeem the balance of the shares which the
Corporation has become obligated to redeem on the applicable Redemption
Date but which it has not redeemed at the Redemption Price together
with any accrued interest thereon as provided below. If any shares of
Redeemable Preferred Stock are not redeemed for the foregoing reason or
because the Corporation otherwise failed to pay or tender to pay the
aggregate Redemption Price on all outstanding shares of Redeemable
Preferred Stock all shares which have not been redeemed shall remain
outstanding and entitled to all the rights and preferences provided
herein, and the Corporation shall pay interest on the unpaid portion of
the Redemption Price for the unredeemed portion at an aggregate per
annum. rate equal to twenty percent (20%) or the maximum rate permitted
by applicable law, whichever is less.
4. VOTING. Except as required by law, the shares of the
Redeemable Preferred Stock shall not have any voting rights or powers.
5. NO REISSUANCE OF REDEEMABLE PREFERRED STOCK. No share or
shares of the Redeemable Preferred Stock acquired by the Corporation by reason
of redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce the
authorized number of shares of the Redeemable Preferred Stock accordingly.
3. Except as hereby, amended, the Articles of Incorporation of the
Corporation shall remain the same.
4. Pursuant to Section 607.0602 of the Act, this Amendment to the
Articles of Incorporation was duly adopted on December 19, 1994 pursuant to the
written consent of the Board of Directors of the Corporation. Shareholder action
was not required.
15
<PAGE> 23
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment as of this 19th day of December, 1994.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Wilburn W. Smith
----------------------------------------
Wilburn W. Smith, President & Director
16
<PAGE> 24
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
SMITH-GARDNER & ASSOCIATES, INC.
Pursuant to the prow of Section 607.1003 of the Florida Business
Corporation Act (the "Act"), the undersigned corporation has adopted the
following Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is SMITH-GARDNER & ASSOCIATES, INC. (the
"Corporation").
2. Article III of the Corporation's Articles of Incorporation is hereby
amended by the deleting the text of Section D.5(g)(II) in its entirety and
substituting in its place the following:
" (II) SALE OF COMMON STOCK. In the event the Corporation shall
at any time, or from time to time, issue, sell or exchange any shares
of Common Stock (including shares held in the Corporation's treasury
but excluding up to 800,000 shares of Common Stock issued to officers,
directors, employees, consultants or agents of the Corporation or upon
the exercise of options or other rights issued to such officers,
directors, employees, consultants or agents (the "Excluded Shares")),
for a consideration per share less than the Conversion Price in effect
immediately prior to the issuance, sale or exchange of such shares,
then, and thereafter successively upon each such issuance, sale or
exchange, the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares shall forthwith be reduced to
an amount determined by multiplying such Conversion Price by a
fraction:
(A) the numerator of which shall be (i) the number of
shares of Common Stock of all classes outstanding immediately
prior to the issuance of such additional shares of Common
Stock (excluding treasury shares but including all shares of
Common Stock issuable upon conversion or exercise of any
outstanding Preferred Stock, options, warrants, rights or
convertible securities (including the Convertible
Debentures)), plus (ii) the number of shares of Common Stock
which the net aggregate consideration received by the
Corporation for the total number of such additional shares of
Common stock so issued would purchase at the Conversion Price
(prior to adjustment), and
1
<PAGE> 25
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
SMITH-GARDNER & ASSOCIATES, INC.
Pursuant to the provisions of Section 607.1003 of the Florida
Business Corporation Act and applicable By-Laws, the undersigned corporation has
adopted the following Amendment to its Articles of Incorporation:
1. Article III of the Corporation's Articles (Amended) of
Incorporation is hereby amended by adding the following in Section D.5(g)(II)
and elsewhere as applicable:
The corporation is authorized to have outstanding as stock
options issued to, or in favor of officers, directors,
employees, consultants or agents of the Corporation or upon
the exercise of options or other rights issued to such
officers, directors, employees, consultants or agents a total
of 850,000 shares (the "Excluded Shares").
2. Except as hereby amended, the Articles (Amended) of
Incorporation of the Corporation shall remain the same, including provisions
contained in Article III as to conversion price per share of common stock
3. Pursuant to Section 607.1003(6), this Amendment to the
Articles of Incorporation was approved by the shareholders of the Corporation by
written consent effective April 1, 1998. The number of votes case for the
amendment was sufficient for approval.
IN WITNESS WHEREOF, the undersigned has executed these Amended
Articles of Amendment as of the 1st day of April, 1998.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Gary G. Hegna
------------------------------
Gary G. Hegna, President
<PAGE> 26
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
SMITH-GARDNER & ASSOCIATES, INC.
Pursuant to the provisions of Section 607.1003 of the Florida Business
Corporation Act (the "Act"), the undersigned corporation has adopted the
following Articles of Amendment to its Articles of Incorporation:
1. Article III of the Corporation's Articles of Incorporation is hereby
amended as follows:
(i) by deleting the first paragraph of the text in its
entirety and submitting in its place the following:
"The aggregate number of shares of all classes of capital
stock that this Corporation shall have authority to issue is
sixty million (60,000,000), consisting of (i) fifty million
(50,000,000) shares of common stock, par value $0.01 per share
(the "COMMON STOCK") and (ii) ten million (10,000,000) shares
of preferred stock, par value $0.01 per share (the "PREFERRED
STOCK")."
and (ii) by deleting the text of Section D.5(g)(II) in its entirety and
substituting in its place the following:
"(II) SALE OF COMMON STOCK. In the event the
Corporation shall at any time, or from time to time, issue,
sell or exchange any shares of Common Stock (including shares
held in the Corporation's treasury but excluding up to
1,850,000 shares of Common Stock issued to officers,
directors, employees, consultants or agents of the Corporation
upon the exercise of options or other rights issued to such
officers, directors, employees, consultants or agents (the
"Excluded Shares")), for a consideration per share less than
the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares, then, and
thereafter successively upon each such issuance, sale or
exchange, the Conversion Price in effect immediately prior to
the issuance, sale or exchange of such shares shall forthwith
be reduced to an amount determined by multiplying such
Conversion Price by a fraction:
(A) the numerator of which shall be (i) the
number of shares of Common Stock of all classes outstanding
immediately
<PAGE> 27
prior to the issuance of such additional shares of Common
Stock (excluding treasury shares but including all shares of
Common Stock issuable upon conversation or exercise of any
outstanding Preferred Stock, options, warrants, rights or
convertible securities (including the Convertible
Debentures)), plus (ii) the number of shares of Common Stock
which the net aggregate consideration received by the
Corporation for the total number of such additional shares of
Common Stock so issued would purchase at the Conversion Price
(prior to adjustment), and
(B) the denominator of which shall be (i) the
number of shares of Common Stock of all classes outstanding
immediately prior to the issuance of such additional shares of
Common Stock (excluding treasury shares but including all
shares of Common Stock issuable upon conversation or exercise
of any outstanding Preferred Stock, options, warrants, rights
or convertible securities (including the Convertible
Debentures)), plus (ii) the number of such additional shares
of Common Stock so issued."
2. Except as hereby amended, the Articles of Incorporation of the
Corporation shall remain the same.
3. Pursuant to SECTION 607.1003(6), this Amendment to the Articles of
Incorporation was approved by the directors and shareholders of the Corporation
by unanimous written consent effective September 7, 1998. The number of votes
cast for the amendment was sufficient for approval.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment as of this 10th day of September, 1998.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Martin K. Weinbaum
----------------------------------
Martin K. Weinbaum,
Vice President - Finance
<PAGE> 1
EXHIBIT 3.3
AMENDED AND RESTATED
BYLAWS
OF
SMITH-GARDNER & ASSOCIATES, INC.
(A Florida Corporation)
<PAGE> 2
INDEX
PAGE
NUMBER
------
ARTICLE ONE - OFFICES
1. Registered Office ........................................ 1
2. Other Offices ............................................ 1
ARTICLE TWO - MEETINGS OF SHAREHOLDERS
1. Place .................................................... 1
2. Time of Annual Meeting ................................... 1
3. Call of Special Meetings ................................. 1
4. Conduct of Meetings ...................................... 1
5. Notice and Waiver of Notice .............................. 2
6. Business of Special Meeting .............................. 2
7. Quorum ................................................... 2
8. Voting Per Share ......................................... 3
9. Voting of Shares ......................................... 3
10. Proxies .................................................. 3
11. Shareholder List ......................................... 4
12. Action Without Meeting.................................... 4
13. Fixing Record Date ....................................... 4
14. Inspectors and Judges . .................................. 5
15. Voting for Directors ..................................... 5
ARTICLE THREE - DIRECTORS
1. Number, Election and Term ................................ 5
2. Vacancies ................................................ 6
3. Powers ................................................... 6
4. Place of Meetings ........................................ 6
5. Annual Meeting ........................................... 6
6. Regular Meetings ......................................... 6
7. Special Meetings and Notice .............................. 6
8. Quorum; Required Vote; Presumption
of Assent .............................................. 7
9. Action Without Meeting ................................... 7
10. Conference by Telephone or Similar
Communications Equipment Meetings ...................... 7
11. Committees ............................................... 7
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12. Compensation of Directors ................................ 8
13. Chairman of the Board .................................... 8
ARTICLE FOUR - OFFICERS
1. Positions ................................................ 8
2. Election of Specified Officers by Board................... 8
3. Election or Appointment of Other
Officers ............................................... 8
4. Salaries ................................................. 8
5. Term; Resignation ........................................ 9
6. President ................................................ 9
7. Vice Presidents .......................................... 9
8. Secretary ................................................ 9
9. Treasurer ................................................ 9
10. Other Officers, Employees and Agents...................... 10
ARTICLE FIVE - CERTIFICATES FOR SHARES
1. Issue of Certificates .................................... 10
2. Legends for Preferences and Restrictions
on Transfer ............................................ 10
3. Facsimile Signatures ..................................... 11
4. Lost Certificates ........................................ 11
5. Transfer of Shares ....................................... 11
6. Registered Shareholders .................................. 11
7. Redemption of Control Shares ............................. 12
ARTICLE SIX - GENERAL PROVISIONS
1. Dividends ................................................ 12
2. Reserves ................................................. 12
3. Checks ................................................... 12
4. Fiscal Year .............................................. 12
5. Seal ..................................................... 12
6. Gender ................................................... 12
ARTICLE SEVEN - AMENDMENTS OF BYLAWS ............................ 12
ii
<PAGE> 4
SMITH-GARDNER & ASSOCIATES. INC.
BYLAWS
ARTICLE ONE
OFFICES
Section 1. REGISTERED OFFICE. The registered office of Smith-Gardner &
Associates, Inc., a Florida corporation (the "Corporation"), shall be located
in the City of Delray Beach, State of Florida, unless otherwise designated by
the Board of Directors.
Section 2. OTHER OFFICES. The Corporation may also have offices at
such other places, either within or without the State of Florida, as the Board
of Directors of the Corporation (the "Board of Directors") may from time to time
determine or as the business of the Corporation may require.
ARTICLE TWO
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All annual meetings of shareholders shall be held at
such place, within or without the State of Florida, as may be designated by the
Board of Directors and stated in the notice of the meeting or in a duly executed
waiver of notice thereof. Special meetings of shareholders may be held at such
place, within or without the State of Florida, and at such time as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. TIME OF ANNUAL MEETING. Annual meetings of shareholders
shall be held on such date and at such time fixed, from time to time, by the
Board of Directors, provided that there shall be an annual meeting held every
year at which the shareholders shall elect a Board of Directors and transact
such other business as may properly be brought before the meeting.
Section 3. CALL OF SPECIAL MEETINGS. Special meetings of the
shareholders shall be held if called by the Board of Directors, the President,
or if the holders of not less than fifty percent (50%) of all the votes entitled
to be cast on any issue proposed to be considered at the proposed special
meeting sign, date, and deliver to the Secretary one or more written demands for
the meeting describing the purpose or purposes for which it is to be held.
SECTION 4. CONDUCT OF MEETINGS. The Chairman of the Board (or in his
absence, the President or such other designee of the Chairman of the Board)
shall preside at the annual and special meetings of shareholders and shall be
given full discretion in
<PAGE> 5
establishing the rules and procedures to be followed in conducting the meetings,
except as otherwise provided by law or in these Bylaws.
Section 5. NOTICE AND WAIVER OF NOTICE. Except as otherwise provided
by law, written or printed notice stating the place, day and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor more than sixty
(60) days before the day of the meeting, either personally or by first-class
mail, by or at the direction of the President, the Secretary, or the officer or
person calling the meeting, to each shareholder of record entitled to vote at
such meeting. If the notice is mailed at least thirty (30) days before the date
of the meeting, it may be done by a class of United States mail other than
first-class. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the shareholder at his address
as it appears on the stock transfer books of the Corporation, with postage
thereon prepaid. If a meeting is adjourned to another time and/or place, and if
an announcement of the adjourned time and/or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting unless THE BOARD
of Directors, after adjournment, fixes a new record date for the adjourned
meeting. Whenever any notice is required to be given to any shareholder, a
waiver thereof in writing signed by the person or persons entitled to such
notice, whether signed before, during or after the time of the meeting stated
therein, and delivered to the Corporation for inclusion in the minutes or filing
with the corporate records, shall be equivalent to the giving of such notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the shareholders need be specified in any written waiver of
notice. Attendance of a person at a meeting shall constitute a waiver of (a)
lack of or defective notice of such meeting, unless the person objects at the
beginning to the holding of the meeting or the transacting of any business at
the meeting, or (b) lack of defective notice of a particular matter at a meeting
that is not within the purpose or purposes described in the meeting notice,
unless the person objects to considering such matter when it is presented.
Section 6. BUSINESS OF SPECIAL MEETING. Business transacted at any
special meeting shall be confined to the purposes stated in the notice thereof.
Section 7. QUORUM. Shares entitled to vote as a separate voting group
may take action on a matter at a meeting only if a quorum of these shares exists
with respect to that matter. Except as otherwise provided in the Articles of
Incorporation or by law, a majority of the shares entitled to vote on the matter
by each voting group, represented in person or by proxy, shall constitute a
quorum at any meeting of shareholders, but in no event shall a quorum consist of
less than one-third (1/3) of the shares of each voting group entitled to vote.
If less than a majority of outstanding shares entitled to vote are represented
at a meeting, a majority of the shares so represented may adjourn the meeting
from time to time without further notice. After a quorum has been established at
any shareholders' meeting, the subsequent withdrawal of shareholders, so as to
reduce the number of shares entitled to vote at the meeting below the number
required for a quorum, shall not affect the validity of any action taken at the
meeting or any adjournment thereof.
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Once a share is represented for any purpose at a meeting, it is deemed present
for quorum purposes for the remainder of the meeting and for any adjournment of
that meeting unless a new record date is or must be set for that adjourned
meeting.
Section 8. VOTING PER SHARE. Except as otherwise provided in the
Articles of Incorporation or by law, each shareholder is entitled to one (1)
vote for each outstanding share held by him on each matter voted at a
shareholders' meeting.
Section 9. VOTING OF SHARES. A shareholder may vote at any meeting of
shareholders of the Corporation, either in person or by proxy. Shares standing
in the name of another corporation, domestic or foreign, may be voted by the
officer, agent or proxy designated by the bylaws of such corporate shareholder
or, in the absence of any applicable bylaw, by such person or persons as the
board of directors of the corporate shareholder may designate. In the absence of
any such designation, or, in case of conflicting designation by the corporate
shareholder, the chairman of the board, the president, any vice president, the
secretary and the treasurer of the corporate shareholder, in that order, shall
be presumed to be fully authorized to vote such shares. Shares held by an
adminitrator, executor, guardian, personal representative, or conservator may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name or the name of his
nominee. Shares held by or under the control of a receiver, a trustee in
bankruptcy proceedings, or an assignee for the benefit of creditors may be voted
by such person without the transfer thereof into his name. If shares stand of
record in the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety or
otherwise, or if two or more persons have the same fiduciary relationship
respecting the same shares, unless the Secretary of the Corporation is given
notice to the contrary and is furnished with a copy of the instrument or order
appointing them or creating the relationship wherein it is so provided, then
acts with respect to voting shall have the following effect: (a) if only one
votes, in person or by proxy, his act binds all; (b) if more than one vote, in
person or by proxy, the act of the majority so voting binds all; (c) if more
than one vote, in person or by proxy, but the vote is evenly split on any
particular matter, each faction is entitled to vote the share or shares in
question proportionally; or (d) if the instrument or order so filed shows that
any such tenancy is held in unequal interest, a majority or a vote evenly split
for purposes hereof shall be a majority or a vote evenly split in interest. The
principles of this paragraph shall apply, insofar as possible, to execution of
proxies, waivers, consents, or objections and for the purpose of ascertaining
the presence of a quorum.
SECTION 10. PROXIES. Any shareholder of the Corporation, other person
entitled to vote on behalf of a shareholder pursuant to law, or attorney-in-fact
for such persons may vote the shareholder's shares in person or by proxy. Any
shareholder of the corporation may appoint a proxy to vote or otherwise act for
him by signing an appointment form, either personally or by his
attorney-in-fact. An executed telegram or cablegram appearing to have
3
<PAGE> 7
been transmitted by such person, or a photographic, photostatic, or equivalent
reproduction of an appointment form, shall be deemed a sufficient appointment
form. An appointment of a proxy is effective when received by the Secretary of
the Corporation or such other officer or agent which is authorized to tabulate
votes, and shall be valid for up to 11 months, unless a longer period is
expressly provided in the appointment form. The death or incapacity of the
shareholder appointing a proxy does not affect the right of the Corporation to
accept the proxy's authority unless notice of the death or incapacity is
received by the secretary or other officer or agent authorized to tabulate votes
before the proxy exercises his authority under the appointment. An appointment
of a proxy is revocable by the shareholder unless the appointment is coupled
with an interest.
Section 11. SHAREHOLDER LIST. After fixing a record date for a meeting
of shareholders, the Corporation shall prepare an alphabetical list of the names
of all its shareholders who are entitled to notice of the meeting, arranged by
voting group with the address of, and the number and class and series, if any,
of shares held by each. The shareholders' list must be available for inspection
by any shareholder for a period of ten (10) days prior to the meeting or such
shorter time as exists between the record date and the meeting and continuing
through the meeting at the Corporation's principal office, at a place identified
in the meeting notice in the city where the meeting will be held, or at the
office of the Corporation's transfer agent or registrar. Any shareholder of the
Corporation or his agent or attorney is entitled on written demand to inspect
the shareholders' list (subject to the requirements of law), during regular
business hours and at his expense, during the period it is available for
inspection. The Corporation shall make the shareholders' list available at the
meeting of shareholders, and any shareholder or his agent or attorney is
entitled to inspect the list at any time during the meeting or any adjournment.
Section 12. ACTION WITHOUT MEETING. Any action required by law to be
taken at a meeting of shareholders, or any action that may be taken at a meeting
of shareholders, may be taken without a meeting or notice if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted with respect to the subject
matter thereof, and such consent shall have the same force and effect as a vote
of shareholders taken at such a meeting.
Section 13. FIXING RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other proper purposes, the
Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than sixty
(60) days, and, in case of a meeting of shareholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders
4
<PAGE> 8
entitled to receive payment of a dividend, the date on which the notice of the
meeting is mailed or the date on which the resolutions of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this Section 13, such determination shall apply to any adjournment thereof,
except where the Board of Directors fixes a new record date for the adjourned
meeting or as required by law.
Section 14. INSPECTORS AND JUDGES. The Board of Directors in advance of
any meeting may, but need not, appoint one or more inspectors of election or
judges of the vote, as the case may be, to act at the meeting or any
adjournment(s) thereof. If any inspector or inspectors, or judge or judges, are
not appointed, the person presiding at the meeting may, but need not, appoint
one or more inspectors or judges. In case any person who may be appointed as an
inspector or judge fails to appear or act, the vacancy may be filled by the
Board of Directors in advance of the meeting, or at the meeting by the person
presiding thereat. The inspectors or judges, if any, shall determine the number
of shares of stock outstanding and the voting power of each, the shares of stock
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots and consents, hear and determine
all challenges and questions arising in connection with the right to vote, count
and tabulate votes, ballots and consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all shareholders.
On request of the person presiding at the meeting, the inspector or inspectors
or judge or judges, if any, shall make a report in writing of any challenge,
question or matter determined by him or them, and execute a certificate of any
fact found by him or them.
Section 15. VOTING FOR DIRECTORS. Unless otherwise provided in the
Articles of Incorporation, directors shall be elected by a plurality of the
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present.
ARTICLE THREE
DIRECTORS
Section 1. NUMBER, ELECTION AND TERM. The number of directors of the
Corporation shall be fixed from time to time, within the limits specified by the
Articles of Incorporation, by resolution of the Board of Directors; provided,
however, no director's term shall be shortened by reason of a resolution
reducing the number of directors. The directors shall be elected at the annual
meeting of the shareholders, except as provided in Section 2 of this Article,
and each director elected shall hold office for the term for which he is elected
and until his successor is elected and qualified or until his earlier
resignation, removal from office or death. Directors must be natural persons who
are 18 years of age or older but need not be residents of the State of Florida,
shareholders of the Corporation or citizens of the United States. Any director
may be removed at any time, with or without cause, at a special meeting of the
shareholders called for that purpose.
5
<PAGE> 9
Section 2. VACANCIES. A director may resign at any time by giving
written notice to the Corporation, the Board of Directors or the Chairman of the
Board. Such resignation shall take effect when the notice is delivered unless
the notice specifies a later effective date, in which event the Board of
Directors may fill the pending vacancy before the effective date if they provide
that the successor does not take office until the effective date. Any vacancy
occurring in the Board of Directors and any directorship to be filled by reason
of an increase in the size of the Board of Directors shall be filled by the
affirmative vote of a majority of the current directors though less than a
quorum of the Board of Directors, or may be filled by an election at an annual
or special meeting of the shareholders called for that purpose, unless otherwise
provided by law. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office, or until the next election of one
or more directors by shareholders if the vacancy is caused by an increase in the
number of directors.
Section 3. POWERS, Except as provided in the Articles of Incorporation
and by law, all corporate powers shall be exercised by or under the authority
of, and the business and affairs of the Corporation shall be managed under the
direction of, its Board of Directors.
Section 4. PLACE OF MEETINGS. Meetings of the Board of Directors,
regular or special, may be held either within or without the State of Florida.
Section 5. ANNUAL MEETING. The first meeting of each newly elected
Board of Directors shall be held, without call or notice, immediately following
each annual meeting of shareholders.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors may also be held without notice at such time and at such place as
shall from time to time be determined by the Board of Directors.
Section 7. SPECIAL MEETINGS AND NOTICE. Special meetings of the Board
of Directors may be called by the Chairman of the Board or by the President and
shall be called by the Secretary on the written request of any two directors.
Written notice of special meetings of the Board of Directors shall be given to
each director at least forty-eight (48) hours before the meeting. Except as
required by statute, neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting. Notices to directors shall be
in writing and delivered personally or mailed to the directors at their
addresses appearing on the books of the Corporation. Notice by mail shall be
deemed to be given at the time when the same shall be received. Notice to
directors may also be given by telegram, teletype or other form of electronic
communication. Notice of a meeting of the Board of Directors need not be given
to any director who signs a written waiver of notice before, during or after the
meeting. Attendance of a director at a meeting shall constitute a waiver of
notice of such meeting and a waiver of any and all objections to the place of
the
6
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meeting, the time of the meeting and the manner in which it has been called or
convened, except when a director states, at the beginning of the meeting or
promptly upon arrival at the meeting, any objection to the transaction of
business because the meeting is not lawfully called or convened.
Section 8. QUORUM; REQUIRED VOTES PRESUMPTION OF ASSENT. A majority of
the number of directors fixed by, or in the manner provided in, these bylaws
shall constitute a quorum for the transaction of business; provided, however,
that whenever, for any reason, a vacancy occurs in the Board of Directors, a
quorum shall consist of a majority of the remaining directors until the vacancy
has been filled. The act of a majority of the directors present at a meeting at
which a quorum is present when the vote is taken shall be the act of the Board
of Directors. A director of the Corporation who is present at a meeting of the
Board of Directors or a committee of the Board of Directors when corporate
action is taken shall be presumed to have assented to the action taken, unless
he objects at the beginning of the meeting, or promptly upon his arrival, to
holding the meeting or transacting specific business at the meeting, or he votes
against or abstains from the action taken.
Section 9. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at a meeting of the Board of Directors or a committee thereof may be
taken without a meeting if a consent in writing, setting forth the action taken,
is signed by all of the members of the Board of Directors or the committee, as
the case may be, and such consent shall have the same force and effect as a
unanimous vote at a meeting. Action taken under this section is effective when
the last director signs the consent, unless the consent specifies a different
effective date. A consent signed under this Section 9 shall have the effect of a
meeting vote and may be described as such in any document.
Section 10. CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT
MEETINGS. Members of the Board of Directors may participate in a meeting of the
Board by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time. Participation in such a meeting shall constitute presence in
person at the meeting, except where a person participates in the meeting for the
express purpose of objecting to the transaction of any business on the ground
the meeting is not lawfully called or convened.
Section 11. COMMITTEES. The Board of Directors, by resolution adopted
by a majority of the full Board of Directors, may designate from among its
members an executive committee and one or more other committees, each of which,
to the extent provided in such resolution, shall have and may exercise all of
the authority of the Board of Directors in the business and affairs of the
Corporation except where the action of the full Board of Directors is required
by statute. Each committee must have two or more members who serve at the
pleasure of the Board of Directors. The Board of Directors, by resolution
adopted in accordance with this Article Three, may designate one or more
directors as alternate members of any committee, who may act in the place and
stead of any absent member or members at any meeting of such committee.
Vacancies in the membership of a committee
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<PAGE> 11
shall be filled by the Board of Directors at a regular or special meeting of the
Board of Directors. The executive committee shall keep regular minutes of its
proceedings and report the same to the Board of Directors when required. The
designation of any such committee and the delegation thereto of authority shall
not operate to relieve the Board of Directors, or any member thereof, of any
responsibility imposed upon it or him by law.
Section 12. COMPENSATION OF DIRECTORS. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 13. CHAIRMAN OF THE BOARD. The Board of Directors may, in its
discretion, choose a chairman of the board who shall preside at meetings of the
shareholders and of the directors and shall be an ex officio member of all
standing committees. The Chairman of the Board shall have such other powers and
shall perform such other duties as shall be designated by the Board of
Directors. The Chairman of the Board shall be a member of the Board of Directors
but no other officers of the Corporation need be a director. The Chairman of the
Board shall serve until his successor is chosen and qualified, but he may be
removed at any time by the affirmative vote of a majority of the Board of
Directors.
ARTICLE FOUR
OFFICERS
Section 1. POSITIONS. The officers of the Corporation shall consist of
a President, one or more Vice Presidents, a Secretary and a Treasurer, and, if
elected by the Board of Directors by resolution, a Chairman of the Board. Any
two or more offices may be held by the same person.
Section 2. ELECTION OF SPECIFIED OFFICERS BY BOARD. The Board of
Directors at its first meeting after each annual meeting of shareholders shall
elect a President, one or more Vice Presidents, a Secretary, and a Treasurer.
Section 3. ELECTION OR APPOINTMENT OF OTHER OFFICERS. Such other
officers and assistant officers and agents as may be deemed necessary may be
elected or appointed by the Board of Directors, or, unless otherwise specified
herein, appointed by the President of the Corporation. The Board of Directors
shall be advised of appointments by the President at or before the next
scheduled Board of Directors meeting.
Section 4. SALARIES. The salaries of all officers of the Corporation to
be elected by the Board of Directors pursuant to Article Four, Section 2 hereof
shall be fixed
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from time to time by the Board of Directors or pursuant to its discretion. The
salaries of all other elected or appointed officers of the Corporation shall be
fixed from time to time by the President of the Corporation or pursuant to his
direction.
Section 5. TERM; RESIGNATION. The officers of the Corporation shall
hold office until their successors are chosen and qualified. Any officer or
agent elected or appointed by the Board of Directors or the President of the
Corporation may be removed, with or without cause, by the Board of Directors.
Any officers or agents appointed by the President of the Corporation pursuant to
Section 3 of this Article Four may also be removed from such officer positions
by the President, with or without cause. Any vacancy occurring in any office of
the Corporation by death, resignation, removal or otherwise shall be filled by
the Board of Directors, or, in the case of an officer appointed by the President
of the Corporation, by the President or the Board of Directors. Any officer of
the Corporation may resign from his respective office or position by delivering
notice to the Corporation. Such resignation is effective when delivered unless
the notice specifies a later effective date. If a resignation is made effective
at a later date and the Corporation accepts the future effective date, the Board
of Directors may fill the pending vacancy before the effective date if the Board
provides that the successor does not take office until the effective date.
Section 6. PRESIDENT. The President shall be the Chief Executive
Officer of the Corporation, shall have general and active management of the
business of the Corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect. In the absence of the Chairman of
the Board or in the event the Board of Directors shall not have designated a
chairman of the board, the President shall preside at meetings of the
shareholders and the Board of Directors.
Section 7. VICE PRESIDENTS. The Vice Presidents in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President. They shall perform such other duties and have such
other powers as the Board of Directors shall prescribe or as the President may
from time to time delegate.
Section 8. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the shareholders and record all the
proceedings of the meetings of the shareholders and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall be. He shall keep in
safe custody the seal of the Corporation and, when authorized by the Board of
Directors, affix the same to any instrument requiring it.
Section 9. TREASURER. The Treasurer shall have the custody of corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in
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books belonging to the Corporation and shall deposit all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the President and
the Board of Directors at its regular meetings or when the Board of Directors so
requires an account of all his transactions as treasurer and of the financial
condition of the Corporation unless otherwise specified by the Board of
Directors, the Treasurer shall be the Corporation's Chief Financial Officer.
Section 10. OTHER OFFICERS, EMPLOYEES AND AGENTS. Each and every other
officer, employee and agent of the Corporation shall possess, and may exercise,
such power and authority, and shall perform such duties, as may from time to
time be assigned to him by the Board of Directors, the officer so appointing him
and such officer or officers who may from time to time be designated by the
Board of Directors to exercise such supervisory authority.
ARTICLE FIVE
CERTIFICATES FOR SHARES
Section 1. ISSUE OF CERTIFICATES. The Corporation shall deliver
certificates representing all shares to which shareholders are entitled; and
such certificates shall be signed by the Chairman of the Board, President or a
Vice President, and by the Secretary or an Assistant Secretary of the
Corporation, and may be sealed with the seal of the Corporation or a facsimile
thereof.
Section 2. LEGENDS FOR PREFERENCES AND RESTRICTIONS ON TRANSFER. The
designations, relative rights, preferences and limitations applicable to each
class of shares and the variations in rights, preferences and limitations
determined for each series within a class (and the authority of the Board of
Directors to determine variations for future series) shall be summarized on the
front or back of each certificate. Alternatively, each certificate may state
conspicuously on its front or back that the Corporation will furnish the
shareholder a full statement of this information on request and without charge.
Every certificate representing shares that are restricted as to the sale,
disposition, or transfer of such shares shall also indicate that such shares are
restricted as to transfer and there shall be set forth or fairly summarized
upon the certificate, or the certificate shall indicate that the Corporation
will furnish to any shareholder upon request and without charge, a full
statement of such restrictions. If the Corporation issues any shares that are
not registered under the Securities Act of 1933, as amended, and registered or
qualified under the applicable state securities laws, the transfer of any such
shares shall be restricted substantially in accordance with the following
legend:
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"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER
THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT
HOLDER'S EXPENSE, AN OPINION (SATISFACTORY TO THE CORPORATION) OF
COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT
REQUIRED.
Section 3. FACSIMILE SIGNATURES. The signatures of the Chairman of the
Board, the President or a Vice President and the Secretary or Assistant
Secretary upon a certificate may be facsimiles, if the certificate is manually
signed by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. In case any officer who
has signed or whose facsimile signature has been placed upon such certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer at
the date of the issuance.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
Section 5. TRANSFER OF SHARES. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompamied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. REGISTERED SHAREHOLDERS. The Corporation shall be entitled
to recognize the exclusive rights of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person, whether or not it shall have express
or other notice thereof except as otherwise provided by the laws of the State of
Florida.
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Section 7. REDEMPTION OF CONTROL SHARES. As provided by the Florida
Business Corporation Act, if a person acquiring control shares of the
Corporation does not file an acquiring person statement with the Corporation,
the Corporation may redeem the control shares at fair market value at any time
during the 60-day period after the last acquisition of such control shares. If a
person acquiring control shares of the Corporation files an acquiring person
statement with the Corporation, the control shares may be redeemed by the
Corporation only if such shares are not accorded full voting rights by the
shareholders as provided by law.
ARTICLE SIX
GENERAL PROVISIONS
Section 1. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in
cash, property, or its own shares pursuant to law and subject to the provisions
of the Articles of Incorporation.
Section 2. RESERVES. The Board of Directors may by resolution create a
reserve or reserves out of earned surplus for any proper purpose or purposes,
and may abolish any such reserve in the same manner.
Section 3. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by the Board of Directors and may be changed from time to time by
resolution of the Board of Directors.
Section 5. SEAL. The corporate seal shall have inscribed thereon the
name and state of incorporation of the Corporation. The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
Section 6. GENDER. All words used in these Bylaws in the masculine
gender shall extend to and shall include the feminine and neuter genders.
ARTICLE SEVEN
AMENDMENTS OF BYLAWS
Unless otherwise provided by law, these Bylaws may be altered, amended
or repealed or new Bylaws may be adopted by action of the Board of Directors.
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<PAGE> 1
EXHIBIT 10.1
SMITH-GARDNER & ASSOCIATES, INC.
---------------------------------------
STOCK OPTION PLAN
---------------------------------------
1. PURPOSE. The purpose of this Plan is to advance the interests of
SMITH-GARDNER & ASSOCIATES, INC., a Florida corporation (the "Company") by
providing an additional incentive to attract and retain qualified and competent
persons who are key employees of the Company, and upon whose efforts and
judgment the success of the Company is largely dependent, through the
encouragement of stock ownership in the Company by such persons.
2. DEFINITIONS. As used herein, the following terms shall have the
meaning indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Committee" shall mean the stock option committee
appointed by the Board pursuant to Section 13 hereof or, if not appointed, the
Board.
(c) "Common Stock" shall mean the Company's Common Stock,
par value $0.01 per share.
(d) "Director" shall mean a member of the Board.
(e) "Fair Market Value" of the Common Stock on any date of
reference shall be the Closing Price on the business day immediately preceding
such date of the Common Stock, unless the Committee in its sole discretion
shall determine otherwise in a fair and uniform manner. For this purpose, the
Closing Price of the Common Stock on any business day shall be (i) if the
Common Stock is listed or admitted for trading on any United States national
securities exchange, or if actual transactions are otherwise reported on a
consolidated transaction reporting system, the last reported sale price of the
Common Stock on such exchange or reporting system, as reported in any newspaper
of general circulation; (ii) if the Common Stock is quoted on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") System, or
any similar system of automated dissemination of quotations of securities
prices in common use, the mean between the closing high bid and low asked
quotations for such day of the Common Stock on such system; (iii) if
applicable, the mean between the high bid and low asked quotations for the
Common Stock as reported by the National Quotation Bureau, Incorporated, if at
least two securities dealers have inserted both bid and asked quotations for
the Common Stock on at least 5 of the 10 preceding days; or (iv) if neither
clauses (i), (ii) or (iii) is applicable, the fair value of the Common Stock as
determined by the Committee.
<PAGE> 2
(f) "Incentive Stock Option" shall mean an incentive stock
option as defined in Section 422 of the Internal Revenue Code.
(g) "Internal Revenue Code" shall mean the Internal Revenue
Code of 1986, as amended from time to time.
(h) "Non-Qualified Stock Option" shall mean an Option which
is not an Incentive Stock Option.
(i) "Option" (when capitalized) shall mean any option
granted under this Plan.
(j) "Optionee" shall mean a person to whom a stock option is
granted under this Plan or any person who succeeds to the rights of such person
under this Plan by reason of the death of such person.
(k) "Plan" shall mean this Stock Option Plan for the
Company.
(l) "Share(s)" shall mean a share or shares of the Common
Stock.
3. SHARES AND OPTIONS. The Company may grant to Optionees from time
to time Options to purchase an aggregate of up to Five Hundred Thousand
(500,000) Shares from Shares held in the Company's treasury or from authorized
and unissued Shares. If any Option granted under the Plan shall terminate,
expire, or be canceled or surrendered as to any Shares, new Options may
thereafter be granted covering such Shares.
4. INCENTIVE AND NON-QUALIFIED OPTIONS.
(a) An Option granted hereunder shall be either an Incentive
Stock Option or a Non-Qualified Stock Option as determined by the Committee at
the time of grant of such Option and shall clearly state whether it is an
Incentive Stock Option or Non-Qualified Stock Option. All Incentive Stock
Options shall be granted within 10 years from the effective date of this Plan.
(b) Options otherwise qualifying as Incentive Stock Options
hereunder will not be treated as Incentive Stock Options to the extent that the
aggregate fair market value (determined at the time the Option is granted) of
the Shares, with respect to which Options meeting the requirements of Internal
Revenue Code Section 422(b) are exercisable for the first time by any
individual during any calendar year (under all plans of the Company and any
parent or subsidiary corporations), exceeds $100,000.
5. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by an option agreement
that may contain any term deemed necessary or desirable by the Committee,
provided such terms are not inconsistent with
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<PAGE> 3
this Plan or any applicable law. Optionees shall be those persons selected by
the Committee from the class of all regular employees of the Company and all
Directors, whether or not employees; PROVIDED, HOWEVER, that no Incentive Stock
Option shall be granted to a Director who is not also an employee of the
Company.
(b) In granting Options, the Committee may take into
consideration the contribution the person has made to the success of the
Company and such other factors as the Committee shall determine. The Committee
shall also have the authority to consult with and receive recommendations from
officers and other personnel of the Company with regard to these matters. The
Committee may from time to time in granting Options under the Plan prescribe
such other terms and conditions concerning such Options as it deems
appropriate, including, without limitation, (i) prescribing the date or dates
on which the Option becomes exercisable; (ii) providing that the Option rights
accrue or become exercisable in installments over a period of years, or upon
the attainment of stated goals or both; or (iii) relating an Option to the
continued employment of the Optionee for a specified period of time, provided
that such terms and conditions are not more favorable to an Optionee than those
expressly permitted herein.
(c) The Options granted to employees under this Plan shall
be in addition to regular salaries, pension; life insurance or other benefits
related to their employment with the Company. Neither the Plan nor any Option
granted under the Plan shall confer upon any person any right to employment or
continuance of employment by the Company.
(d) Notwithstanding any other provisions of the Plan to the
contrary, an Incentive Stock Option shall not be granted to any person owning
directly or indirectly (through attribution under Section 424(d) of the
Internal Revenue Code) at the date of grant, stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company unless
the option price of such Option is at least 110% of the Fair Market Value of
the Shares subject to such Option on the date the Option is granted, and such
Option by its terms is not exercisable after the expiration of five years from
the date such Option is granted.
6. OPTION PRICE. The option price per Share of any Option shall be
any price determined by the Committee but shall not be less than the par value
per Share; PROVIDED, HOWEVER, that in no event shall the option price per Share
of any Incentive Stock Option be less than the Fair Market Value of the Shares
underlying such Option on the date such Option is granted.
7. EXERCISE OF OPTIONS. An Option shall be deemed exercised when (i)
the Company has received written notice of such exercise in accordance with the
terms of the Option; (ii) full payment of the aggregate option price of the
Shares as to which the Option is exercised has been made; and (iii)
arrangements that are satisfactory to the Committee in its sole discretion have
been made for the Optionee's payment to the Company of the amount that is
necessary for the Company employing the Optionee to withhold in accordance with
applicable Federal or state tax withholding requirements. Unless further
limited by the Committee in any Option, the option price of any Shares
purchased shall be paid in cash, by certified or official bank check or by
money order; PROVIDED, HOWEVER, that the
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<PAGE> 4
Committee in its sole discretion may accept a personal check in full or partial
payment of any Shares. The Company in its sole discretion may, on an individual
basis or pursuant to a general program established by the Committee in
connection with this Plan, lend money to an Optionee to exercise all or a
portion of an Option granted hereunder. If the exercise price is paid in whole
or part with an Optionee's promissory note, such note shall (i) provide for
full recourse to the maker; (ii) be collateralized by the pledge of the Shares
that the Optionee purchases upon exercise of such Option: (iii) bear interest
at a rate no less than the rate of interest payable by the Company to its
principal lender; and (iv) contain such other terms as the Committee in its
sole discretion shall require. No Optionee shall be deemed to be a holder of
any Shares subject to an Option unless and until a stock certificate or
certificates for such Shares are issued to such person(s) under the terms of
this Plan. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as expressly provided in Section 10 hereof.
8. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in
such amounts, at such intervals and upon such terms as the Committee shall
provide in such Option, except as otherwise provided in this Section 8.
(a) The expiration date of an Option shall be determined by
the Committee at the time of grant, but in no event shall an Option be
exercisable after the expiration of ten years from the date of grant of the
Option.
(b) In the event of a change in control of the Company (as
hereafter defined) all Options then outstanding shall vest and be exercisable
in full immediately. As used herein, the term "change in control of the
Company" shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13 (d) and 14 (b) (2) of the Securities Exchange Act of 1934)
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing forty percent (40%) or more of the combined voting power
of the Company's then outstanding securities, except for an initial public
offering by the Company, (ii) during any period of twelve (12) months,
individuals who at the beginning of such period constituted the Board of
Directors of the Company cease for any reason to constitute a majority thereof,
unless the election or the nomination for election by the Company's
shareholders of each new director was approved by a vote of at least a majority
of the directors then still in office, who were directors at the beginning of
the period or (iii) a person (as defined in clause (i) above) acquires (or,
during the 12-month period ending on the date of the most recent acquisition by
such person or group of persons, has acquired) gross assets of the Company that
have an aggregate fair market value greater than or equal to fifty percent
(50%) of the fair market value of all of the gross assets of the Company
immediately prior to such acquisition or
(c) Committee may in its sole discretion accelerate the date
on which an Option may be exercised and may accelerate the vesting of any
Shares subject to any Option or previously acquired by the exercise of any
Option.
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<PAGE> 5
9. TERMINATION OF OPTION PERIOD.
(a) The unexercised portion of any Option shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
(i) three months after the date on which the
Optionee's employment is terminated (or, in the case of a nonemployee Director,
the date on which the Optionee ceases to be a Director) or, in the case of a
Non-Qualified Stock Option, and unless the Committee shall otherwise determine
at the time of grant, the date on which the Optionee's employment is
terminated, in either case for any reason other than by reason of (A) Cause
(which, solely for purposes of this Plan, shall mean the termination of the
Optionee's employment or directorship by reason of the Optionee's willful
misconduct or gross negligence), (B) a mental or physical disability as
determined by a medical doctor satisfactory to the Committee or (C) death;
(ii) immediately upon the termination of the
Optionee's employment (or, in the case of a nonemployee Director, the removal
of the Optionee as a Director) for Cause;
(iii) one year after the date on which the
Optionee's employment is terminated (or, in the case of a nonemployee Director,
the date the Optionee is removed as a Director) by reason of a mental or
physical disability (within the meaning of Section 22(e) of the Internal
Revenue Code) as determined by a medical doctor satisfactory to the Committee;
or
(iv) (A) one year after the date of termination of
the Optionee's employment (or, in the case of a nonemployee Director, the date
the Optionee ceases to be a Director) by reason of death of the employee, or
(B) three months after the date on which the Optionee shall die if such death
shall occur during the one year period specified in Subsection 9(a)(iii)
hereof.
10. ADJUSTMENT OF SHARES.
(a) If at any time while the Plan is in effect or
unexercised Options are outstanding, there shall be any increase or decrease in
the number of issued and outstanding Shares through the declaration of a stock
dividend or through any recapitalization resulting in a stock split-up,
combination or exchange of Shares, then and in such event:
(i) appropriate adjustment shall be made in the
maximum number of Shares available for grant under the Plan, so that the same
percentage of the Company's issued and outstanding Shares shall continue to be
subject to being so optioned; and
(ii) appropriate adjustment shall be made in the
number of Shares and the exercise price per Share thereof then subject to any
outstanding Option, so that the same percentage of the Company's issued any
outstanding Shares shall remain subject to purchase at the same aggregate
exercise price.
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<PAGE> 6
(b) Subject to the specific terms of any Option, the
Committee may change the terms of Options outstanding under this Plan, with
respect to the option price or the number of Shares subject to the Options, or
both, when, in the committee's sole discretion, such adjustments become
appropriate by reason of a corporate transaction described in Subsections 8(b)
hereof so as to preserve but not increase the benefits under the Plan.
(c) Except as otherwise expressly provided herein, the
issuance by the Company of shares of its capital stock of any class, or
securities convertible into shares of capital stock of any class, either in
connection with direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to the number of or
exercise price of Shares then subject to outstanding Options granted under the
Plan.
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under the Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate (i)
any of all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business; (ii) any merger or
consolidation of the Company; (iii) any issue by the Company of debt
securities, or preferred or preference stock that would rank above the Shares
subject to outstanding Options; (iv) the dissolution or liquidation of the
Company; (v) any sale, transfer or assignment of all or any part of the assets
or business of the Company; or (vi) any other corporate act or proceeding,
whether of a similar character or otherwise.
11. TRANSFERABILITY OF OPTIONS. No Option shall be transferable by
the Optionee otherwise than by will or the laws of descent and distribution,
and each Option shall be exercisable during the Optionee's lifetime only by the
Optionee.
12. ISSUANCE OF SHARES.
(a) Notwithstanding any other provision of this Plan, the
Company shall not be obligated to issue any Shares unless it is advised by
counsel of its selection that it may do so without violation of the applicable
Federal and state laws pertaining to the issuance of securities, and may
require any stock so issued to bear a legend, may give its transfer agent
instructions, and may take such other steps, as in its judgment are reasonably
required to prevent any such violation.
(b) As a condition to any sale or issuance of Shares upon
exercise of any Option, the Committee may require such agreements, undertakings
and legends on the certificates as the Committee may deem necessary or
advisable to facilitate compliance with the Plan, the Option Agreement and with
any applicable law or regulation, including, but not limited to, the following:
(i) a representation and warranty by the Optionee to the Company, at the time
any Option is exercised, that the Optionee is acquiring the Shares for
investment and not with a view to, or for sale in connection with, the
distribution of any such Shares; (ii) a representation, warranty and/or
agreement
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<PAGE> 7
to be bound by any legends endorsed upon the certificate(s) for such Shares
that are, in the opinion of the Committee, necessary or appropriate to
facilitate compliance with the provisions of any securities laws deemed by the
Committee to be applicable to the issuance and transfer of such Shares; and
(iii) such other representations, warranties, agreements and legends as the
Committee may deem necessary or advisable to comply with this Plan and any
agreements by the Optionees.
13. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Board, or, if
designated a Committee of not less than two Directors. The Committee shall have
all of the powers of the Board with respect to the Plan. Any member of the
Committee may be removed at any time, with or without cause, by resolution of
the Board and any vacancy occurring in the membership of the Committee may be
filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and
regulations for carrying out the purposes of the Plan. The Committee's
determinations and its interpretation and construction of any provision of the
Plan shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee
shall be made either (i) by a majority vote of the members of the Committee
present at a meeting at which a quorum of the Committee is present, or (ii)
without a meeting by the unanimous written approval of the members of the
Committee.
14. WITHHOLDING OR DEDUCTION FOR TAXES. If at any time specified
herein for the making of any issuance or delivery of any Option or Common Stock
to any Optionee, any law or regulation of any governmental authority having
jurisdiction in the premises shall require the Company to withhold, or to make
any deduction for, any taxes or take any other action in connection with the
issuance or delivery then to be made, such issuance or delivery shall be
deferred until such withholding or deduction shall have been provided for by
the Optionee or beneficiary, or other appropriate action shall have been taken.
15. INTERPRETATION.
(a) The Plan shall be administered and interpreted so that
all Incentive Stock Options granted under the Plan will qualify as Incentive
Stock Options under Section 422 of the Internal Revenue Code. If any provision
of the Plan should be held invalid for the granting of Incentive Stock Options
or illegal for any reason, such determination shall not affect the remaining
provisions hereof, but instead the Plan shall be construed and enforced as if
such provision had never been included in the Plan.
(b) This Plan shall be governed by the laws of the State of
Florida.
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(c) Headings contained in this Plan are for convenience only
and shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine, or neuter
gender shall be a reference to such other gender as is appropriate.
16. AMENDMENT AND DISCONTINUATION OF THE PLAN. Either the Board or
the Committee may from time to time amend the Plan or any Option; PROVIDED,
HOWEVER, that, except to the extent provided in Section 9, no amendment or
suspension of the Plan or any Option issued hereunder shall substantially
impair any Option previously granted to any Optionee without the consent of
such Optionee.
17. EFFECTIVE DATE AND TERMINATION DATE. The effective date of the
Plan is the date on which the Board adopts this Plan, and the Plan shall
terminate on the 10th anniversary of the effective date.
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<PAGE> 1
EXHIBIT 10.2
SMITH-GARDNER & ASSOCIATES, INC.
------------------------------------
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement (the "Agreement") is made and
entered into as of the ____ day of ___________________, 1998 (the "Grant
Date"), between SMITH-GARDNER & ASSOCIATES, INC., a Florida corporation (the
"Company") and ______________________ (the "Optionee").
1. GRANT OF OPTION. The Company hereby grants to the Optionee, an
incentive stock option (the "Option") to acquire __________ shares (the "Option
Shares") of Common Stock, $.01 par value, of the Company pursuant to the
Company's Stock Option Plan (the "Plan"), the terms of which are incorporated
herein for all purposes.
2. EXERCISE PRICE. The exercise price per share of the Option Shares
subject to the Option is $2.53.
3. EXERCISE SCHEDULE: NO EXERCISE UNTIL IPO.
(a) Except as otherwise provided in Sections 8 and 9 of the
Plan, the Option shall be exercisable in whole or in part and cumulatively
according to the following schedule: the Option shall become exercisable for
(i) twenty five percent (25%) of the Option Shares
one (1) year after the Grant Date ("Vesting Commencement Date"), and
(ii) the balance of the Option Shares in successive
equal quarterly installments (each of six and one-quarter percent (6.25%) of
the Option Shares) at the end of each of the next 12 calendar quarters after
the Vesting Commencement Date.
In no event shall the Option become exercisable for any additional Option
Shares after the Optionee's employment with the Company is terminated.
(b) Notwithstanding anything in this Agreement or the Plan
to the contrary, other than provided for in paragraph 6 of this agreement, in
no event shall the Option be exercisable, in whole or in part, until the
closing of the Company's initial public offering of Common Stock ("IPO")
pursuant to an effective registration statement filed under the Securities Act
of 1933, as amended. In addition, to the extent requested by the Company or the
underwriter of the IPO, the Optionee will not sell or otherwise transfer or
dispose of any Option Shares acquired upon exercise of the Option for up to one
hundred eighty (180) days following the effective date of the IPO.
4. TRANSFERABILITY. The Option is non transferable otherwise than by
will or the laws of descent and distribution and during the lifetime of the
Optionee is exercisable only by the Optionee.
<PAGE> 2
5. TERMINATION OF OPTION. The Option shall expire and shall
automatically and without notice terminate and become null and void ten (10)
years after the Grant Date; provided, that any unexercised portion of the
Option shall automatically and without notice terminate and become null and
void as provided in Section 9 of the Plan.
6. CHANGE IN CONTROL. In the event of a change in control of the
Company (as hereafter defined) all options then outstanding shall vest and be
exercisable in full immediately. As used herein, the term "change in control of
the Company" shall be deemed to have occurred if (i) any "person" (as such term
is used in Sections 13 (d) and 14 (b) (2) of the Securities Exchange Act of
1934) becomes the beneficial owner, directly or indirectly, of securities of
the Company representing forty percent (40%) or more of the combined voting
power of the Company's then outstanding securities, except for an initial
public offering by the Company, (ii) during any period of twelve (12) months,
individuals who at the beginning of such period constituted the Board of
Directors of the Company cease for any reason to constitute a majority thereof,
unless the election or the nomination for election by the Company's
shareholders of each new director was approved by a vote of at least a majority
of the directors then still in office, who were directors at the beginning of
the period or (iii) a person (as defined in clause (i) above) acquires (or,
during the 12-month period ending on the date of the most recent acquisition by
such person or group of persons, has acquired) gross assets of the Company that
have an aggregate fair market value greater than or equal to fifty percent
(50%) of the fair market value of all of the gross assets of the Company
immediately prior to such acquisition or acquisitions.
7. INTERPRETATION. The Optionee acknowledges receipt of the Plan, and
accepts the Option subject to, and agrees to be bound by, all the terms and
provisions of the Plan and this Agreement. The Optionee hereby accepts as
binding, conclusive and final all decisions or interpretations of the Committee
upon any questions arising under the Plan and this Agreement. Capitalized terms
used herein that are defined in the Plan and not defined herein shall have the
meanings attributed thereto in the Plan.
8. NO RIGHT TO EMPLOYMENT. This Option shall not confer upon the
Optionee any right to employment with the Company.
9. NOTICES. Any notice under this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally or when
deposited in the United States mail, registered, postage prepaid, and
addressed, in the case of the Company, to the Company's Secretary at 1615 South
Congress Avenue, Delray Beach, Florida 33445, or if the Company should move its
principal office, to such principal office, and, in the case of the Optionee,
to the Optionee's last permanent address as shown on the Company's records,
subject to the right of either party to designate some other address at any
time hereafter in a notice satisfying the requirements of this Section.
2
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10. LAW GOVERNING. This Agreement shall be governed in accordance
with and governed by the internal laws of the State of Florida, and venue for
any action shall be in Palm Beach County, Florida.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first written above.
COMPANY:
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Gary G. Hegna
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Title: Gary G. Hegna, President & CEO
OPTIONEE:
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Exhibit 10.3
SMITH-GARDNER & ASSOCIATES, INC.
1998 EMPLOYEE STOCK OPTION PLAN
Smith-Gardner & Associates, Inc. (the "Company") hereby adopts this
Smith-Gardner & Associates, Inc. 1998 Employee Stock Option Plan (the "Plan")
the terms of which shall be as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Company by
providing eligible individuals (as designated pursuant to Section 4 below) with
an opportunity to acquire or increase a proprietary interest in the Company,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Company and its subsidiaries, and will encourage such
eligible individuals to remain in the employ of the Company or one or more of
its subsidiaries. Each stock option granted under the Plan (an "Option") shall
be an option that is not intended to constitute an "incentive stock option"
("Incentive Stock Option") within the meaning of Section 422 of the Internal
Revenue Code of 1986, or the corresponding provision of any subsequently-enacted
tax statute, as amended from time to time (the "Code") unless such Option is
granted to an employee of the Company or a "subsidiary corporation" (a
"Subsidiary") thereof within the meaning of Section 424(f) of the Code and is
specifically designated at the time of grant as being an Incentive Stock Option.
Any Option so designated shall constitute an Incentive Stock Option only to the
extent that it does not exceed the limitations set forth in Section 7 below.
2. ADMINISTRATION
(a) BOARD. The Plan shall be administered by the Board of
Directors of the Company (the "Board"), which shall have the full power and
authority to take all actions, and to make all determinations required or
provided for under the Plan or any Option granted or Option Agreement (as
defined in Section 8 below) entered into under the Plan and all such other
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Board to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Board executed in accordance with the
Company's Articles of Incorporation and Bylaws, and with applicable law. The
interpretation and construction by the Board of any provision of the Plan or of
any Option granted or Option Agreement entered into hereunder shall be final and
conclusive.
(b) COMMITTEE. The Board may from time to time appoint a
committee (the "Committee") consisting of not less than two members of the
Board, none of whom shall be an officer or other salaried employee of the
Company or any Subsidiary, and each of whom shall qualify in all respects as a
"non-employee director" as defined in Rule 16b-3 of the Securities and Exchange
Commission under the Securities and Exchange Act of 1934 (the "Exchange Act")
and an "outside
<PAGE> 2
director" for purposes of Section 162(m) of the Code. The Board, in its sole
discretion, may provide that the role of the Committee shall be limited to
making recommendations to the Board concerning any determinations to be made and
actions to be taken by the Board pursuant to or with respect to the Plan, or the
Board may delegate to the Committee such powers and authorities related to the
administration of the Plan, as set forth in Section 2(a) above, as the Board
shall determine, consistent with the Articles of Incorporation and Bylaws of the
Company and applicable law. The Board may remove members, add members, and fill
vacancies on the Committee from time to time, all in accordance with the
Company's Articles of Incorporation and Bylaws, and with applicable law. The
majority vote of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
(c) NO LIABILITY. No member of the Board or of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted or Option Agreement entered into hereunder.
(d) DELEGATION TO THE COMMITTEE. In the event that the Plan or
any Option granted or Option Agreement entered into hereunder provides for any
action to be taken by or determination to be made by the Board, such action may
be taken by or such determination may be made by the Committee if the power and
authority to do so has been delegated to the Committee by the Board as provided
for in Section 2(b) above. Unless otherwise expressly determined by the Board,
any such action or determination by the Committee shall be final and conclusive.
3. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be shares of common stock, $.01 par value, of the Company (the "Stock"),
which shares may be treasury shares or authorized but unissued shares. The
number of shares of Stock that may be issued pursuant to Options granted under
the Plan shall not exceed in the aggregate 1,000,000 shares, subject to
adjustment as provided in Section 17 below. If any Option expires, terminates,
or is terminated or canceled for any reason prior to exercise in full, the
shares of Stock that were subject to the unexercised portion of such Option
shall be available for future Options granted under the Plan.
4. ELIGIBILITY
Options may be granted under the Plan to any employee or non-employee
director of, or any consultant or other independent contractor who provides
services to, the Company, a Subsidiary or any other entity in which the Company
has a significant equity or other interest as determined by the Board (an
"Affiliate"). The maximum number of shares of Stock subject to Options that may
be granted during any calendar year under the Plan to any executive officer or
other employee of the Company or any Subsidiary or Affiliate whose compensation
is or may be subject to Code section 162(m) is 1,000,000 shares (subject to
adjustment as provided in Section 17 hereof). An individual may hold more than
one Option, subject to such restrictions as are provided herein.
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<PAGE> 3
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) EFFECTIVE DATE. The Plan shall be effective as of the date
of adoption by the Board and approval of the stockholders of the Company, which
date is set forth below.
(b) TERM. The Plan shall terminate on the date 10 years from
the effective date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board may, at any
time and from time to time, prior to the date of termination of the Plan, grant
to such eligible individuals as the Board may determine ("Optionees"), Options
to purchase such number of shares of the Stock on such terms and conditions as
the Board may determine. The date on which the Board approves or ratifies the
grant of an Option (or if the grant is ratified by the Board or Committee such
earlier date as is specified by the Board or Committee) shall be considered the
date on which such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option intended to constitute an Incentive Stock Option (and so
designated at the time of grant) shall qualify as an Incentive Stock Option only
to the extent that the aggregate fair market value (determined at the time the
Option is granted) of the stock with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under the Plan and all other plans of the Optionee's employer corporation and
its parent and subsidiary corporations within the meaning of Section 422(d) of
the Code) does not exceed $100,000. This limitation shall be applied by taking
Options into account in the order in which they were granted.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by the Company and by the
Optionee, in such form or forms as the Board shall from time to time determine
and with such restrictions including, covenants not to compete, as the Board or
Committee may from time to time determine. Option Agreements covering Options
granted from time to time or at the same time need not contain similar
provisions; PROVIDED, HOWEVER, that all such Option Agreements shall comply with
all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an Option (the
"Option Price") shall be not less than 100 percent of the fair market value (as
defined below) of a share of the Stock; PROVIDED, HOWEVER, that in the event
that the Optionee would otherwise be ineligible to receive an Incentive Stock
Option by reason of the provisions of Section 422(b)(6) and 424(d) of the Code
(relating to stock ownership of more than 10 percent), the Option Price of an
Option that is intended to be an Incentive Stock Option shall be not less than
110 percent of the fair market value (as defined
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<PAGE> 4
below) of a share of Stock at the time such Option is granted. The fair market
value of a share of Stock on any date of reference shall mean the "Closing
Price" (as defined below) of the Stock on the business day immediately preceding
such date, unless the Board or the Committee in its sole discretion shall
determine otherwise. For the purpose of determining fair market value, the
"Closing Price" of the Stock on any business day shall be (i) if the Stock is
listed or admitted for trading on any United States national securities
exchange, or if actual transactions are otherwise reported on a consolidated
transaction reporting system, the last reported sale price of Stock on such
exchange or reporting system, as reported in any newspaper of general
circulation, (ii) if the Stock is quoted on the National Association of
Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system
of automated dissemination of quotations of securities prices in common use, the
last reported sale price of Stock on such system or, if sales prices are not
reported, the mean between the closing high bid and low asked quotations for
such day of Stock on such system, as reported in any newspaper of general
circulation or (iii) if neither clause (i) or (ii) is applicable, the mean
between the high bid and low asked quotations for the Stock as reported by the
National Quotation Bureau, Incorporated if at least two securities dealers have
inserted both bid and asked quotations for Stock on at least five of the ten
preceding days. If none of (i) , (ii) or (iii) above is applicable, then fair
market value shall be determined in good faith by the Committee or the Board,
and the Committee or the Board may determine such fair market value as of any
date that is not more than one year prior to the date for which such
determination is being made.
10. TERM AND EXERCISE OF OPTIONS
(a) OPTION PERIOD. Each Option granted under the Plan shall
terminate and all rights to purchase shares thereunder shall cease upon the
expiration of ten years from the date such Option is granted, or on such date
prior thereto as may be fixed by the Board and stated in the Option Agreement
relating to such Option; PROVIDED, HOWEVER, that in the event the Optionee would
otherwise be ineligible to receive an Incentive Stock Option by reason of the
provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock
ownership of more than 10 percent), an Option granted to such Optionee that is
intended to be an Incentive Stock Option shall in no event be exercisable after
the expiration of five years from the date it is granted.
(b) VESTING AND LIMITATIONS ON EXERCISE. Except as otherwise
provided herein, each Option shall become exercisable with respect to 25% of the
total number of shares subject to the Option on the date that is 12 months after
the date of its grant (the "Vesting Date") and with respect to an additional 25%
of the number of such shares on each of the next three succeeding anniversaries
of the Vesting Date; provided, however, that the Board may in its discretion
provide that an Option may be exercised, in whole or in part, at any time and
from time to time, over a period commencing on or after the date of grant and
ending upon the expiration or termination of the Option, as the Board shall
determine and set forth in the Option Agreement relating to such Option. Without
limiting the foregoing, the Board, subject to the terms and conditions of the
Plan, may in its sole discretion provide that an Option may be exercised
immediately upon grant or that it may not be exercised in whole or in part for
any period or periods of time during which such Option is outstanding; PROVIDED,
HOWEVER, that any vesting requirement or other such limitation on the exercise
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<PAGE> 5
of an Option may be rescinded, modified or waived by the Board, in its sole
discretion, at any time and from time to time after the date of grant of such
Option, so as to accelerate the time at which the Option may be exercised.
Notwithstanding any other provision of the Plan, no Option granted to an
Optionee under the Plan shall be exercisable in whole or in part prior to the
date the Plan is approved by the shareholders of the Company as provided in
Section 5 above.
(c) METHOD OF EXERCISE. An Option that is exercisable
hereunder may be exercised by delivery to the Company on any business day, at
its principal office, addressed to the attention of the Chief Financial Officer
of the Company, of written notice of exercise, which notice shall specify the
number of shares with respect to which the Option is being exercised, and shall
be accompanied by payment in full of the Option Price of the shares for which
the Option is being exercised, except as provided below. The minimum number of
shares of Stock with respect to which an Option may be exercised, in whole or in
part, at any time shall be the lesser of 100 shares or the maximum number of
shares available for purchase under the Option at the time of exercise. Payment
of the Option Price for the shares of Stock purchased pursuant to the exercise
of an Option shall be made (i) in cash, by certified or official bank check or
by money order or, in the Committee's sole discretion, by personal check; (ii)
to the extent permitted by applicable law and under the terms of the Option
Agreement with respect to such Option, by the delivery of a promissory note of
the Optionee to the Company on such terms as shall be set out in such Option
Agreement; or (iii) by a combination of the methods described in (i) and (ii).
An attempt to exercise any Option granted hereunder other than as set forth
above shall be invalid and of no force and effect. Promptly after the exercise
of an Option, the individual exercising the Option shall be entitled to the
issuance of a Stock certificate or certificates evidencing his ownership of such
shares. A separate Stock certificate or certificates shall be issued for any
shares purchased pursuant to the exercise of an Option that is intended to be an
Incentive Stock Option, which certificate or certificates shall not include any
shares that were purchased pursuant to the exercise of an Option that is not an
Incentive Stock Option. An individual holding or exercising an Option shall have
none of the rights of a shareholder until the shares of Stock covered thereby
are fully paid and issued to him and, except as provided in Section 17 below, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date of such issuance.
(d) CHANGE IN CONTROL. In the event of a Change in Control (as
defined below), except as the Board shall otherwise provide in an Option
Agreement with respect to an Option granted under the Plan, all outstanding
Options shall become immediately exercisable in full, without regard to any
limitation on exercise imposed pursuant to Section 10(b) above, and, unless
waived in advance of such Change in Control by the Board, each Optionee who is a
director, an employee or a consultant of the Company or a Subsidiary or
Affiliate at the time of such Change in Control shall have the right to require
the Company to pay, in cancellation of such Option, an amount equal to the
product of (i) the excess of (x) the fair market value per share of the Stock
over (y) the Option Price times (ii) the number of shares of Stock specified by
the Optionee in a written notice to the Company (up to the full number of shares
of Stock then subject to such Option). For purposes of the Plan, a "Change in
Control" shall be deemed to occur if any person shall (a) acquire direct or
indirect beneficial ownership of more than 50% of the total combined voting
power with respect to the
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<PAGE> 6
election of directors of the issued and outstanding stock of the Company (except
that no Change in Control shall be deemed to have occurred if the persons who
were stockholders of the Company immediately before such acquisition own all or
substantially all of the voting stock or other interests of such person
immediately after such transaction), or (b) have the power (whether as a result
of stock ownership, revocable or irrevocable proxies, contract or otherwise) or
ability to elect or cause the election of directors consisting at the time of
such election of a majority of the Board. A "person" for this purpose shall mean
any person, corporation, partnership, joint venture or other entity or any group
(as such term is defined for purposes of the Exchange Act) and a person shall be
deemed to be a beneficial owner as that term is used in Rule 13d-3 under the
Exchange Act. The amount payable under this Section 10(d) shall be remitted by
the Company in cash or by certified or bank check, reduced by applicable tax
withholding.
11. TRANSFERABILITY OF OPTIONS
No Option shall be assignable or transferable by the Optionee to whom
it is granted, other than by will or the laws of descent and distribution,
except that, upon approval by the Board, the Optionee may transfer an Option
that is not intended to constitute an Incentive Stock Option (a) pursuant to a
qualified domestic relations order as defined for purposes of the Employee
Retirement Income Security Act of 1974, as amended, or (b) by gift to a member
of the "Family" (as defined below) of the Optionee, to or for the benefit of one
or more organizations qualifying under Code sections 501(c)(3) and 170(c)(2) (a
"Charitable Organization") or to a trust for the exclusive benefit of the
Optionee, one or more members of the Optionee's Family, one or more Charitable
Organizations, or any combination of the foregoing, provided that any such
transferee shall enter into a written agreement to be bound by the terms of this
Agreement. For this purpose, "Family" shall mean the ancestors, spouse,
siblings, spouses of siblings, lineal descendants and spouses of lineal
descendants of the Optionee. During the lifetime of an Optionee to whom an
Incentive Stock Option is granted, only such Optionee (or, in the event of legal
incapacity or incompetence, the Optionee's guardian or legal representative) may
exercise the Incentive Stock Option.
12. TERMINATION OF EMPLOYMENT OR SERVICE
Upon the termination of the employment or other service of an Optionee
with the Company, a Subsidiary or an Affiliate, any Option that was not vested
and exercisable on the date of the termination of such Optionee's employment
shall expire and be forfeited as of such date, and any Option that was vested
and exercisable on the date of the termination of such Optionee's employment
shall expire and be forfeited as of such date, except (i) as set forth in
Section 13 below, and (ii) that if any Optionee is terminated other than for
"cause", such Optionee's Option shall expire three months after the date of such
termination. Notwithstanding the foregoing provisions of this Section 12, the
Board may provide, in its discretion, that following the termination of
employment or service of an Optionee with the Company, any Subsidiary or
Affiliate, an Optionee may exercise an Option, in whole or in part, at any time
subsequent to such termination of employment or service and prior to termination
of the Option pursuant to Section 10(a) above, either subject to or without
regard to any vesting or other limitation on exercise imposed pursuant to
Section 10(b) above. Whether a leave
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of absence or leave on military or government service shall constitute a
termination of employment or service for purposes of the Plan shall be
determined by the Board, which determination shall be final and conclusive. For
purposes of this Plan, "cause" shall mean (i) an Optionee's theft or
embezzlement, or attempted theft or embezzlement, of money or property of the
Company, an Optionee's perpetration or attempted perpetration of fraud, or an
Optionee's participation in a fraud or attempted fraud, on the Company or an
Optionee's unauthorized appropriation of, or an Optionee's attempt to
misappropriate, any tangible or intangible asset or property of the Company,
(ii) any act or acts of disloyalty, misconduct or moral turpitude by an Optionee
materially injurious to the interest, property, operations, business or
reputation of the Company or an Optionee's conviction of a crime the commission
of which results in injury to the Company, or (iii) an Optionee's failure or
inability (other than by reason of "permanent and total disability") to carry
out effectively his duties and obligations to the Company or to participate
effectively and actively in the management of the Company, in each case as
determined by the Board or the Committee.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) DEATH. If an Optionee dies while in the employ or service
of the Company, a Subsidiary or an Affiliate or within the period following the
termination of employment or service during which the Option is exercisable
under Section 13(b) below, all Options held by such Optionee prior to death
shall become immediately vested and exercisable in full and the executors or
administrators or legatees or distributees of such Optionee's estate shall have
the right, at any time within one year after the date of such Optionee's death
and prior to termination of the Option pursuant to Section 10(a) above, to
exercise any Option held by such Optionee at the date of such Optionee's death;
PROVIDED, HOWEVER, that the Board may provide, in its discretion, that following
the death of an Optionee, the executors or administrators or legatees or
distributees of such Optionee's estate may exercise an Option, in whole or in
part, at any time subsequent to such Optionee's death and prior to termination
of the Option pursuant to Section 10(a) above, either subject to or without
regard to any vesting or other limitation on exercise imposed pursuant to
Section 10(b) above.
(b) DISABILITY. If an Optionee terminates employment or
service with the Company, a Subsidiary or an Affiliate by reason of the
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, then all Options held by such Optionee shall become
immediately exercisable in full and the Optionee shall have the right, at any
time within one year after such termination of employment or service and prior
to termination of the Option pursuant to Section 10(a) above, to exercise, in
whole or in part, any Option held by such Optionee at the date of such
termination of employment or service; provided, however, that the Board may
provide, in its discretion, that an Optionee may, in the event of the
termination of employment or service of the Optionee with the Company, a
Subsidiary or an Affiliate by reason of the "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code) of such Optionee, exercise
an Option in whole or in part, at any time subsequent to such termination of
employment or service and prior to termination of the Option pursuant to Section
10(a) above, either subject to or without regard to any vesting or other
limitation on exercise imposed pursuant to Section 10(b) above. Whether a
termination of employment or service is to be considered by reason of "permanent
and
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<PAGE> 8
total disability" for purposes of this Plan shall be determined by the Board,
which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by the Company from the sale of Stock pursuant to
Options granted under the Plan shall constitute general funds of the Company.
15. REQUIREMENTS OF LAW
(a) VIOLATIONS OF LAW. The Company shall not be required to
sell or issue any shares of Stock under any Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or the Company of any provisions of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or
regulations. Any determination in this connection by the Board shall be final,
binding, and conclusive. The Company shall not be obligated to take any
affirmative action in order to cause the exercise of an Option or the issuance
of shares pursuant thereto to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such Option (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
(b) COMPLIANCE WITH RULE 16B-3. The intent of this Plan is to
qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the
extent any provision of the Plan does not comply with the requirements of Rule
16b-3, it shall be deemed inoperative to the extent permitted by law and deemed
advisable by the Board and shall not affect the validity of the Plan. In the
event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on
behalf of the Board, may exercise discretion to modify this Plan in any respect
necessary to satisfy the requirements of the revised exemption or its
replacement.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; PROVIDED, HOWEVER, that no amendment by the Board shall, without
approval by a majority of the votes present and entitled to vote at a duly held
meeting of the stockholders of the Company at which a quorum representing a
majority of all outstanding voting stock is, either in person or by proxy,
present and voting on the amendment, or by written consent in accordance with
applicable state law and the Certificate of Incorporation and Bylaws of the
Company, change the requirements as to eligibility to receive Options that are
intended to qualify as Incentive Stock Options, increase the maximum number of
shares of Stock in the aggregate that may be sold pursuant to Options that are
intended to qualify as Incentive Stock Options granted under the Plan (except as
permitted under Section 17 hereof) or
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modify the Plan so that Options granted under the Plan could not satisfy the
applicable requirements of Code section 162(m). Except as permitted under
Section 17 hereof, no amendment, suspension or termination of the Plan shall,
without the consent of the holder of the Option, alter or impair rights or
obligations under any Option theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) RECAPITALIZATION. If the outstanding shares of Stock are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by the Company, occurring after the effective date of
the Plan, the number and kinds of shares for the purchase of which Options may
be granted under the Plan shall be adjusted proportionately and accordingly by
the Company. In addition, the number and kind of shares for which Options are
outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the holder of the Option immediately following such
event shall, to the extent practicable, be the same as immediately prior to such
event. Any such adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised portion
of the Option outstanding but shall include a corresponding proportionate
adjustment in the Option Price per share.
(b) REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING
CORPORATION. Subject to Subsection (c) hereof, if the Company shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Company with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) DISSOLUTION OR LIQUIDATION; REORGANIZATION IN WHICH THE
COMPANY IS NOT THE SURVIVING CORPORATION OR SALE OF ASSETS OR STOCK. Upon the
dissolution or liquidation of the Company, the Plan and all Options outstanding
hereunder shall terminate. In the event of any termination of the Plan under
this Section 17(c), each individual holding an Option shall have the right,
immediately prior to the occurrence of such termination and during such
reasonable period as the Board in its sole discretion shall determine and
designate, to exercise such Option in whole or in part, whether or not such
Option was otherwise exercisable at the time such termination occurs and without
regard to any vesting or other limitation on exercise imposed pursuant to
Section 10(b) above. In connection with a merger, consolidation, reorganization
or other business combination of the Company with one or more other entities in
which the Company is not the surviving entity, or upon a sale of all or
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the
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<PAGE> 10
surviving corporation) that results in any person or entity (or persons or
entities acting as a group or otherwise in concert) owning more than 50 percent
of the combined voting power of all classes of stock of the Company, unless the
Board or the Committee otherwise determines the Company and the acquiring or
surviving entity shall provide for the continuation of the Plan and the
assumption of the Options theretofore granted, or for the substitution for such
Options of new options covering the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices. The Board shall send prior written notice of the
occurrence of an event described in this Section 17(c) to all individuals who
hold Options not later than the time at which the Company gives notice to its
stockholders that such event is proposed.
(d) ADJUSTMENTS. Adjustments under this Section 17 related to
stock or securities of the Company shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) NO LIMITATIONS ON CORPORATION. The grant of an Option
pursuant to the Plan shall not affect or limit in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure or to merge, consolidate, dissolve or
liquidate, or to sell or transfer all or any part of its business or assets.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option Agreement
entered into pursuant to the Plan shall be construed to confer upon any
individual the right to remain in the employ of the Company, any Subsidiary or
an Affiliate, or to interfere in any way with the right and authority of the
Company, any Subsidiary or an Affiliate either to increase or decrease the
compensation of any individual at any time, or to terminate any employment or
other relationship between any individual and the Company, any Subsidiary or an
Affiliate.
19. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Company for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
This Plan was duly adopted and approved by the Board of Directors and
all of the Stockholders of the Company effective as of the 30th day of June,
1998.
- 10 -
<PAGE> 1
EXHIBIT 10.4
INCENTIVE STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement"), is made and effective
as of this ___ day of ________, 1998, by and between Smith-Gardner &
Associates, Inc., a Florida corporation (the "Company") with its principal
place of business at 1615 South Congress Avenue, Delray Beach, Florida
33445-6368, and _________________________ (the "Optionee").
RECITALS
Pursuant to the Smith-Gardner & Associates, Inc. 1998 Stock Option
Plan (the "Plan"), the Company desires to grant to the Optionee, and the
Optionee desires to accept, an option to purchase shares of the Company's
common stock, $.01 par value per share (the "Common Stock"), upon the terms and
conditions set forth in this Agreement.
TERMS OF AGREEMENT
In consideration of the mutual representations, warranties, covenants
and conditions contained herein, and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. GRANT OF OPTION
Subject to the terms and conditions of this Agreement, the Company
hereby grants to the Optionee an incentive stock option (the "Option") to
purchase an aggregate of ______________ (___) shares (the "Option Shares") of
Common Stock. This Option is intended to be treated as an option which
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
2. EXERCISE PRICE
The exercise price ("Option Price") of this Option shall be $4.53 per
Option Share; PROVIDED, HOWEVER, that in the event that the Company completes
an initial public offering of Common Stock under the Securities Act by July 1,
1999, then immediately upon the closing thereof the Option Price shall
automatically be adjusted to equal the price at which shares of Common Stock
are offered for sale to the public pursuant to such offering. The Option Price
of this Option shall be subject to adjustment in the event of changes in the
capitalization of the Company, as set forth in Section 8 hereto.
<PAGE> 2
3. TERM AND VESTING OF OPTION
(a) OPTION PERIOD. Subject to the provisions of the Plan, this Option
shall terminate and all rights to purchase shares hereunder shall cease on the
ten year anniversary of the Grant Date.
(b) VESTING. Subject to the provisions of the Plan, this Option shall
become exercisable with respect to 25% of the total number of shares subject to
this Option on the date that is 12 months after the Grant Date (the "Vesting
Date") and with respect to an additional 25% of the number of such shares on
each of the next three succeeding anniversaries of the Vesting Date.
Notwithstanding the foregoing, the Board of Directors of the Company ("Board")
may in its discretion provide that any vesting requirement or other such
limitation on the exercise of this Option may be rescinded, modified or waived
by the Board, in its sole discretion, at any time and from time to time after
the Grant Date, so as to accelerate the time at which this Option may be
exercised.
(c) CHANGE IN CONTROL. In the event of a Change in Control (as defined
below), all rights to acquire Option Shares hereunder shall become immediately
exercisable in full, without regard to any limitation on exercise imposed
pursuant to Section 3(b) above. For purposes of this Agreement, a "Change in
Control" shall be deemed to occur if any person shall (a) acquire direct or
indirect beneficial ownership of more than 50% of the total combined voting
power with respect to the election of directors of the issued and outstanding
stock of the Company (except that no Change in Control shall be deemed to have
occurred if the persons who were stockholders of the Company immediately before
such acquisition own all or substantially all of the voting stock or other
interests of such person immediately after such transaction), or (b) have the
power (whether as a result of stock ownership, revocable or irrevocable
proxies, contract or otherwise) or ability to elect or cause the election of
directors consisting at the time of such election of a majority of the Board.
For purposes of this Agreement, a "person" shall mean any person, corporation,
partnership, joint venture or other entity or any group (as such term is
defined for purposes of Section 13(d) of the Exchange Act) and "beneficial
ownership" shall be determined in accordance with Rule 13d-3 under the Exchange
Act.
4. TRANSFERABILITY OF OPTION
This Option shall not be assignable or transferable by the Optionee,
other than by will or the laws of descent and distribution.
5. REQUIREMENTS OF LAW
(a) VIOLATIONS OF LAW. The Company shall not be required to sell or
issue any shares of Common Stock under this Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the
Option or the Company of any provisions of any law or regulation of any
governmental authority, including without limitation, any federal or state
securities laws or regulations. Any determination in this connection by the
Board shall be final, binding, and conclusive. The Company shall not be
obligated to take any affirmative action in order to cause the exercise of
2
<PAGE> 3
the Option or the issuance of shares pursuant thereto to comply with any law or
regulation of any governmental authority.
(b) REGISTRATION. At the time of any exercise of this Option, the
Company may, if it shall determine it necessary or desirable for any reason,
require the Optionee (or his or her heirs, legatees or legal representative, as
the case may be), as a condition to the exercise thereof, to deliver to the
Company a written representation of present intention to purchase the shares
for their own account as an investment and not with a view to, or for sale in
connection with, the distribution of such shares, except in compliance with
applicable federal and state securities laws with respect thereto. In the event
such representation is required to be delivered, an appropriate legend may be
placed upon each certificate delivered to the Optionee (or his or her heirs,
legatees or legal representative, as the case may be) upon his or her exercise
of part or all of the Option and a stop transfer order may be placed with the
transfer agent. The Option shall also be subject to the requirement that, if at
any time the Company determines, in its discretion, that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of or in connection with, the issuance or purchase of the shares
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company in
its sole discretion. Optionee agrees to execute any "lock-up" or similar
agreement required by the Company's underwriters in connection with the
Company's initial public offering. The Company shall not be obligated to take
any affirmative action in order to cause the exercisability or vesting of the
Option or to cause the exercise of the Option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority.
(c) WITHHOLDING. The Board may make such provisions and take such steps
as it may deem necessary or appropriate for the withholding of any taxes that
the Company is required by any law or regulation of any governmental authority,
whether federal, state or local, domestic or foreign, to withhold in connection
with the exercise of the Option, including, but not limited to, (i) the
withholding of delivery of shares of Common Stock upon exercise of the Option
until the holder reimburses the Company for the amount the Company is required
to withhold with respect to such taxes, (ii) the canceling of any number of
shares of Common Stock issuable upon exercise of the Option in an amount
sufficient to reimburse the Company for the amount it is required to so
withhold, or (iii) withholding the amount due from Optionee's wages or
compensation due such person.
6. DISCLAIMER OF RIGHTS
No provision of this Agreement shall be construed to confer upon any
individual, including Optionee, the right to remain in the employ of the
Company or any Subsidiary or to interfere in any way with the right and
authority of the Company or any Subsidiary either to increase or decrease the
compensation of any individual, including Optionee, at any time, or to
terminate any employment or other relationship between any individual,
including Optionee, and the Company or any Subsidiary.
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<PAGE> 4
7. PROVISIONS OF THE PLAN
The provisions of the Plan shall govern if and to the extent that there
are inconsistencies between those provisions and the provisions of this
Agreement. By execution of this Agreement, the Optionee acknowledges receipt of
a copy of the Plan and represents that he (i) is familiar with the terms and
provisions of the Plan, (ii) accepts the Option subject to all of the terms and
provisions of the Plan, and (iii) after reviewing the Plan and this Agreement
in their entirety, has had the opportunity to obtain the advice of counsel
prior to executing this Agreement and fully understands all of the provisions
of this Agreement and the Plan prior to execution of this Agreement.
8. MISCELLANEOUS
(a) NO WAIVER. Neither the failure nor any delay on the part of either
party to exercise any right, remedy, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege preclude any other or further exercise of
the same or of any other right, remedy, power or privilege, nor shall any
waiver of any right, remedy, power or privilege with respect to any occurrence
be construed as a waiver of such right, remedy, power or privilege with respect
to any other occurrence. No waiver shall be effective unless it is in writing
and is signed by the party asserted to have granted such waiver.
(b) INCORPORATION OF DEFINITIONS. Unless otherwise provided in this
Agreement, capitalized terms used and not otherwise defined in this Agreement
shall have the respective meanings ascribed to them in the Plan.
(c) CONTROLLING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of Delaware, without
application to the principles of conflict of laws.
(d) NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when personally
delivered, one day following the day when deposited with an overnight courier
service for overnight priority service, such as Federal Express, for delivery
to the intended addressee or three days following the day when deposited in the
United States mails, first class postage prepaid, certified or registered mail,
and addressed, in the case of the Company, as set forth in the first paragraph
of this Agreement, and, in the case of Optionee, as set forth below Optionee's
signature on the last page hereof. Any person may alter the address to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this Section for the giving of
notice.
(e) BINDING NATURE OF AGREEMENT; TRANSFERABILITY. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives,
4
<PAGE> 5
successors and assigns. This Agreement shall not be assignable or transferable
by the Optionee other than by will or the laws of descent and distribution.
(f) SEVERABILITY. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or rendered
invalid or unenforceable by virtue of the fact that for any reason any other or
others of them may be invalid or unenforceable in whole or in part.
(g) SECTION HEADINGS. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
(h) NUMBER OF DAYS. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; PROVIDED, HOWEVER that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
(i) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the parties and their respective
successors and permitted assigns.
(j) ENTIRE AGREEMENT; AMENDMENTS. This Agreement fulfills and satisfies
in full the Company's commitment to issue stock options to the Optionee as of
the date of Optionee's employment with the Company which began on the Grant
Date, as an inducement to Optionee to accept employment with the Company. This
Agreement (including the documents and exhibits referred to herein) constitutes
the entire agreement among the parties and supersedes any prior understandings,
agreements, or representations by or among the parties, written or oral, that
may have related in any way to the subject matter hereof. This Agreement may
not be amended, supplemented or modified in whole or in part except by an
instrument in writing signed by the party or parties against whom enforcement
of any such amendment, supplement or modification is sought.
(k) CONSTRUCTION. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and
thereof strict construction shall be applied against any party. Any reference
to any federal, state, local or foreign statute or law shall be deemed also to
refer to the rules and regulations promulgated thereunder, unless the context
requires otherwise. The parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any party has
breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the party has not breached shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty or covenant.
5
<PAGE> 6
(l) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original and all of which
together will constitute one and the same instrument.
(m) PRONOUNS. The use of any gender in this Agreement shall be deemed
to include all genders, and the use of the singular shall be deemed to include
the plural and vice versa, wherever it appears appropriate from the context.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Wilburn Smith
---------------------------------
Name: Wilburn Smith
-------------------------------
Title: President
------------------------------
OPTIONEE:
------------------------------------
------------------------------------
Address:
------------------------------------
------------------------------------
6
<PAGE> 1
Exhibit 10.6
SMITH-GARDNER & ASSOCIATES, INC.
$12,000,000 CONVERTIBLE SUBORDINATED DEBENTURES
DUE DECEMBER 1, 2000
------------------
DEBENTURE PURCHASE AGREEMENT
------------------
AS OF DECEMBER 19, 1994
<PAGE> 2
Smith-Gardner & Associates, Inc.
Debenture Purchase Agreement
As of December 19, 1994
INDEX
Page
Table of Contents will generate here
(i)
<PAGE> 3
EXHIBITS
Exhibit A - List of Lenders
Exhibit B - Form of Debenture
Exhibit C - Preferred Stock Terms
Exhibit D - Company Counsel Opinion
Exhibit E - Form of Non-Competition Agreement
Exhibit F - Form of Confidentiality and Invention Assignment Agreement
SCHEDULES
Schedule 2.4 - Capitalization
Schedule 2.5 - Subsidiaries; Investments
Schedule 2.6 - Financial Statements
Schedule 2.7 - Liabilities
Schedule 2.8 - Absence of Certain Developments
Schedule 2.9 - Accounts Receivable
Schedule 2.10 - Title of Properties
Schedule 2.11 - Tax Matters
Schedule 2.12 - Contracts and Commitments
Schedule 2.13 - Proprietary Rights
Schedule 2.14 - Litigation and Compliance with Laws
Schedule 2.15 - Customer and Supplier Actions
Schedule 2.16 - Employee Benefit Programs
Schedule 2.17 - Labor Laws
Schedule 2.19 - Environmental Matters
Schedule 2.21 - Product and Service Claims
Schedule 2.22 - Backlog
Schedule 2.23 - Information on Founders
Schedule 2.24 - Broker's Fee
Schedule 5.1(c) - Indebtedness
Schedule 6.9 - Affiliated Transactions
Schedule 6.10 - Management Compensation
(ii)
<PAGE> 4
DEBENTURE PURCHASE AGREEMENT
AGREEMENT made as of the 19th day of December 1994 by and among
Smith-Gardner & Associates, Inc., a Florida corporation (the "Company"), Wilburn
Smith and Allan Gardner (each a "Founder" and collectively the "Founders") and
the persons named in EXHIBIT A hereto (collectively the "Lenders," and each
individually a "Lender").
WHEREAS, the Company has agreed to sell and the Lenders have agreed to
purchase convertible debentures due in the year 2000 from the Company in an
aggregate principal amount of $12,000,000.
WHEREAS, the proceeds from the purchase and sale of such convertible
debentures shall be used by the Company for the purpose of making corporate
distributions on the shares of capital stock held by the Company's existing
shareholders.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
SECTION 1. TERMS OF PURCHASE; PAYMENT TERMS
1.1 SALE AND PURCHASE. Subject to the terms and conditions herein set
forth, the Company shall issue and sell to each of the Lenders, and each Lender
shall purchase from the Company, a convertible debenture due 2000 in
substantially the form attached hereto as EXHIBIT B (a "Debenture" and
collectively, the "Debentures") in the principal amount set forth opposite the
name of such Lender in EXHIBIT A hereto for a purchase price equal to 100% of
the principal amount thereof (the "Purchase Price"). The Debentures, which will
aggregate to $12,000,000 in principal amount, will be dated the date of issuance
thereof, mature on December 1, 2000 (the "Maturity Date"), bear interest and be
payable as set forth in Section 1.2 hereof and be convertible as set forth in
Section 7 hereof.
1.2 TERMS OF THE DEBENTURES.
(a) INTEREST. The Debentures shall bear interest on the unpaid
principal amount thereof: (i) from the date of issuance thereof through and
until June 30, 1997 at the rate of ten (10%) per annum; and (ii) from and after
July 1, 1997 at a rate equal to fifteen percent (15%) per annum (the
"Interest"). The Interest shall be computed on the basis of a 360-day year and
the actual number of days elapsed, and be payable on each March 31, June 30,
September 30 and December 31 for the respective three-month periods ending on
each such date, commencing on March 31, 1995 and upon any other payment or
conversion of any principal amount of the Debentures.
(b) DEFAULT INTEREST. In the event that any principal amount
of the Debentures is not paid within fifteen (15) days of when due payable
(whether at stated maturity, by acceleration or otherwise), the Interest on that
portion of such principal amount which has not been so paid shall,
<PAGE> 5
notwithstanding anything herein to the contrary and until that portion of such
principal payment on the Debentures has been brought current, thereafter bear
interest at a rate of twenty percent (20%) per annum.
(c) PRINCIPAL PAYMENTS. Subject to prior conversion pursuant
to the terms of this Agreement and prepayments authorized under Section 1.2(f),
the Company shall pay the principal balance of the Debentures without set-off,
deduction or counterclaim in the following principal amounts on the payment
dates indicated, together in each case with all accrued interest thereon:
AMOUNT OF PRINCIPAL
PAYMENT DATE BALANCE REPAID
------------ -------------------
DECEMBER 1, 1999 $ 6,000,000
DECEMBER 1, 2000 $ 6,000,000
(d) CONVERSION. The Debentures shall be convertible at the
option of a majority in interest of the Lenders into shares of Convertible
Participating Preferred Stock, par value $.01 per share ("Convertible Preferred
Stock"), and Redeemable Preferred Stock, par value $.01 per share ("Redeemable
Preferred Stock"), of the Company, all in accordance with, on the terms and
during the periods set forth in Section 7 hereof. No conversion of the
Debentures shall be permitted except as provided in Section 7 hereof.
(e) PAYMENTS ON THE DEBENTURES. All payments of principal and
interest on the Debentures shall be made by the Company in lawful money of the
United States of America in immediately available funds not later than 12:00
p.m., Boston time, on the date such payment is due, or, if such date is not a
Business Day, then on the next succeeding Business Day, at the address of the
Lenders stated in EXHIBIT A hereto or, if not so stated, at such other addresses
of which the Company shall have received written notice or, at the Company's or
the Lender's election, by crediting the Lender's account at a bank designated by
the Lender in writing to the Company.
(f) PREPAYMENT. The outstanding principal amount of the
Debentures may be prepaid, in whole but not in part, by the Company at any time
upon sixty (60) days prior written notice. The Debentures shall be subject to
mandatory prepayment upon the consummation of: (i) the sale of all or
substantially all of the assets of the Company; (ii) the sale or transfer of all
or a majority of the outstanding capital stock of the Company other than as
permitted under the terms of Section 9 hereof; (iii) an initial public offering
of the Company's Common Stock under the Securities Act of 1933, as amended; or
(iv) the merger or consolidation of the Company with or into another corporation
or entity (other than a wholly-owned subsidiary or in connection with an
acquisition permitted under the terms of Section 6.13 hereof).
1.3 CLOSING. A closing (the "Closing") of the sale and purchase of the
Debentures shall take place at such location, date and time as shall be mutually
agreed upon by the Company and the Lenders (the "Closing Date"). At the Closing,
the Company will deliver the Debentures being
2
<PAGE> 6
acquired by each Lender against payment of the full Purchase Price therefor by
or on behalf of each Lender to the Company by certified or bank cashier's check
or wire transfer of immediately available funds.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FOUNDERS
In order to induce the Lenders to enter into the Agreement, each of the
Company and, to the best of their knowledge, the Founders hereby jointly and
severally agrees with the Lenders and represents and warrants to the Lenders
that, as of the date hereof:
2.1 ORGANIZATION, EXISTENCE AND AUTHORITY. The Company has been duly
formed and is validly existing as a corporation in good standing under the laws
of the State of Florida; the Company does not own or lease any real property
outside the State of Florida, and has no employees residing outside the State of
Florida. The Company has all requisite corporate power and authority, and all
material and necessary authorization, approvals, orders, licenses, certificates
and permits, to conduct its business as presently conducted and to enter into,
execute, deliver and perform all of its duties and obligations under this
Agreement and all related instruments and agreements executed in connection
herewith. A true and complete copy of the Company's Articles of Incorporation as
amended to date, certified by the Florida Secretary of State, and of the
Company's by-laws, as amended to date, certified by the Company's Secretary have
previously been delivered to the Lenders, are complete and correct, and, with
the exception of the amendment creating the Preferred Shares (as defined below),
no amendments thereto are pending. The Company is not in violation of any term
of its charter or by-laws, or, in any material respect, of any term of any
agreement, instrument, judgment, decree, order, statute, rule or government
regulation applicable to the Company or to which the Company is a party, which
would, in any individual instance, or in any series of related instances, have a
material adverse effect on the Company.
2.2 AUTHORIZATION. This Agreement and all documents and instruments
executed by the Company and the Founders pursuant hereto are valid and binding
obligations of the Company and, to the extent applicable, the Founders,
enforceable in accordance with their terms, except as the enforcement thereof
may be limited by bankruptcy and other laws of general application relating to
creditor's rights or general principles of equity. The execution, delivery and
performance of this Agreement and all documents and instruments contemplated
hereby, the issuance of the Debentures and, if converted, the Convertible
Preferred Stock and the Redeemable Preferred Stock (collectively, the "Preferred
Shares") issuable upon such conversion and, if the Convertible Preferred Stock
is converted into Common Stock, the Common Stock issuable upon such conversion
(the "Conversion Shares"), have been duly authorized by all necessary corporate
action of the Company. No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority is required to be
obtained by the Company in connection with the execution and delivery of this
Agreement or the issuance, delivery, payment, redemption or conversion of the
Debentures in accordance with the terms of this Agreement or, if the Debentures
are converted, the Preferred
3
<PAGE> 7
Shares, or, if the Convertible Preferred Stock is converted, the Conversion
Shares, or the performance or consummation of any other transaction contemplated
hereby or thereby.
2.3 NON-CONTRAVENTION. The execution, delivery and performance by each
of the Company and the Founders of this Agreement and the other agreements
executed pursuant hereto to which they are a party and the consummation of the
transactions contemplated hereby does not and will not: (a) conflict with or
result in any default under any material contract, obligation or commitment of
the Company or either of the Founders or any charter provision, by-law or
corporate restriction applicable to the Company; (b) result in the creation of
any lien, charge or encumbrance of any nature upon any of the properties or
assets of the Company or either of the Founders; or (c) violate any instrument,
agreement, judgment, decree or order, or any statute, rule or regulation of any
federal, state or local government or agency, applicable to the Company or
either of the Founders or to which the Company or either of the Founders is a
party.
2.4 CAPITALIZATION. The authorized capital stock of the Company
consists of (i): 25,000,000 shares of common stock, $.01 par value per share
(the "Common Stock"), of which 5,263,100 shares are, or as of the Closing Date
will be, duly and validly issued, outstanding, fully paid and non-assessable and
(ii) 5,000,000 shares of preferred stock, $.01 par value per share, of which
22,557 shares have been designated as the Convertible Preferred Stock and 12,000
shares have been designated as the Redeemable Preferred Stock, of which no
shares are, or as of the Closing Date will be, issued or outstanding. 2,500,000
of such outstanding shares of Common Stock are owned beneficially, and of
record, by each of Wilburn Smith and Allan Gardner, free and clear of any
adverse claims, and 263,100 of such outstanding shares of Common Stock are owned
beneficially and of record by Thomas Quigley, free and clear of any adverse
claims. Except for the Debentures to be issued hereunder, there are no
outstanding warrants, options, rights, commitments, pre-emptive rights or
agreements of any kind for the issuance or sale of, or outstanding securities
convertible into, any additional shares of capital stock of any class of the
Company. The Company has duly and validly authorized and reserved 22,557 shares
of Convertible Preferred Stock and 12,000 shares of Redeemable Preferred Stock
for issuance upon conversion of the Debentures and 2,255,614 Conversion Shares
for issuance upon conversion of the Convertible Preferred Stock; and the shares
of Convertible Preferred Stock, Redeemable Preferred Stock and Common Stock so
issued will, upon such conversion, be validly issued, fully paid and
non-assessable. The relative rights, preferences, restrictions and other
provisions relating to the Convertible Preferred Stock and Redeemable Preferred
Stock are as set forth in EXHIBIT C attached hereto (the "Preferred Stock
Terms"). Except as disclosed in SCHEDULE 2.4 hereof or as set forth in the
Company's charter documents, there are no restrictions on the transfer of the
shares of capital stock of the Company other than those arising under federal
and state securities laws or under this Agreement. There are no rights to have
the Company's capital stock registered for sale to the public in connection with
the laws of any jurisdiction, other than rights set forth in the Registration
Rights Agreement.
2.5 SUBSIDIARIES: INVESTMENTS. The Company does not have any
subsidiaries. Except as disclosed in SCHEDULE 2.5, the Company does not own or
have, nor has it previously owned or had,
4
<PAGE> 8
any direct or indirect interest in, control over or loan or advance to, any
person, corporation, partnership, joint venture or other entity of any kind.
2.6 FINANCIAL STATEMENTS. Included in SCHEDULE 2.6 are the following
financial statements of the Company:
(a) Unaudited balance sheets of the Company as at
December 31, 1993 and December 31, 1992, and the related statements of
operations and cash flows for the twelve month periods ended on such
dates, in each case reviewed by Bernard A. Strauss, the Company's
independent certified public accountant; and
(b) Preliminary unaudited balance sheet of the
Company as at October 3, 1994 and preliminary unaudited statement of
operations for the nine-month period then ended.
All of such financial statements have been prepared on a cash
basis, fairly represent the financial condition of the Company in all material
respects as of the dates thereof on such basis, and are true, accurate and
complete in all material respects as of the dates thereof. Nothing has come to
the attention of the senior management of the Company since such dates which
would indicate that such financial statements were not true, accurate and
complete in all material respects as of the dates thereof.
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent
disclosed in SCHEDULE 2.7 and to the extent reflected or reserved against in the
unaudited balance sheet of the Company as of October 3, 1994 included in
SCHEDULE 2.6 (the "Base Balance Sheet"), the Company does not have any material
liability or liabilities arising out of any transaction or state of facts
existing prior to the date hereof and required to be disclosed in a balance
sheet prepared in accordance with general accepted accounting principals (GAAP)
and the Company has no other material contingent liability or liabilities
arising out of any transaction or state of facts existing prior to the date
hereof which are not specifically disclosed elsewhere in this Agreement or the
Schedules hereto, (other than contractual obligations to customers and vendors
arising out of transactions entered into in the ordinary course of the Company's
business).
2.8 ABSENCE OF CERTAIN DEVELOPMENTS. Except as disclosed on SCHEDULE
2.8 or elsewhere in this Agreement (including the Schedules hereto), since the
date of the Base Balance Sheet, there has been: (a) no material adverse change
in the condition, financial or otherwise, of the Company or in the assets,
liabilities, properties or business of the Company; (b) no declaration, setting
aside or payment of any dividend or other distribution with respect to, or any
direct or indirect redemption or acquisition of, any capital stock in the
Company; (c) no waiver of any valuable right of the Company or cancellation of
any material debt or claim held by the Company; (d) no material loan by the
Company to any officer, director, employee or shareholder of the Company, or any
agreement or commitment therefor; (e) no increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee, agent or
shareholder of the Company (other than salary increases in
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the ordinary course of business consistent with past practice); (f) no material
loss, destruction or damage to any property of the Company, whether or not
insured; (g) no labor trouble involving the Company and no material change in
the senior management or other key personnel of the Company or the terms and
conditions of their employment; and (h) no acquisition or disposition of any
assets (or any contract or arrangement therefor) nor any other material
transaction by the Company otherwise than for fair value in the ordinary course
of business.
2.9 ACCOUNTS RECEIVABLE. Except to the extent reserved against in the
Base Balance Sheet or disclosed elsewhere in this Agreement (including the
Schedules hereto), all of the accounts receivable of the Company represent bona
fide completed sales made in the ordinary course of business, are valid and
enforceable claims and are, to the best knowledge of the Company, subject to no
set-off or counterclaim and collectible in the ordinary course. Except as
disclosed on SCHEDULE 2.9, the Company has no accounts receivable from any
person, firm or corporation which is affiliated with it or from any of its
directors, officers, employees or shareholders.
2.10 TITLE TO PROPERTIES. Except as disclosed in SCHEDULE 2.10 or in
the Base Balance Sheet, the Company has good and marketable title to all of its
properties and assets, free and clear of any liens, restrictions or encumbrances
which could materially and adversely affect the value of such properties or
interfere with the Company's use thereof. All machinery and equipment included
in such properties which is necessary to the business of the Company is in good
condition and repair, reasonable wear and tear excepted, and the Company is not
in default under any material leases of real or personal property to which it is
a party, and such leases by their terms afford the Company peaceful and
undisturbed possession of the subject matter of the lease. The Company is not in
violation, in any material respect, of any zoning, building or safety ordinance,
regulation or requirement or other law or regulation applicable to the operation
of its owned or leased properties, nor has it received any notice of violation
with which it has not complied, which would, in any individual instance, or any
series of related instances, have a material adverse effect on the Company.
2.11 TAX MATTERS. Except asset forth in SCHEDULE 2.11, the Company and
each of the Founders (it being understood that all representations made in this
Section 2. 11 relating to the Founders are made only to the extent they relate
to disclosure and payment of their personal income taxes related to the taxable
income of the Company) have timely and properly filed or received timely and
proper extensions for the filing of all Tax Returns required to be filed by
them, and all such Tax Returns were correct and complete in all material
respects. The Company and each of the Founders has paid all Taxes owed by them
(whether or not shown on any Tax Return), except Taxes which have not yet
accrued or otherwise become due. All Taxes and other assessments and levies
which the Company and each of the Founders was or is required to withhold or
collect from customers or employees have been withheld and collected and have
been paid over or will be paid over when due to the proper governmental
authorities. Except as set forth in SCHEDULE 2.11: (a) none of the Company or
either of the Founders has ever received notice of any audit or of any proposed
deficiencies from the Internal Revenue Service ("IRS") or any other taxing
authority (other than routine audits undertaken in the ordinary course and which
have been resolved on or prior to the date hereof without material adverse
effect on the Company or either of the Founders or their respective
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financial condition); (b) there are in effect no waivers of applicable statutes
of limitations with respect to any Taxes owed by the Company or either of the
Founders for any year; (c) neither the IRS nor any other taxing authority is now
asserting or, to the best knowledge of the Company and each of the Founders,
threatening to assert against the Company or either of the Founders any
deficiency or claim for additional Taxes or interest thereon or penalties in
connection therewith in respect of the income or sales of the Company; and (d)
none of the Company or either of the Founders has ever been a member of an
affiliated group of corporations filing a combined federal income Tax Return,
nor does the Company or either of the Founders have any liability for Taxes of
any other Person under Treasury Regulation ss. 1. 1502-6 (or any similar
provision of foreign, state or local law) or otherwise. None of the Company or
either of the Founders is a party to any Tax allocation or sharing arrangement.
The Company has, at all times since December 9, 1988, qualified and presently
qualifies as an entity properly taxable as an S corporation (as defined in
Section 1361 of the Code).
2.12 CONTRACTS AND COMMITMENTS. Except as set forth in this Agreement
(including the Schedules hereto), the Company is not a party to any contract,
obligation or commitment: (a) which involves a potential commitment or payment
in excess of $100,000 or which is otherwise material and not entered into in the
ordinary course of business; (b) with any of the Founders or its other officers
or key employees or persons or organizations related to or affiliated with any
such persons; (c) which relate to the purchase, redemption, transfer or voting
of its capital stock; or (d) relating to the licensing, distribution,
development, purchase, sale or servicing of software; except in each case as are
described in SCHEDULE 2.12, and copies of all such agreements have been
delivered or made available to the Lenders, (all such contracts and commitments
described on SCHEDULE 2.12 are collectively referred to as the "Material
Agreements"). Other than termination or expiration in the ordinary course of
business, the Company does not know of any basis for the termination, expiration
or modification of any of the Material Agreements within one year from the date
hereof nor has it received any notice thereof, which termination, expiration or
modification would not be at the Company's option and would have a material
adverse effect on the Company. The Company is not in default in any material
respect under any Material Agreement, and to the best knowledge of the Company
there is no state of facts which upon notice or lapse of time or both would
constitute such a default.
2.13 PROPRIETARY RIGHTS; EMPLOYEE RESTRICTIONS. Set forth in SCHEDULE
2.13 is a list and brief description of all patents, patent rights, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names and copyrights, and all applications for such which
are in the process of being prepared, owned by or registered in the name of the
Company, or of which the Company is a licensor or licensee or in which the
Company has any right, and in each case a brief description of the nature of
such right. The Company owns or possesses adequate licenses or other rights to
use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, programming processes, formulae, trade secrets and know how
(collectively "Intellectual Property") necessary to the conduct of its business
as presently conducted and as proposed to be conducted. The Company is not aware
of any infringement by any other person of any rights of the Company under any
Intellectual Property. No claim is pending or, to the best knowledge of the
Company,
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threatened against the Company to the effect that any Intellectual Property
owned or licensed by the Company, or which the Company otherwise has the right
to use, or the operation or products or services of the Company infringe upon or
conflict with the asserted rights of any other person under any Intellectual
Property, and there is no basis for any such claim (whether or not pending or
threatened). The Company has not received any notice from any other person
asserting that any of the Intellectual Property owned or licensed by the
Company, or which the Company otherwise has the right to use, or the operation
or products or services of the Company infringe upon or conflict with the
asserted rights of such person under any Intellectual Property. No claim is
pending or threatened against the Company to the effect that any Intellectual
Property owned or licensed by the Company, or which the Company otherwise has
the right to use, is invalid or unenforceable by the Company, and there is no
basis for any such claim (whether or not pending or threatened). The Company has
not received any notice from any other person asserting that any of the
Intellectual Property owned or licensed by the Company, or which the Company
otherwise has the right to use, is invalid or unenforceable by the Company.
Except as set forth on SCHEDULE 2.13, the Company has taken commercially
reasonable actions to ensure the confidentiality of all non-patented technical
information developed by or belonging to the Company that is material to the
business of the Company. Except as disclosed in SCHEDULE 2.13, neither the
Company, the Founders, nor, to the best of the Company's knowledge, any of the
Company's other employees has any agreements or arrangements with former
employers of any past or present employees relating to any Intellectual Property
of such employers, which interfere or conflict with the performance of such
employee's duties for the Company or results in such employers having any rights
in, or claims on, the Company's Intellectual Property. The activities of the
Founders and, to the best knowledge of the Company, the Company's other
employees and agents on behalf of the Company do not violate any agreements or
arrangements which any such employees or agents have with former employers.
2.14 LITIGATION AND COMPLIANCE WITH LAWS.
(a) Except as set forth in SCHEDULE 2.14, there is no
investigation, action, suit or proceeding at law or in equity or by or before
any governmental instrumentality or other agency now pending or, to the best
knowledge of the Company, threatened against the Company or any Founder or key
employee of the Company, which calls or has a possibility of calling into
question the validity, or hindering the enforceability or performance. of this
Agreement or any action taken or to be taken pursuant hereto or by any of the
other agreements and transactions contemplated hereby; nor to the best knowledge
of the Company, has there occurred any event or does there exist any condition
on the basis of which any such litigation, proceeding or investigation should
reasonably be anticipated to be instituted and have a material adverse effect on
the Company or the business prospects of the Company.
(b) Except as to subject matter more specifically addressed
elsewhere in this Agreement and except as set forth in SCHEDULE 2.14, the
Company is, and at all times during its existence has been, in material
compliance with all laws and governmental rules and regulations, domestic or
foreign and all export control or similar laws or regulations, except where
non-compliance therewith, in any individual instance or any series of related
instances, would not
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have a material adverse effect on the Company. Except as set forth in SCHEDULE
2.14, the Company is not in default in any material respect with respect to any
judgment, order, writ, injunction, decree, demand or assessment, that the
Company or its assets are subject to or by which the Company is bound and which
has been issued by any court or any federal, state, municipal or other
governmental or self-regulatory agency, organization, board, commission, bureau,
instrumentality or department, domestic or foreign, relating to any aspect of
the business, affairs, properties or assets of the Company. Except as set forth
in SCHEDULE 2.14, the Company has not been charged or, to the best knowledge of
the Company, threatened with, or under investigation with respect to, any
material violation of material federal, foreign, state, municipal or other law
or any administrative rule or regulation, domestic or foreign in any matter
directly relating to or affecting the business, affairs, properties or assets of
the Company.
2.15 PERMITS; CUSTOMER AND SUPPLIER RELATIONS. The Company has all
necessary franchises, permits, licenses and other rights and privileges to own
its property and to conduct its business as it is presently or proposed to be
conducted, except for those the absence of which could not have a material
adverse effect on the Company. The Company believes that the relationships of
the Company with its major customers and its suppliers are good commercial
working relationships, and, except as set forth on SCHEDULE 2.15, no major
customer has terminated its relationship with the Company and the Company has
not received any notice within the last two years from any major customers or
suppliers of their intention to terminate, or otherwise modify such
relationships in a manner which could have a material adverse effect on the
Company.
2.16 EMPLOYEE BENEFIT PROGRAMS. Except as set forth on SCHEDULE 2.16
hereto, the Company does not maintain and has not in the past maintained any
Employee Program (as defined herein). For purposes of this Section 2.16,
"Employee Program" means (a) all employee benefit plans within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including, but not limited to, Multiple employer welfare arrangements
(within the meaning of ERISA Section 3(4)), plans to which more than one
unaffiliated employer contributes and employee benefit plans (such as foreign or
excess benefit plans) which are not subject to ERISA; and (b) all stock option
plans, bonus or incentive award plans, severance pay policies or agreements,
deferred compensation agreements, supplemental income arrangements, vacation
plans, and all other employee benefit plans, agreements, and arrangements not
described in (a) above. An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under such Employee Program, or
has any obligation (by agreement or under applicable law) to contribute to or
provide benefits under such Employee Program, or if such Employee Program
provides benefits to or otherwise covers employees of such entity (or their
spouses, dependents, or beneficiaries). The Company has not maintained any
employee benefit plan to which more than one employer contributes pursuant to
one or more collective bargaining agreements. SCHEDULE 2.16 sets forth a list of
every Pension Plan (as hereinafter defined) that has been maintained by the
Company at any time during the twelve-month period ending on the Closing Date.
The Company has not incurred (a) any material accumulated funding deficiency
within the meaning of ERISA, or (b) any material liability to the Pension
Benefit Guaranty Corporation established under ERISA (or any successor thereto
under ERISA) in connection with any Pension Plan established or maintained by
it. The Company has not
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had any tax assessed against it by the MS for any alleged violation under
Section 4975 of the Internal Revenue Code. The Company does not have any
unfunded liability under a Pension Plan or a contingent liability for withdrawal
from a multi-employer Pension Plan except as disclosed in the financial
statements. "Pension Plan" shall mean an employee benefit plan or other plan
maintained for the employees of the Company as described in Section 4021(a) of
ERISA.
2.17 LABOR LAWS. The Company employs approximately 150 individual
employees. The Company is not subject to any collective bargaining agreement or
other labor agreement. The Company is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such employees. Except as set forth on SCHEDULE
2.17, upon termination of the employment of any of said employees, the Company
will not by reason of anything done prior to the Closing be obligated to provide
advance notice of termination of employment or be liable to any of said
employees for so-called "severance pay." The Company is in material compliance
with all applicable laws and regulations respecting labor, employment, fair
employment practices, terms and conditions of employment, and wages and hours.
There are no charges of employment discrimination or unfair labor practices or
strikes, slowdowns, stoppages of work, or any other concerted interference with
normal operations existing, pending or threatened against or involving the
Company and no union has demanded or requested to represent or, to the best
knowledge of the Company, is currently attempting to represent, any of the
Company's employees.
2.18 SOLVENCY. The Company has not: (a) made a general assignment for
the benefit of creditors; (b) filed any voluntary petition in bankruptcy or
suffered the filing of any involuntary petition by its creditors; (c) suffered
the appointment of a receiver to take possession of all, or substantially all,
of its assets; (d) suffered the attachment or other judicial seizure of all, or
substantially all, of its assets; (e) admitted in writing its inability to pay
its debts as they come due; or (f) made an offer of settlement, extension or
composition to its creditors generally. After giving effect to the transactions
provided for or contemplated herein (including the payment of the distribution
to the Company's existing shareholders to be made with the proceeds of the
Debentures), to the best knowledge of the Company: (a) it will be able to pay
its debts as they come due in the usual course of business and will have
adequate capital to conduct its business; and (b) its total assets will be
greater than its total liabilities (total assets for this purpose being
determined on the basis of the "fair saleable value" thereof). For purposes of
this Section 2.18, the "fair saleable value" of the assets of the Company means
the gross amount (without deduction for costs of sale, taxes or other payments)
of money that might be expected to be realized, as of the valuation date, from
an interested purchaser in a not theoretical market aware of all relevant
information and a seller, equally informed, who is interested in disposing of
the entire operation as a going-concern, neither party being under a compulsion
to act.
2.19 ENVIRONMENTAL MATTERS.
(a) Except as set forth in SCHEDULE 2.19 and except for
individual instances or any series of related instances which would not have a
material adverse effect on the assets, business or
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financial condition of the Company: (i) to the best knowledge of the Company,
the Company has never generated, transported, used, stored, treated, disposed
of, or managed any Hazardous Waste (as defined in Section 2.19(b) below), nor
has the Company contracted with any party for the generation, transportation,
use, storage, treatment, disposal or management of any Hazardous Waste; (ii) to
the best knowledge of the Company, the Company does not presently own, operate,
lease, or use, nor has it previously owned, operated, leased, or used any site
on which underground storage tanks are or were located or which contain or
contained any asbestos or asbestos-containing material, any polychlorinated
byphenyls ("PCBs") or equipment containing PCBs, or any urea formaldehyde foam
insulation; (iii) to the best knowledge of the Company, the Company has never
violated any Environmental Law (as defined in Section 2.19(b)(iii) below); and
(iv) the Company, the operations of its businesses, and any real property owned,
operated, leased, or used by the Company, and any facilities and operations of
the Company thereon, to the best of the Company's knowledge, are presently in
compliance in all material respects with all applicable Environmental Laws and
any and all orders or directives of any governmental authorities having
jurisdiction under such Environmental Laws, including, without limitation, any
orders or directives with respect to any clean-up or remediation of any release
or threat of release of any Hazardous Material.
(b) For purposes of this Section 2.19, (i) "Hazardous
Material" shall mean and include any hazardous waste, hazardous material,
hazardous substance, petroleum product, oil, asbestos, polychlorinated
byphenyls, urea formaldehyde, toxic substance,pollutant, contaminant, or other
substance which may pose a threat to the environment or tohuman health or
safety, as defined or regulated under any Environmental Law;(ii) "Hazardous
Waste* shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; (iii) "Environmental Law" shall mean any environmental or
health and safety-related law, regulation, rule, ordinance, or by-law at the
federal. state, or local level existing as of the date hereof or previously
enforced; and (iv) the "Company" shall mean and include the Company and all
other entities for whose conduct the Company is or may be held responsible under
any Environmental Law including, but not limited to, lessees.
2.20 INVENTORY. The Company's inventory is of a quality and quantity
which is salable in the ordinary course of conduct of the Company's business and
the Company maintains adequate reserves against the cost basis of its inventory
based on the Company's historical and projected performance. None of the
Company's net inventory is obsolete or unsalable in a material amount.
2.21 PRODUCT AND SERVICE CLAIMS. Except as set forth on Schedule 2.21,
other than warranty claims substantially consistent with the Company's past
experience and which are not, in the aggregate, material to the Company, there
are no pending or, to the best of the Company's knowledge, threatened product or
service claims with respect to any products manufactured or services provided by
the Company prior to the Closing Date nor are there any facts upon which a claim
of such nature should reasonably be anticipated to be based. Except for on-going
price renegotiation with customers in the ordinary course of business, no claim
has been made against the Company for renegotiation or price of any business
transaction resulting from or relating to defective
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products or services, and, to the best of the Company's knowledge, there are no
facts upon which any such claim should reasonably be anticipated to be based.
2.22 BACKLOG. As of December 1, 1994, the Company had a backlog of firm
orders for the sale of products as set forth in SCHEDULE 2.22. All of the
Company's backlog represent and will, as of the Closing Date, represent orders
for products with specifications that can be met in accordance with the terms of
such orders and in the ordinary course of conduct of the Company's business
without undue delay or extraordinary expense.
2.23 INFORMATION SUPPLIED TO LENDERS. Neither this Agreement, nor the
Schedules referenced herein, nor any certificate or statement furnished to the
Lenders by or on behalf of the Company pursuant to the terms hereof, when taken
together, contains any untrue statement of a material fact, and none of this
Agreement, the Schedules or such other documents, omits to state a material fact
necessary in order to make the statements contained therein not misleading. To
the best of the Company's and each of the Founders' knowledge, there is no
material fact directly relating to the business, operations or condition of the
Company (other than facts which relate to general economic or computer software
industry trends or conditions) that materially adversely affects or in the
future in the reasonable business judgment of the Company (so far as the Company
may now foresee based upon material facts of which they are now aware) is likely
to materially adversely affect the same that has not been set forth in this
Agreement or in the Schedules hereto. Except as disclosed on Schedule 2.23,
neither of the Founders or any of their respective affiliates has been: (a)
subject to voluntary or involuntary petition under the federal bankruptcy laws
or any state insolvency law or the appointment of a receiver, fiscal agent or
similar officer by a court for his business or property; (b) convicted in a
criminal proceeding or named as a subject of a pending criminal proceeding
(excluding traffic violations and other minor offenses); (c) subject to any
order, judgment, or decree (not subsequently reversed, suspended or vacated) of
any court of competent jurisdiction permanently or temporarily enjoining him
from, or otherwise imposing limits or conditions on his, engaging in any
securities, investment advisory, banking, insurance or other type of business or
acting as an officer or director of a public company; or (d) found by a court of
competent jurisdiction in a civil action or by the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated any
federal or state commodities, securities or unfair trade practices law, which
such judgment or finding has not been subsequently reversed, suspended, or
vacated.
2.24 BROKER'S -FEE. Except as set forth on SCHEDULE 2.24, the Company
has not incurred or become liable for any brokerage commission or finder's fee
relating to or in connection with the transactions contemplated by this
Agreement. The Company agrees to indemnify the Lenders against any claims
against the Lenders for brokerage fees or commissions payable to any broker or
finder retained by or on behalf of the Company or the Founders in connection
with the financing contemplated by this Agreement and to pay all expenses
incurred by the Lenders in connection with the defense of any action brought to
collect any brokerage fees or commissions by any such broker or finder.
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SECTION 3. CLOSING CONDITIONS OF LENDERS
The Lenders' obligation to purchase and pay for the Debentures shall be
subject to compliance by the Company with the following conditions, each of
which shall be presumed fulfilled to the Lenders' satisfaction upon execution of
this Agreement by the Lenders:
3.1 OPINIONS OF COMPANY COUNSEL. The Lenders shall have received from
counsel for the Company, Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., their favorable opinion, dated the Closing Date, substantially in the form
attached hereto as EXHIBIT D.
3.2 AUTHORIZATION. The Company shall have duly adopted resolutions in
form reasonably satisfactory to the Lenders authorizing the Company to
consummate the transactions contemplated hereby in accordance with the terms
hereof, including, without limitation, the issuance of the Debentures, the
issuance of the Preferred Shares upon conversion of the Debentures and, upon
conversion of the Convertible Preferred Stock, the issuance of the Conversion
Shares, and the Lenders shall have received a duly executed certificate of an
authorized officer of the Company setting forth a copy of such resolutions and
such other matters as may be requested by the Lenders.
3.3 NON-COMPETITION AND OTHER AGREEMENTS. Each of the Founders shall
have entered into a Non-Competition Agreement with the Company in the form of
EXHIBIT E hereto. All senior management of the Company who are exposed to
technical and proprietary information of the Company shall have entered into
confidentiality and invention assignment agreements with the Company
substantially in the form attached as EXHIBIT F.
3.4 LIFE INSURANCE. The Company shall have delivered evidence to the
Lenders of the actions the Company has taken as of the date hereof to obtain key
man life insurance in accordance with the terms of Section 6.7 hereof.
3.5 CHARTER AMENDMENT. The Company shall have duly and properly
authorized and filed with the Florida Secretary of State an amendment and
restatement of its Articles of Incorporation which shall create the Preferred
Shares with the terms set forth on EXHIBIT C hereto.
3.6 DELIVERY OF DOCUMENTS. Concurrently with the Closing of the
transactions contemplated hereby, the Company shall have executed and delivered
to the Lenders (or shall have caused to be executed and delivered to the
Lenders, by the appropriate Persons), the following:
(a) The Debentures;
(b) Certified copies of resolutions of the Company authorizing
the execution and delivery of this Agreement and the Debentures;
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(c) A copy of the Company's Amended and Restated Articles of
Incorporation, as amended, certified as of a recent date by the Florida
Secretary of State and a copy of the Company's by-laws, as amended;
(d) The Registration Rights Agreement; and
(e) Such other supporting documents and certificates as the
Lenders may reasonably request and as may be required pursuant to this
Agreement.
3.7 USE OF PROCEEDS. All proceeds from the sale of the Debentures by
the Company to the Lenders may be used to make a corporate distribution to the
Company's existing shareholders.
3.8 NO VIOLATION OR INJUNCTION. The consummation of the transactions
contemplated by this Agreement shall not be in violation of any law or
regulation applicable to the Company or the Founders, shall not be subject to
any injunction, stay or restraining order and shall not require any filings,
approvals or consents which shall not have previously been made or obtained.
3.9 NO LITIGATION. No litigation, suit, action, claim or investigation
shall be pending, or threatened, which might impair or prevent the performance
of the Company or the Founders hereunder or the transactions contemplated
herein.
3.10 NO ADVERSE CHANGE. Between October 3, 1994 and the Closing Date,
there shall have been no material adverse change in the financial conditions,
prospects, properties. assets, liabilities, business or operations of the
Company, whether or not in the ordinary course of business.
3.11 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings
taken by the Company and the Founders prior to or at the Closing in connection
with the transactions contemplated by this Agreement, and all documents and
instruments related thereto, shall be reasonably satisfactory in form and
substance to the Lenders, and the Lenders shall receive such copies thereof and
other materials (certified, if requested) as they may reasonably request in
connection therewith. The issuance and sale of the Debentures to the Lenders
shall be made in conformity with all applicable state and federal securities
laws.
SECTION 4. CLOSING CONDITIONS OF THE COMPANY
The Company's obligations to sell and issue the Debentures shall be
subject to the following conditions, each of which shall be presumed fulfilled
to the Company's satisfaction upon execution of this Agreement by the Company:
4.1 AUTHORIZATION. The Company shall have received a duly executed
certificate of an authorized officer or agent for each of the Lenders setting
forth the basis of such Lender's authorization to consummate the transactions
contemplated hereby in accordance with the terms
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hereof, including, without limitation, the purchase of the Debentures and such
other matters as may be requested by the Company.
4.2 NO VIOLATION OR INJUNCTION. The consummation of the transactions
contemplated by this Agreement shall not be in violation of any law or
regulation, shall not be subject to any injunction, stay or restraining order
and shall not require any filings, approvals or consents which shall not have
previously been made or obtained.
4.3 NO LITIGATION. No litigation, suit, action, claim or investigation
shall be pending, or threatened, which might impair or prevent the performance
of the Company or the Founders hereunder or the transactions contemplated
herein.
4.4 PURCHASE PRICE. The Company shall have received the entire Purchase
Price for the Debentures as specified in Section 1.3.
SECTION 5. FINANCIAL COVENANTS
The Company (which term shall be deemed to include, for purposes of
this Section 5, any subsidiary or subsidiaries of the Company formed after the
date of this Agreement) and, with respect to Section 5.3, each of the Founders
shall comply with the following covenants, from the date hereof and for so long
as any of the Debentures remains outstanding.
5.1 INDEBTEDNESS. The Company will not directly or indirectly, incur,
create, assume, become or be liable in any manner with respect to, or permit to
exist, any Indebtedness or liability, except:
(a) Indebtedness under the Debentures and any other
Indebtedness owed by the Company to the Lenders;
(b) Senior Debt in an aggregate outstanding principal amount
less than or equal to ten percent (10%) of the Company's gross revenues for the
then prior fiscal year as set forth on the audited financial statements
delivered pursuant to Section 6.1 hereof;
(c) Indebtedness (including Indebtedness owed to any
stockholders or affiliates of the Company) as described in SCHEDULE 5. 1 (C) .
(d) Indebtedness with respect to trade obligations (including
trade payables) and other normal accruals, including Taxes, assessments and
other governmental charges, arising in the ordinary course of business and not
yet due and payable, or which are being contested in good faith by appropriate
proceedings, and then only to the extent the amount thereof has been set aside
on the Company's books;
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(e) Indebtedness incurred for purchase money obligations and
Capital Leases, so long as: (i) the pertinent assets are acquired for use in the
ordinary course of the Company's business; and (ii) either the Indebtedness
secured thereby does not exceed the fair market value of such assets or the
purchase price thereof if such assets are acquired directly from the
manufacturer or an authorized dealer thereof, and
(f) Indebtedness in respect of guarantees by the Company to a
third party, to the extent that any such guarantee secures Indebtedness of the
Company which is specifically permitted to be incurred or to remain outstanding
under the provisions of this Section 5. 1.
5.2 LIENS. The Company will not, directly or indirectly, create, incur,
assume or suffer to exist any Lien (as defined below) of any nature whatsoever
on any of its assets (including any leasehold interests in property used by the
Company) or ownership interests now or hereafter owned, other than:
(a) Liens securing the payment of taxes and other government
charges, either not yet due or the validity of which is being contested in good
faith by appropriate proceedings, and as to which the Company shall have set
aside on its books adequate reserves to the extent required by generally
accepted accounting principles and provided that, in any event, payment of any
such tax, assessment, charge, levy or claim shall be made before any of the
Company's property shall be seized and sold in satisfaction thereof;
(b) Liens securing Indebtedness permitted under Sections
5.1(b), 5.1(c) and 5.1(e) above;
(c) Deposits under worker's compensation, unemployment
insurance and social security laws;
(d) Restrictions, easements, and minor irregularities in title
which do not and will not materially interfere with the occupation, use and
enjoyment of the properties of _________ in the normal course of business as
presently conducted or materially impair _________ such, assets for the purpose
of such business;
(e) Liens imposed by law, such as mechanics', materialmen's,
landlords's, _____________ and carriers' Liens and other similar Liens, securing
obligations incurred in _________ course of business which are not past due or
which are being contested in good __________ appropriate proceedings and for
which appropriate reserves have been established;
(f) Liens, deposits or pledges to secure the performance of
bids, tenders, __________ than contracts for the payment of indebtedness),
leases (to the extent _________ the terms of this Agreement), public or
statutory obligations, surety, stay, ___________ity, performance or other
similar bonds, or other similar obligations arising in __________ course of
business;
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(g) Judgment and other similar Liens arising in connection
with court provided that the execution or other enforcement of such Liens is
effectively __________ claims secured thereby are being actively contested in
good faith and by PROCEEDINGS; and
(h) Liens against the fee interest in real property leased by
the Company _______ring obligations of the owner of such property.
5.3 DISTRIBUTIONS OR REDEMPTIONS.
(a) Except as otherwise expressly authorized or permitted by
this ________ the Company will not: (i) make any distributions of cash, property
or securities ___________y with respect to any of its capital stock; (ii)
directly or indirectly redeem, otherwise acquire for consideration any shares of
its capital stock; or make any payments to the Founders.
(b) Notwithstanding the provisions of subsection 5.3(a) above,
the __________, subject to the terms hereof, make periodic cash distributions to
the __________ of the Company in an aggregate amount which does not exceed the
Company's __________ taxable income from January 1, 1994 (less any amounts
distributed prior to ____________ and any withholding excess or other state
taxes payable by the Company and without ________ excess of any original issue
discount deductions attributable to the Debentures __________ cash interest paid
thereon) and after the payment of all Interest on, and _________ the Debentures
which is then due and payable and so long as the Company, _________ to such
stockholder distributions has working capital which is sufficient to __________
business needs as they come (including all payments of interest on ________f,
the Debentures due within, the next year); PROVIDED, HOWEVER, that if the
__________ot properly qualified as an S corporation for federal income tax
purposes at any date hereof, the Company shall for any such periods ending on or
prior to June _________ be permitted to make cash distributions in an amount
equal to the Company's after-tax net income for such periods, and the Company
shall not make any cash distributions after June 30, 1997 unless such
distribution has been approved in advance by both the Company and the Lenders.
(c) If any amounts are distributed to the stockholders with
respect to any period prior to or after the date hereof on the assumption that
the Company was then qualified as an S corporation and it is later determined
that the Corporation was not an S corporation for Federal income tax purposes
during such period, each stockholder, by his signature hereto, agrees to
promptly contribute to the capital of the Company his proportionate share (based
on relative stockholdings at the time of the underlying distribution) of the
lesser of: (i) such distributions; or (ii) the aggregate amount of the Company's
federal and state income tax liabilities for such periods.
(d) The Lenders shall, from time to time and upon ten (10)
business days prior written notice, be entitled to date of each receive a
written statement from the Company setting forth the amount of any payments or
distributions hereunder and a certification by the Founders that such
distributions were in compliance with the terms hereof, together with the
calculations forming the basis for such distributions.
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(e) Notwithstanding the provisions of Section 5.3(a), the
Company may (i) make salary and bonus payments to the Founders as provided in
Section 6.10 hereof, and (ii) repurchase or redeem shares of Common Stock issued
pursuant to stock repurchase agreements under which the Company has the option
to repurchase such shares upon the occurrence of certain events, including the
termination of employment and involuntary transfers by operation of law, at a
repurchase price which does not exceed the purchase price paid to the Company
for such shares.
SECTION 6. OPERATING AND REPORTING COVENANTS
Without the prior written consent of the Lenders, the Company (which
term shall be deemed to include, for purposes of this Section 6, any subsidiary
or subsidiaries of the Company formed after the date of this Agreement) and,
solely to the extent of Sections 6.4 and 6.11, the Founders, shall comply with
the following covenants, for so long as any of the Debentures or any shares of
Convertible Preferred Stock remain outstanding or until the Company shall
successfully complete a Qualified Public Offering, whichever occurs first:
6.1 FINANCIAL STATEMENTS & MINUTES. The Company shall maintain a system
of accounts from which financial statements prepared in accordance with
generally accepted accounting principles consistently applied can be derived,
keep full and complete financial records and furnish to each of the Lenders the
following reports: (a) within 120 days after the end of fiscal year 1994, and
within 90 days after the end of each fiscal year thereafter, a copy of the
balance sheet of the Company as at the end of such year, together with
statements of operations and cash flow of the Company for such year, audited by
independent public accountants of recognized national standing reasonably
satisfactory to the Lenders, prepared on an accrual basis consistently applied,
and, commencing with fiscal year 1995, including in comparative form the
corresponding figures for the prior fiscal period; (b) within 45 days after the
end of each calendar quarter, an unaudited balance sheet of the Company as at
the end of such quarter, and unaudited statements of operations and cash flow
for the Company for such quarter and for the year to date, and, commencing with
fiscal year 1995, including in comparative form the corresponding figures for
the prior fiscal period; (c) within 30 days after the end of each month, an
unaudited balance sheet of the Company as at the end of such month and unaudited
statements of operations for the Company for such month and for the year to
date; (d) as soon as reasonably practicable after any meetings of the Board of
Directors of the Company, copies of the minutes of such meeting; (e) in
connection with the annual and quarterly financial statements delivered pursuant
to clauses (a) and (b) above, a certification from the Chief Financial Officer
of the Company if there exists any default or Event of Default under this
Agreement, or any set of facts or circumstances which, with the giving of notice
and/or the passage of time, could constitute such a default or Event of Default
and stating the relevant facts and the related consequences and what actions the
Company proposes to remedy them; and (f) such other financial information as the
Lenders may reasonably request. The Lenders or their authorized representatives
shall have the right to meet with the Company's independent auditors not less
than once each year to discuss the financial condition and results of operation
of the Company, its financial controls and the accounting principles applied in
the preparation of its financial statements.
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6.2 BUDGET AND STRATEGIC PLAN. The Company shall prepare and submit to
the Lenders a budget and strategic plan for the Company for each fiscal year of
the Company within 45 days after the first day of fiscal year 1995 and at least
30 days prior to commencement of each fiscal year thereafter, commencing fiscal
year 1996. The Company shall review the budget and strategic plan periodically
with the Lenders and shall promptly advise the Lenders of all material changes
therein and all material deviations therefrom.
6.3 CONDUCT OF BUSINESS. The Company will continue to engage
principally in the business now conducted by the Company or a business or
businesses similar thereto or reasonably compatible therewith. The Company will
use its best efforts, in its reasonable business judgment, to keep in full force
and effect its corporate existence and all intellectual property rights owned by
it and useful in its business (except such rights as the Company has reasonably
determined are not material to the Company's continuing operations).
6.4 PAYMENT OF TAXES, COMPLIANCE WITH LAWS, ETC. The Company shall pay
and discharge all lawful taxes, assessments and governmental charges or levies
imposed upon it or its property before the same shall become in default, as well
as an lawful claims for labor, materials and supplies which, if not paid when
due, might become a lien or charge upon its property or any part thereof,
Provided, however, that the Company shall not be required to pay and discharge
any such tax, assessment, charge, levy or claim so long as the validity thereof
is being contested by it in good faith by appropriate proceedings and an
adequate reserve therefor has been established. Each Founder shall pay and
discharge all lawful taxes, assessments, governmental charges or levies imposed
upon him or his property with respect to the earnings of the Company before the
same shall be in default, except those the validity of which are being contested
by them in good faith by appropriate proceedings. The Company will use its best
efforts to comply, in all material respects, with all applicable laws and
regulations in the conduct of its business, to the extent failure to comply
would have a material adverse effect on the Company and its business.
6.5 ADVERSE CHANGES. To the extent not disclosed in the financial
statements to be provided under Section 6.1, the Company will promptly advise
the Lenders of any event which represents a material adverse change in the
condition or business, financial or otherwise, of the Company, and of each suit
or proceeding commenced or threatened against the Company which, if adversely
determined, could result in such a material adverse change.
6.6 INSURANCE. The Company will keep its insurable properties insured,
upon reasonable business terms, against liability, errors and omissions, and the
perils of casualty, fire, business interruption, and extended coverage in
amounts of coverage substantially similar to those customarily maintained by
companies in the same or similar business, and of similar size, as the Company.
The Company will also maintain with such insurers insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner customary for companies engaged in the same or similar business, and of
similar size.
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6.7 LIFE INSURANCE. The Company will use its best efforts to obtain and
maintain, and continue to pay the premiums on, key man life insurance policies
from financially sound and reputable insurers on the life of each of the
Founders in the face amount of $5,000,000, which such policy shall (a) name the
Company as the beneficiary thereof, and (b) not be cancelled or materially
amended or changed without the prior written consent of the Lenders. The Company
will not transfer, borrow against or pledge said policies without the prior
written consent of the Lender. Notwithstanding the foregoing, the Company shall
not be required to obtain or maintain key man life insurance policies on either
of the Founders if the Company and the Lenders jointly determine that the cost
of obtaining or maintaining any such policy is unreasonably expensive.
6.8 MAINTENANCE OF PROPERTIES. The Company, in its reasonable
discretion, will maintain all properties used or useful in the conduct of its
business in good repair, working order and condition, ordinary wear and tear
excepted.
6.9 AFFILIATED TRANSACTIONS. Except as set forth on SCHEDULE 6.9 or
otherwise expressly provided in this Agreement, the Company will not engage in
any transactions with, or make any payments or distributions to or for the
benefit of, or any persons or entities controlled by, related to or affiliated
with either of the Founders, without the prior written consent of the Lenders;
PROVIDED, HOWEVER, that the Company shall be entitled to: (a) make the
distributions to Founders as provided in Section 5.3 hereof; (b) provide the
Founders with such health, disability, pension, profit sharing and other
benefits that are generally available to all officers and employees of the
Company; (c) make salary, bonus and other payments to the Founders as provided
in Section 6.10 hereof, and (d) accept capital contributions from the Founders
on their Common Stock.
6.10 MANAGEMENT COMPENSATION. Compensation paid by the Company to its
management (including the Founders) and other employees will be: (i) both
reasonably comparable to compensation paid to similarly-situated employees in
companies in the same or similar businesses of similar size and maturity and
with comparable financial performance and reasonable in relation to the
Company's overall compensation structure; or (ii) reasonably consistent with the
past practice of the Company as set forth on SCHEDULE 6.10; PROVIDED, HOWEVER,
that in no event shall the Company be required to decrease the cash compensation
payable to any such person below the amounts paid to such persons prior to the
date hereof.
6.11 BOARD OF DIRECTORS; INSPECTION. The Lenders shall be entitled to
send two representatives (the "Lender Representatives") to attend all meetings
of the Board of Directors of the Company, but such Lender Representatives shall
not be considered elected members of the Board of Directors of the Company. The
Company will ensure that meetings of the Board of Directors of the Company are
held at least once each calendar quarter and provide the Lender Representatives
with at least twenty (20) days prior written notice of all Board of Director
meetings as well as copies of all materials provided to the Directors. The
Company will reimburse the Lender Representatives for their reasonable travel
expenses, including the cost of air fare and any necessary meals and lodging,
incurred in connection with attending such meetings or performing such other
business on behalf of the Company as may be approved by the Company in advance.
The Company will notify the Lenders
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in writing five (5) business days prior to the effectiveness of any action to be
taken by written consent of directors or stockholders, except with respect to
ministerial matters, and will provide reasonable opportunity for consultation
with the Lenders with regard to the matters covered thereby during such five-day
period prior to the effectiveness of such consents. The Company's Board of
Directors shall consist, initially, of the two (2) Founders; PROVIDED, HOWEVER,
that the Founders shall use their best efforts to find and appoint at least one
qualified, unaffiliated person willing to serve as a Director of the Company
within twelve (12) months after the Closing Date and the Board of Directors
shall, at that time, be expanded correspondingly. Upon conversion of the
Debentures and for so long as the Lenders continue to hold Debentures,
Convertible Preferred Stock or Conversion Shares representing 15% of the common
equity in the Company on a fully-diluted basis, the Board of Directors shall be
increased so as to permit the Lenders, as a group, to designate two (2)
representatives to be elected as members of the Board of Directors of the
Company and the Founders agree to vote their shares so as to elect the
individuals so designated by the Lenders. The Company shall ensure that the
stock certificates held by the Founders and their Permitted Transferees are
properly legended to reference this voting agreement. The Lenders' Director
designees shall be entitled to reimbursement of all reasonable travel expenses
incurred in connection with their attendance at all Board meetings and the
Lenders' Director designees shall be entitled to receive the same board fees and
other compensation, if any, paid to any outside Directors. The Company will,
upon reasonable prior notice to the Company, permit authorized representatives
of the Lenders to visit and inspect any of the properties of the Company,
including its books of account, and to discuss its affairs, finances and
accounts with its agents, officers and independent accountants, all at such
reasonable times and as often as may be reasonably requested, in all cases so as
not to interfere with the Company's operations or personnel.
6.12 ISSUANCE OF CAPITAL STOCK, CONVERTIBLE SECURITIES, OPTIONS,
WARRANTS OR RIGHTS. The Company covenants and agrees that it will not sell or
issue any shares of capital stock or bonds, certificates of indebtedness,
debentures or other securities convertible into or exchangeable for shares of
capital stock, or options, warrants or rights carrying any rights to purchase
shares of capital stock or convertible or exchangeable securities of the Company
other than pursuant to or as referenced in this Agreement; PROVIDED, HOWEVER,
that the Company may: (a) issue Common Stock, options, stock appreciation rights
or other common stock equivalents to employees of the Company representing up to
395,722 shares of Common Stock with the prior written consent of the Lenders (it
being expressly understood that no third party beneficiary rights are intended
hereby nor shall any be inferred ;(b) engage in a Qualified Public Offering of
its common stock; and (c) issue the Preferred Shares upon conversion of the
Debentures and the Conversion Shares upon conversion of the Convertible
Preferred Stock.
The Lenders may, in their sole discretion, condition any waiver of the
provisions of this Section 6.12 upon the Company offering each of the Lenders
(on a pro rata basis with an overallotment option as to any amounts thereof not
taken up by any other Lender) the right to participate in all or any portion of
such proposed financing, on the most favorable terms and conditions proposed to
be extended by the Company.
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6.13 MERGER, CONSOLIDATION, REORGANIZATION, SALE OF ASSETS,
ACQUISITION. The Company will not: (a) sell, lease or otherwise dispose of
(whether in one transaction or a series of related transactions) all or any
substantial portion of its assets, other than sales of inventory in the ordinary
course of business, sales of obsolete assets and sales of other assets in any
one fiscal year which have a book value of less than $100,000; (b) merge with or
into or consolidate with another corporation, partnership or other entity (other
than a wholly-owned subsidiary or in connection with an acquisition permitted
under clause (c) below); or (c) acquire any other corporation or business
concern, whether by acquisition of assets, capital stock or otherwise, and
whether in consideration of the payment of cash, the issuance of shares of
capital stock or otherwise where the consideration of any individual acquisition
exceeds $1,000,000 or the consideration for all such acquisitions in the
aggregate exceeds $5,000,000, and subject to the other limitations contained
herein.
6.14 NO AMENDMENTS TO CHARTER DOCUMENTS. The Company will not make any
amendment or modification to, or waiver of any of the terms of, the Company's
Amended and Restated Articles of Incorporation.
6.15 RESTRICTIONS ON OTHER AGREEMENTS. Other than as provided in or
contemplated by Section 11 of this Agreement, the Company will not enter into
any agreement with any party which by its express terms: (a) restricts the
payments due the holders of the Debentures; or (b) otherwise conflicts with or
impairs any of the rights or privileges granted to the Lenders hereunder.
6.16 ENFORCEMENT OF EMPLOYEE CONFIDENTIALITY AND INVENTION ASSIGNMENT
AGREEMENTS AND NON-COMPETITION AGREEMENTS. The Company agrees that it will
diligently enforce all of its rights under: (a) the Non-Competition Agreements
referred to in Section 3.3 hereof; and (b) subject to the exercise of its
reasonable judgment, the employee confidentiality and inventions assignment
agreements referred to in Section 3.14 hereof, in its reasonable discretion.
6.17 STAY, EXTENSION AND USURY LAWS. For so long as any of the
Debentures remain outstanding, the Company covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Agreement; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impede the execution of any power herein granted to the
Lenders, but will suffer and permit the execution of every such power as though
no such law has been enacted.
Notwithstanding anything herein or in the Debentures which may be to
the contrary, in no event, contingency, or circumstances whatsoever shall the
interest or any amount deemed to be interest payable by the Company hereunder
with respect to the Debentures exceed the maximum amount permitted by applicable
law and, to the extent that any payments in excess of such permitted amount are
finally determined to have been received by the Lenders, such excess shall be
considered payments in respect of the principal of the Debentures, and, if the
principal of the Debentures has
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been paid in full, shall be refunded to the Company. All sums paid or agreed to
be paid to any Lender for the use, forbearance, or detention of the Debentures
shall, to the extent permitted by law, be amortized, prorated, allocated, and
spread throughout the entire term of the Debentures.
SECTION 7. CONVERSION
At any time upon and after the earliest of: (a) June 30, 1997; (b) the
Company successfully completing an initial public offering of its Common Stock;
(c) the Company selling, leasing or otherwise disposing of all or any
substantial portion of its assets other that in the ordinary course of business;
(d) the Company merging or consolidating with or into another corporation,
partnership or other entity (other than as expressly permitted under Section
6.13 above); (e) the Founders transferring, selling or otherwise disposing of
any of their ownership interest in the Company other than as expressly permitted
under Section 9, (f) the Company's issuance of a written notice to the Lenders
exercising its voluntary prepayment right; or (g) the occurrence of an Event of
Default pursuant to subsection (f) or (g) of Section 8.1 hereof (following any
applicable remedy period, including the 60 day period in which an Involuntary
Petition may be dismissed or, stayed), Lenders holding a majority in interest of
the Debentures may, upon 30 days prior written notice, require that all of the
then outstanding Debentures be converted into 22,556.14 shares of Convertible
Preferred Stock and for each $1,000 in principal amount of the Debentures being
converted one (1) share of Redeemable Preferred Stock; PROVIDED, HOWEVER, that
in the event that any principal of the Debentures shall have been prepaid prior
to conversion, such prepayment shall only reduce the amount of Redeemable
Preferred Stock received upon conversion and shall not reduce the amount of
Convertible Preferred Stock received upon such conversion. Except as
contemplated by Section 9.3 hereof, no partial conversion of the Debentures
shall be permitted.
Notwithstanding anything in this Agreement to the contrary, the
Debentures: (a) may be partially converted pursuant to Section 9.3 hereof; and
(b) may not be prepaid as a result of the events set forth in Section 1.2(f)
hereof unless the Lenders shall have (i) received at least sixty (60) days prior
written notice of such event and the related prepayment of the Debentures and
(ii) been afforded an opportunity to convert the Debentures prior to the
consummation of such event. In connection with the conversion of Debentures
under this Section 7, the Company shall pay to the Lenders, in cash, all accrued
but unpaid Interest on the Debentures through the date of such conversion and
each Leader shall surrender all of its Debentures, marked cancelled, and
acknowledged by the Lenders to be paid-in-full, to the Company at the Company's
principal office in exchange for the shares of Convertible Preferred Stock and
Redeemable Preferred Stock and interest payments described above. Upon delivery
of the Debentures to the Company, marked cancelled, the Lenders shall be deemed
to be shareholders in the Company holding their respective shares of Convertible
Preferred Stock and Redeemable Preferred Stock. The Company shall make such
filings as are required and obtain all necessary consents and approvals
necessary to consummate such conversion, including, if applicable, all necessary
filings and approvals under Title 11 of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. The Company shall take all other action
that the Lenders may reasonably request to evidence and effectuate the Lenders
becoming shareholders holding shares of Convertible Preferred Stock and
Redeemable Preferred Stock in the Company. The Company will comply with
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all applicable state "blue sky" or securities laws in connection with the
issuance and sale of the Debentures, any of the securities into which the
Debentures may be converted and the other securities issued by the Company. Upon
such conversion, the Company's Board of Directors shall be expanded to include
an additional two members in accordance with Section 6.11 hereof.
SECTION 8. EVENTS OF DEFAULT; REMEDIES
8.1 EVENTS OF DEFAULT.
In each case of the happening of the following events while any of the
Debentures are outstanding (each of which is herein sometimes referred to as an
"Event of Default"):
(a) if a default occurs in the payment of any premium,
installment of the principal of, interest on, or other obligation with respect
to, the Debentures, whether at the due date thereof or upon acceleration
thereof, and, solely in the case of any such default in the payment of interest,
charges, fees or expenses, such default continues for more than five (5) days
after the due date thereof; i
(b) if any material representation or warranty made herein or
in any agreement executed in connection with, or in any schedule, certificate,
financial statement or other instrument furnished in connection with, this
Agreement shall prove to have been false or misleading when made in any material
respect;
(c) if a default occurs in the due observance or performance
of any covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the provisions of Sections 5, 6.9, 6.10, 6.12
or 6.13 of this Agreement and such default remains uncured for thirty (30) days
after the occurrence thereof, or for such longer period if the default cannot
reasonably be cured within such 30-day period and the Company is diligently
pursuing cure of the default, but in no event for a period greater than 90 days
after written notice thereof has been delivered by the Lenders to the Company,
PROVIDED, HOWEVER, that if such default cannot be remedied, then such default
shall be deemed to be an Event of Default as of the date of the occurrence
thereof,
(d) if a default occurs in the due observance or performance
of any covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to any of the provisions of this Agreement not
referenced in subsections (b) or (c) above and such default remains uncured for
forty-five (45) days after written notice thereof has been delivered by the
Lenders to the Company, or for such longer period if the default cannot
reasonably be cured within such 45-day period and the Company is diligently
pursuing cure of the default, but in no event for a period greater than 90 days
after written notice thereof has been delivered by the Lenders to the Company,
PROVIDED, HOWEVER , that if such default cannot be remedied, then such default
shall be deemed to be an Event of Default as of the date of the occurrence
thereof;
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(e) if a default occurs with respect to any other Indebtedness
of the Company for borrowed money in an aggregate amount in excess of $500,000
and such default is not remedied or waived within thirty (30) days of the date
thereof;
(f) if the Company shall (i) discontinue its business, (ii)
apply for or consent to the appointment of a receiver, trustee, custodian or
liquidator of it or any of its property, (iii) admit in writing its inability to
pay its debts as they mature, (iv) make a general assignment for the benefit of
creditors, or (v) file a voluntary petition in bankruptcy, or a petition or an
answer seeking reorganization or an arrangement with creditors, or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation laws or statutes, or an answer admitting the material
allegations of a petition filed against it in any proceeding under any such law,
or if corporate action shall be taken for the purpose of effecting any of the
foregoing;
(g) there shall be filed against the Company an involuntary
petition seeking reorganization of the Company or the appointment of a receiver,
trustee, custodian or liquidator of the 'Company or a substantial part of its
assets, or an involuntary petition under any bankruptcy, reorganization or
insolvency law of any jurisdiction, whether now or hereafter in effect (any of
the foregoing petitions being hereinafter referred to as an "Involuntary
Petition");
(h) if final judgment(s) from a court of competent
jurisdiction for the payment of money in excess of an aggregate of $500,000
shall be rendered against the Company and the same shall remain unstayed or
undischarged for a period of thirty (30) consecutive days, during which time
execution shall not be effectively stayed; or
(i) if there occurs any attachment of any property of the
Company in an amount exceeding $500,000, which shall not be discharged or bonded
within thirty (30) days of the date of such attachment;
then, upon each and every such Event of Default and at any time thereafter
during the continuance of such Event of Default at the election of the Lenders,
the Debentures shall immediately become due and payable, both as to principal
and interest, without presentment, demand, or protest, all of which are hereby
expressly waived, anything contained herein or in the Debentures to the contrary
notwithstanding (except in the case of an Event of Default under subsections (f)
or (g) of this Section, in which event such Indebtedness shall automatically
become due and payable). In the event of an acceleration of the Debentures as a
result of the filing of an Involuntary Petition as specified in subsection (g)
of this Section, such acceleration shall be rescinded, and the Company's rights
hereunder reinstated, if, within sixty (60) days following the filing of such
Involuntary Petition, such Involuntary Petition shall have been dismissed or
stayed, and there shall exist no other Event of Default under this Agreement.
8.2 REMEDIES ON DEFAULT, ETC. In case any one or more Events of Default
shall occur and be continuing, the Lenders may proceed to protect and enforce
their rights by an action at law, suit in equity or other appropriate
proceeding, whether for the specific performance of any agreement
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contained in this Agreement or the Debentures, or for an injunction against a
violation of any of the terms hereof or thereof or in and of the exercise of any
power granted hereby or thereby or by law. No right conferred upon the Lenders
hereby or the Debentures shall be exclusive of any other right referred to
herein or therein or now or hereafter available at law, in equity, by statute or
otherwise. Notwithstanding anything in this Agreement or the Debentures to the
contrary, the Lenders shall only have recourse against the Founders hereunder,
whether on account of an Event of Default or otherwise, for: (i) fraud; (ii)
intentional or knowing misrepresentation; or (iii) breach by the Founders of
Sections 5.3, 6.9 or 6.10, and . in no event shall the Lenders be entitled,
except as otherwise provided hereunder or in Section 12 hereof, to seek payment
from the Company or the Founders in excess of the then outstanding principal
amount of the Debentures, all accrued interest thereon and any collection costs
incurred by the Lenders.
SECTION 9. FOUNDER COVENANT
Until the Company shall successfully complete a Qualified Public
Offering, each of the Founders shall comply with the following covenant during
the period that any of the Debentures or any shares of Convertible Preferred
Stock remain outstanding. The Company shall ensure that the stock certificates
held by the Founders and their Permitted Transferees are properly legended to
reference these restrictions on transfer.
9.1 PROHIBITED AND PERMITTED TRANSFERS; DEFINITIONS.
(a) From and after the Closing Date, neither of the Founders
shall sell, assign, transfer, pledge, hypothecate, mortgage, encumber or dispose
of all or any of his Shares except in compliance with the terms of this Section
9. Notwithstanding the foregoing, the Founders' Shares may be transferred
without complying with Sections 9.2 or 9.3 hereof as provided in the following
clauses (individuals receiving shares from the Founders pursuant to any of the
following permitted transfers are collectively referred to as the "Permitted
Transferees"): (i) by way of gift to their respective spouse or to their
siblings or lineal descendants or ancestors or to any trust for the benefit of
any one or more of the foregoing or to an unleveraged partnership or corporation
in which all of the equity interests are beneficially owned by any one or more
of the foregoing; provided that any such transferee shall agree in writing with
the Lenders, as a condition to such transfer, to be bound by all of the
provisions of this Agreement with respect to such Shares to the same extent as
the Founders and provided, further, that such transfers in the aggregate
represent less than 50% of the applicable Founder's Shares; (ii) by any sale or
disposition of Shares pursuant to a registered public offering in which the
Lenders have rights to participate pursuant to the Registration Rights
Agreement; (iii) any transfer, disposition, assignment, sale or hypothecation of
Shares pursuant to a merger or consolidation of the Company with any other
entity approved by the Lenders; or (iv) any transfer upon the death of a
Founder.
(b) As used in this Section 9, "Shares" shall mean and
include: (i) with respect to the Lenders, all Debentures, and all shares of
Convertible Preferred Stock, Conversion Shares and Redeemable Preferred Stock
into which the Debentures are ultimately convertible; (ii) with respect
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to the Founders (which term, for the purpose of this Section 9 shall be deemed
to include all Permitted Transferees of the Founders), all shares of Common
Stock, and any options or other securities exercisable or convertible into
Common Stock and/or other capital stock of the Company now owned or hereafter
acquired by any of the Founders or their Permitted Transferees and, in each case
together with any securities acquired as a result of any conversion, stock
split, stock dividend, recapitalization or the like. For all purposes of this
Section 9, options and other securities convertible into or exchangeable for
capital stock shall be deemed to be equivalent to the number of shares of
capital stock which they may be exercised for or converted into, as of the
applicable date, with appropriate adjustments to reflect applicable exercise
prices, if any.
9.2 RIGHT OF FIRST REFUSAL.
(a) If at any time either of the Founders desires to sell or
otherwise transfer all or any part of his Shares pursuant to a bona fide offer
from a third party (the "Proposed Transferee"), such Founder shall submit a
written offer (the "Offer") to sell such Shares (the "Offered Shares") to the
Lenders or the then holders of the Debentures on terms and conditions including
price, not less favorable than those on which such Founder proposed to sell such
Offered Shares to the Proposed Transferee. The Offer shall be submitted to the
Lenders at least 45 days prior to the proposed transfer and shall disclose the
identity of the Proposed Transferee, the number of Offered Shares proposed to be
sold, the total number of Shares owned by such Founder, the terms and
conditions, including price, of the proposed sale, and any other material facts
relating to the proposed sale. The Offer shall further state that the Lenders
and/or their designees and assigns may purchase all, but not less than all, of
the Offered Shares for the price and upon the other terms and conditions,
including deferred payment (if applicable), set forth therein and shall also
advise the Lenders of their co-sale rights pursuant to Section 9.3 hereof,
provided, however, that notwithstanding anything contained herein to the
contrary, (i) the Lenders may assign all or a portion of their rights to accept
the Offer to their respective affiliates who are not direct customers or
competitors of the Company and (ii) any such assignment shall only be permitted
with respect to a proposed sale by the Founders where the sale price equals or
exceeds $10 million. Each Lender who desires to purchase any of the Offered
Shares shall communicate in writing its election to purchase to the applicable
Founder, which communication shall state the number of Offered Shares that such
Lender desires to purchase, and shall be given within 30 days of the date on
which notice of the Offer is given. In the event that the Lenders elect to
purchase an aggregate number of Offered Shares that is greater than the number
of Offered Shares, then each Lender will be deemed to have elected to purchase
that number of Offered Shares that is equal to the total number of Offered
Shares multiplied by a fraction, the numerator of which is the total number of
Offered Shares that such Lender elected to purchase and the denominator of which
is the total number of Offered Shares that all of the Lenders electing to
purchase Offered Shares elected to purchase.
(b) Any communication of acceptance from the Lenders shall,
when taken in conjunction with the Offer and except as provided in Section
9.2(c) hereof, be deemed to constitute a valid, legally binding and enforceable
agreement for the sale and purchase of such Offered Shares. Sales of the Offered
Shares to be sold to the Lender shall be made at the offices of the Company
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within 60 days after the Offer was first made. Such sale shall be effected by
the applicable Founder's delivery of a certificate or certificates evidencing
the Offered Shares to be sold, duly endorsed for transfer against payment of the
purchase price therefor.
(c) If the Lenders collectively do not elect to purchase all
of the Offered Shares, none of the Offered Shares shall be sold to or purchased
by the Lenders, and the Offered Shares may be sold by the applicable Founder(s)
at any time within the 90-day period after the expiration of all applicable
periods referred to in Section 9.3(b) hereof. Any such sale shall be to the
Proposed Transferee(s), at not less than the price and upon other terms and
conditions, if any, not, more favorable to the Proposed Transferee(s) than those
specified in the Offer and shall be subject to Section 9.3 hereof. Any Offered
Shares not sold within such 90-day period shall continue to be subject to the
requirements of this Section 9.2 and Section 9:3 hereof. If Offered Shares are
sold pursuant to this Section 9.2 to any person who is not a party to this
Agreement, the Offered Shares so sold shall no longer be subject to the
restrictions or benefits imposed by this Section 9.2.
(d) The Lenders may assign their rights under this Section 9.2
to any transferee of Debentures or securities of the Company (or its successors)
held by them upon conversion of the Debentures or an affiliate; provided,
however, that no assignment may be made to any entity which is (or which has an
affiliate which is) a direct competitor or customer of the Company.
9.3 RIGHT OF PARTICIPATION IN SALES.
(a) If at any time either Founder or his Permitted Transferees
desire to sell all or any part of the Shares owned by them to any person other
than to a Permitted Transferee or to the Lenders pursuant to Section 9.2 (such
person or entity referred to herein as a "Third Party Purchaser"), each, Lender
shall have the right to sell to the Third Party Purchaser, as a condition to
such sale by the applicable Founder, at the same price per share and otherwise
upon other terms and conditions that are in the aggregate the same as involved
in such sale by such Founder, up to such Lender's Pro Rata Share (as defined
below) of the total number of Shares proposed to be sold by such Founder and/or
his Permitted Transferees (subject to subsection (b) below). For purposes of
this Section 9.3, the term "Pro Rata Share" shall mean the percentage of voting
stock that the Debentures, Convertible Preferred Shares and Conversion Shares
held by the Lenders then represent on a fully-diluted basis of all voting stock
then outstanding. In connection with the exercise of their rights hereunder, the
Lenders shall, notwithstanding anything herein or in the Company's charter to
the contrary, be entitled to partially convert the Debentures.
(b) At the time of the initial notice described in Section
9.2(a) above, any transferring Founder shall also provide each Lender with a
calculation as to the number of shares that may be sold by them to the Third
Party Purchaser pursuant to this Section 9.3. Each Lender wishing to participate
in any sale under this Section 9.3 shall notify the transferring Founder in
writing within 30 days after the giving of the notice described in Section
9.2(a). Except as provided in Section 9.3(d) below, no Shares may be purchased
by the Third Party Purchaser from the transferring Founder unless the Third
Party Purchaser simultaneously purchases from the Lenders all Shares which
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they have elected to sell pursuant to this Section 9.3, with the sales to such
Third Party Purchaser to be consummated not prior to the expiration of all
notice periods described in this Section 9.3(b) and (in the case of the
transferring Founder) not after the expiration of the 90-day period described in
Section 9.2(c).
(c) Any Shares sold to a Third Party Purchaser pursuant to
this Section 9.3 shall no longer be subject to the restrictions or benefits
imposed by this Section 9.3.
(d) If the Lenders do not hold securities of the type being
offered under this Section 9.3 by the transferring Founder, (i) the Lenders
shall have the right to convert and sell such portion of their securities as is
convertible into the number of securities (or equivalent securities) which the
Lenders would otherwise have been entitled to sell under this Section 9.3 to the
Third Party Purchaser, and (ii) in the event that the Lenders hold Debentures
and, notwithstanding anything herein or in the Company's charter to the
contrary, they shall be entitled to payment from the Company of all accrued but
unpaid Interest through the sale date and any portion of the principal which is
not convertible into equity securities that are substantially equivalent to the
Shares held by the transferring Founder.
(e) The Lenders may assign their rights under this Section 9.3
to any transferee of Debentures or securities of the Company (or its successors)
held by them upon conversion of the Debentures; PROVIDED, HOWEVER, that no
assignment may be made to any entity which is (or which has an affiliate which
is) a competitor or customer of the Company.
SECTION 10. REPRESENTATIONS AND WARRANTIES OF THE LENDERS
10.1 REPRESENTATION OF LENDERS. In order to induce the Company and the
Founders to enter into this Agreement, each Lender hereby severally represents
and warrants to and agrees with the Company and each of the Founders with
respect to such Lender's purchase of Debentures hereunder that as of the date
hereof:
(a) The execution of the Agreement has been duly authorized by
all necessary action on the part of the Lender, and this Agreement has been duly
executed and delivered, and constitutes a valid, legal and binding agreement of
the Lender enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy and other laws of general application
relating to creditor's rights or general principles of equity. The Lender
understands and acknowledges that there can be no assurances that the conversion
privilege on the Debentures will be of any future value or that it is
substantially certain to be exercisable.
(b) The Lender is acquiring the Debentures for its own
account, for investment, and not with a view to any "distribution" thereof
within the meaning of the Securities Act. The Lender has not been formed for the
specific purpose of making the investment contemplated by this Agreement, the
information concerning the state of residence of each Lender supplied to counsel
for the Company is true and correct as of the date hereof and, except with
respect to TA Venture
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Investors, the Lender is an "accredited investor, as defined under the
Securities Act and the regulations promulgated thereunder. The Lender will not
transfer any interests in the Debentures, or any shares of Convertible Preferred
Stock, Redeemable Preferred Stock or Conversion Shares unless such transfers are
(i) registered under all applicable federal and state securities laws or are
exempt from such registration or (ii) exempt from registration; provided,
however, that in no event shall any transfers be made to entities who are direct
competitors or customers of the Company.
(c) The Lender understands that because the Debentures have
not been registered under the Securities Act, it cannot dispose of any or all of
the Debentures unless such Debentures are subsequently registered under the
Securities Act or exemptions from such registration are available. The Lender
acknowledges and understands that, except as provided in the Registration Rights
Agreement, it has no independent right to require the Company to register the
Debentures, that the Company has no intention to register the Debentures, and
that the Company may not accomplish a public offering of the Debentures or the
securities into which they are convertible.
(d) The Lender is knowledgeable and experienced in the making
of investments in private enterprises, is able to bear the economic risk of loss
of its investment in the Company, has been granted the opportunity to
investigate the affairs of the Company, and has availed itself of such
opportunity either directly or through its authorized representative.
(e) The Lender has been advised that the Debentures have not
been and are not being registered under the Securities Act or under the
securities or "blue sky" laws of any jurisdiction and that the Company in
issuing the Debentures is relying upon, among other things, the representations
and warranties of each Lender contained in this Section 10 in concluding that
each such issuance is a "private offering" and does not require compliance with
the registration provisions of the Securities Act.
(f) The Company will not be responsible for, and the Lender
will hold the Company and the Founders harmless from, brokerage commissions,
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement which are based on any arrangement or agreement
expressly made by or on behalf of the Lender.
(g) The Lender has had access to or been supplied with all
material information. regarding the Company, its financial condition and
historical results of operations, and all questions concerning the Company have
been answered to its satisfaction.
(h) The Lender agrees that all representations contained in
this Section shall be repeated and reaffirmed at the time of each subsequent
conversion of the Debentures into Shares of the Convertible Preferred Stock and
Redeemable Preferred Stock, or conversion of the Convertible Preferred Stock
into Conversion Shares.
10.2 CONFIDENTIALITY. Each Lender agrees and covenants with the Company
that until the Company has completed an initial public offering, it will keep
all Confidential Information strictly
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confidential and shall not publicly disclose any part or all of the Confidential
Information for any reason whatsoever without the consent of the Company;
PROVIDED, HOWEVER, that this Section 10.2 shall not prohibit any of the Lenders
from disclosing the Company's financial results or condition in periodic reports
to their respective investors or as otherwise required by applicable law.
For purposes of this Section 10.2, "Confidential Information" shall
mean all information disclosed by the Company in writing as and only to the
extent it involves development, design, production, testing or manufacturing of
the products of the Company or the financial results of the Company's operation
prior to the completion of a public offering or a sale of the Company.
Notwithstanding the foregoing, Confidential Information shall not include
information which is: (i) already in a Lenders' possession at the time of its
disclosure to such Lender or is subsequently developed or discovered by the
Lenders without the use of Confidential Information of the Company, (ii) is
generally known to the public or in the trade, or becomes so known other than as
a result of a breach of the Lenders' obligations hereunder, (iii) is disclosed
to the Lenders on a nonconfidential basis by a person other than the Company,
provided that such person is not known by the Lenders to be in violation of a
confidentiality agreement with the Company in making such disclosure.
10.3 CALL RIGHT ON CONVERSION SHARES.
(a) At the election of the Company, the Company may repurchase
all, but not less than all, of the Conversion Shares then outstanding at any
time between December 1, 2000 and December 1, 2001, so long as: (i) the Company
has not completed a public offering of its Common Stock under the Securities Act
of 1933, as amended, on or prior to such date; and (i) the Redeemable Preferred
Stock shall have been redeemed in full on or prior to such date. If the Company
elects to repurchase the Conversion Shares, it shall give written notice of such
election at least 90 days prior to the date of repurchase, together with the
Company's estimate of the Fair Market Value of the Conversion Shares and the
date of repurchase, to the holders of the Conversion Shares and all of the
Conversion Shares shall be repurchased on, or within 90 days after, the date
specified for repurchase in the Company's notice (the "Repurchase Date") for a
per share cash purchase price equal to the Fair Market Value (as determined in
Section 3(d) below) of the Conversion Shares plus any accumulated and unpaid
dividends (the "Repurchase Price"). On or after the Repurchase Date, each holder
of Conversion Shares called for repurchase shall surrender the certificate
evidencing such shares to the Company.
(b) From and after the Repurchase Date, unless there shall
have been a default in payment or tender by the Company of the Repurchase Price,
all rights of the holders with respect to such repurchased Conversion Shares
(except the right to receive the Repurchase Price in accordance with the terms
hereof upon surrender of their certificate) shall cease and such shares shall
not thereafter be transferred on the books of this Company or be deemed to be
outstanding for any purpose whatsoever; PROVIDED HOWEVER that the holders of the
Conversion Shares shall, in the event of an offering by the Company of equity
securities or securities convertible into or exchangeable for equity securities,
a sale of all or any substantial portion of the asset or outstanding capital
stock of the Company or a merger or consolidation of the Company with or into
another corporation or entity,
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in any such case occurring within two years of the Repurchase Date, be entitled
upon the consummation of such transaction to receive the excess of: (i) the
consideration which such holders would have been entitled to receive on their
Conversion Shares had they been outstanding on such date or, in the event of a
securities offering, been sold in such offering; over (ii) the aggregate
Repurchase Price previously received by such holders.
(c) If the funds of the Company legally available for
repurchase of the Conversion Shares on the Repurchase Date are insufficient to
repurchase the total number of Conversion Shares, the Company shall use those
funds which are legally available to redeem the maximum possible number of such
shares ratably among the holders of such Conversion Shares to be repurchased. At
any time thereafter when additional funds of the Company are legally available
for the repurchase of the Conversion Shares, such funds will immediately be used
to repurchase the balance of the Conversion Shares which the Company has become
obligated to repurchase on the Repurchase Date but which it has not redeemed at
the Repurchase Price together with any accrued interest thereon as provided
below. If any Conversion Shares are not repurchased because the Company failed
to pay or tender to pay the aggregate Repurchase Price on all outstanding
Conversion Shares, all Conversion Shares which have not been repurchased shall
remain outstanding and entitled to all the rights and preferences provided
herein, and the Company shall pay interest on the unpaid portion of the
Repurchase Price on the remaining Conversion Shares at an aggregate per annum
rate equal to twenty percent (20%) or the maximum rate of interest permitted
under applicable law, whichever is less.
(d) If the holders of a majority in interest of the Conversion
Shares do not object in writing to the Company's estimate of the Fair Market
Value of the Conversion Shares within fifteen (15) days after receipt of the
Company's written notice of redemption, such estimate shall be the Fair Market
Value for purposes of determining the Redemption Price of the Conversion Shares.
If the holders of the Conversion Shares do timely object to the Company's
estimate of Fair Market Value, the Company and such holders shall seek for a ten
(10) day period thereafter to negotiate the Fair Market Value in good faith. If
the Company and the holders of a majority in interest of the Conversion Shares
are unable to agree upon such Fair Market Value by the end of such period, each
of the Company and the holders (acting by a majority in interest) shall, within
ten (10) days thereafter, select an unaffiliated investment banking firm of
nationally recognized standing in the software industry to appraise the Fair
Market Value of the Conversion Shares. Each such firm will deliver its appraisal
of the Fair Market Value within fifteen (15) days thereafter, and if the lower
appraisal is at least 90% of the higher appraisal, the arithmetic mean of the
two shall be the Fair Market Value. If the two appraisals vary by more than 10%,
the two firms shall promptly select a third investment banking firm of
nationally recognized standing in the software industry. Such third firm shall,
within ten (10) days thereafter, deliver its appraisal of the Fair Market Value
of the Conversion Shares, the two appraisals which are closest together in value
shall be averaged and such amount shall be the Fair Market Value for purposes of
determining the Redemption Price. The Fair Market Value of the Conversion Shares
shall be determined: (i) without regard to the illiquid nature of such stock or
for any discount attributable to the minority interest represented by such
stock; (ii) with the Company valued as a going concern (including all net
working capital); and (iii) on the basis of what a willing
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buyer would pay to a seller under no compunction to sell. All costs of the
appraisals hereunder shall be borne by the Company.
SECTION 11. INTERCREDITOR MATTERS
11.1 SUBORDINATION TO PAYMENT. Notwithstanding anything in this
Agreement, in the Debentures or in any of the other documents and instruments
executed and, or, delivered pursuant thereto or in connection therewith to the
contrary, the Debentures shall be subordinate and junior in right of payment to
the Senior Debt of the Company to the extent and in the manner set forth in this
Section 11. Except as specifically provided for otherwise in this Section 11,
payments an account of the Debentures may be made by the Company and such
payments may be received and retained by the Lenders as and when due.
11.2 BANKRUPTCY OR LIQUIDATION. Upon the event of: (a) any insolvency
or bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings with respect to the Company; (b) any proceedings for
voluntary liquidation, dissolution or other winding up of the Company (whether
or not involving insolvency or bankruptcy proceedings); or (c) any distribution,
division or application, partial or complete, voluntary or involuntary, by
operation of law or otherwise, of all or substantially all of the property,
assets or business of the Company or the proceeds thereof to any creditor or
creditors other than in the ordinary course of business (including without
limitation any marshaling of assets), all Senior Debt shall be paid in full in
cash (or other property acceptable to the holders of Senior Debt in their sole
determination) before any payment or distribution, direct or indirect, whether
in cash, securities, property or otherwise, shall thereafter be made on the
Debentures; PROVIDED, HOWEVER, that this provision shall not preclude the
Lenders from (i) exercising their conversion rights under Section 7 hereof and
receiving the Preferred Shares issuable upon such conversion or (ii) exchanging
the Debentures for other securities which are subordinated in right of payment
to the Senior Debt on terms which are no more favorable to the Lenders than the
terms of this Section 11.
11.3 PAYMENT DEFAULT ON SENIOR DEBT. Except as specifically provided
otherwise in Section 11.8 hereof, during the continuance of any default (without
regard to any applicable grace or cure periods) in the payment of any sums
(principal, interest or otherwise) due and payable on any Senior Debt (whether
as a result of a periodic payment, maturity, acceleration or a mandatory
prepayment), no payment on the Debentures, direct or indirect, whether in cash,
securities, property or otherwise, shall be made after written notice of the
foregoing default is given to the Company and the Lenders, unless and until the
default under such Senior Debt shall have been cured in full or arrangements for
such cure, which are accepted in writing by the holder of such Senior Debt,
shall have been made.
11.4 NON-PAYMENT DEFAULT ON SENIOR DEBT. Except as specifically
provided otherwise in Section 11.8 hereof, upon the occurrence of a default on
any Senior Debt (without regard to any applicable grace or cure periods), other
than a default described in Section 11.2 or 11.3 above, no payment on
Debentures, direct or indirect, whether in cash, property, securities or
otherwise shall be made from the date that written notice of the foregoing
default is given to the Company and the
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Lenders and for a period of 120 days thereafter, unless and until the default
under such Senior Debt shall have been cured in full or arrangements for such
cure, which are accepted in writing by the holder of such Senior Debt, shall
have been made PROVIDED; HOWEVER , that: (i) no more than two (2) payment
blockage periods may be declared hereunder in any 365-day period; and (ii) no
default may be cited as the basis for two (2) separate payment blockages in any
365-day period.
11.5 LIMITATION ON THE EXERCISE OF CERTAIN RIGHTS. The Lenders agree
that, upon written notice to it from any holder of Senior Debt specifying such
holder's name and address, they will not thereafter, without at least one day's
prior written notice to the holder of such Senior Debt, make any request or
demand for, accelerate or bring any action with respect to, the payment of the
Debentures.
11.6 SUBROGATION. Upon the payment in full of all Senior Debt, the
Lenders shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of assets of the Company made on the Senior
Debt until all of the obligations or the Debentures shall be paid in full.
Except as may be otherwise ordered by a court with respect to the payments
contemplated under Section 11.2 hereof, no payments or distributions to the
holders of the Senior Debt of cash, property, securities or otherwise (including
any amounts paid on account of the Debentures which are subsequently paid over
to or held in trust for the benefit of the holders of any Senior Debt) shall, as
between the Company, the Lenders and the Company's other creditors, be deemed to
be a payment by the Company on account of the Debentures. The provisions of this
Section 11 are intended solely to define the relative rights of the Lenders, on
the one hand, and the holders of Senior Debt, on the other hand, VIS A VIS, the
Company.
11.7 ABSOLUTE OBLIGATION. Nothing contained in this Section 11 is
intended to or shall impair, as among the Company, its creditors other than
holders of Senior Debt and the Lenders, the obligation of the Company, which is
absolute and unconditional, to pay to the Lenders any and all sums outstanding
under the Debentures as and when the same shall become due and payable in
accordance with the terms thereof. Nor is anything contained in this Section 11
intended to: (a) affect the relative rights of the Lenders and creditors of the
Company other than the holders of Senior Debt, or (b) prevent the Lenders from
exercising all remedies otherwise permitted by applicable law upon default,
subject to the limitations set forth in Section 11.5 hereof and to the rights
under this Section III of the holders of Senior Debt with respect to cash,
property or securities of the Company received upon the exercise of any such
remedy. The failure of the Company to make any payment on the Debentures by
reason of any provision of this Debenture shall not be construed as preventing
the occurrence of an Event of Default under Section 8.
11.8 CONVERSION. Nothing contained in this Section 11 shall be deemed
to Prohibit the rights of the Lenders to convert the Debentures pursuant to
Section 7 hereof and to receive the Preferred Shares issuable upon such
conversion.
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SECTION 12. INDEMNIFICATION
(a) The Company shall, to the full extent permitted by law,
and in addition to any such rights which any Indemnified Party (as defined
herein) may have pursuant to statute, the Company's charter, the Company's
by-laws, or otherwise, indemnify and hold harmless each Lender (including its
respective directors, officers, partners, employees and agents, an Indemnified
Investor") and each person (a "Controlling Person" and collectively with
Indemnified Investors, the "Indemnified Parties") who controls any of them
within the meaning of Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all losses, claims,
damages, expenses and liabilities, joint or several, including any
investigation, legal and other expenses incurred in connection with the
investigation, defense, settlement or appeal of, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted ("Losses" or
"Loss"), to which they, or any of them, may become subject by reason of their
status as a security holder, creditor, director, agent, representative or
controlling person of the Company, (including, without limitation, any and all
Losses under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise, which relates directly
or indirectly to the registration, purchase, sale or ownership of any securities
of the Company or to any fiduciary obligation owed with respect thereto);
PROVIDED, HOWEVER, that the Company will not be liable to the extent that such
Loss arises from and is based on an untrue statement or omission or alleged
untrue statement or omission in a registration statement or prospectus which is
made in reliance on and in conformity with written information furnished to the
Company in an instrument duly executed by or on behalf of such Indemnified Party
specifically stating that it is for use in the preparation thereof The
indemnification and contribution provided for in this Section 12 will remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Parties or any officer, director, employee, agent or Controlling
Person of the Indemnified Parties.
(b) If the indemnification provided for in Section 12(a) above
for any reason is held by a court of competent jurisdiction to be unavailable to
an Indemnified Party in respect of any Losses referred to therein, then the
Company, in lieu of indemnifying such Indemnified Party thereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Lenders, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Lenders in connection with the action or inaction which resulted in such Losses,
as well as any other relevant equitable considerations. In connection with the
registration of the Company's securities, the relative benefits received by the
Company and the Lenders shall be deemed to be in the same respective proportions
that the net proceeds from the offering (before deducting expenses) received by
the Company and the Lenders, in each case as set forth in the table on the cover
page of the applicable prospectus, bear to the aggregate public offering price
of the securities so offered. The relative fault of the Company and the Lenders
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates
35
<PAGE> 39
to information supplied by the Company or the Lenders and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Lenders agree that it would not be just and
equitable if contribution pursuant to this Section 12(b) were determined by pro
rata or per capita allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. In connection with the registration of the Company's
securities, in no event shall an Investor be required to contribute any amount
under this Section 12(b) in excess of the lesser of (i) that proportion of the
total of such Losses indemnified against equal to that proportion of the total
securities sold under such registration statement which is being sold by such
Lender or (ii) the proceeds received by such Lender from its sale of securities
under such registration statement. No person found guilty of fraudulent
misrepresentation (within the meaning of Section II(f) of the Securities Act)
shall be entitled to contribution from any person who was not found guilty of
such fraudulent misrepresentation.
(c) Any Indemnified Party that proposes to assert the right to
be indemnified under this Section 12 will, promptly after receipt of notice of
commencement of any claim or action against such party in respect of which a
claim is to be made against the Company under this Section 12, notify the
Company of the commencement of such action, enclosing a copy of all papers
served, but the omission so to notify the Company will not relieve the Company
from any liability that the Company may have to any Indemnified Party under the
foregoing provisions of this Section 12 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
Company. The Indemnified Party will have the right to retain its own counsel in
any such action and all fees, disbursements and other charges incurred in the
investigation, defense and/or settlement of such action shall be advanced and
reimbursed by the Company promptly as they are incurred; PROVIDED, HOWEVER, that
the Indemnified Party shall agree to repay any expenses so advanced hereunder if
it is ultimately determined by a court of competent jurisdiction that the
Indemnified Party to whom such expenses are advanced is not entitled to be
indemnified as a matter of law; and PROVIDED FURTHER that so long as the
Indemnified Party has reasonably concluded that no conflict of interest exists,
the Company may assume the defense of any action hereunder with counsel
reasonably satisfactory to the Indemnified Party. The Company shall not settle
any action or claim for which indemnification is sought under this Section 12
without the prior written consent of the Indemnified Party.
SECTION 13. DEFINITIONS
Unless the context specifically requires otherwise, capitalized terms
used in this Agreement shall have the meaning specified below:
"Capital Lease" means any lease of property (real, personal or mixed) which in
accordance with generally accepted accounting principles consistently applied,
would be capitalized on the lessee's balance sheet or for which the amount of
the asset and liability thereunder should be disclosed in a note to such balance
sheet as if so capitalized.
36
<PAGE> 40
"Founders" means Wilburn Smith and Allan Gardner.
"Indebtedness" means with respect to any Person, (i) any liability, contingent
or otherwise, of such Person (A) for borrowed money (whether or not recourse of
the lender is to the whole of the assets of such Person or only to a portion
thereof), (B) evidenced by a note, debenture or similar instrument (including a
purchase money obligation) given in connection with the acquisition of any
property or assets, (C) for any letter of credit or performance bond in favor of
such Person, (D) for the payment of money relating to a capitalized lease
obligation, or (E) any liability, contingent or otherwise, of such Person to any
other Person for any purchase price associated with any acquisition of assets,
business or otherwise (including any deferred purchase price, assumption of
Indebtedness, noncompetition payments or other forms of consideration); (ii) any
liability of others of the kind described in the preceding clause (i), which the
Person has guaranteed or which is otherwise its legal liability, contingent or
otherwise; (iii) any obligation secured by a Lien to which the property or
assets of such Person are subject, whether or not the obligations secured
thereby shall have been assumed by or shall otherwise be such Person's legal
liability; (iv) all other items (except items of capital stock, capital or
paid-in surplus or of retaining earnings) which in accordance with generally
accepted accounting principles, would be included as a liability on the balance
sheet of such Person on the date of determination; and (v) any and all
deferrals, renewals, extensions or refinancing of, or amendments, modifications
of supplements to, any liability of the kind, described in any of the preceding
clauses (i), (ii), (iii) or (iv).
"Lien" means any interest in, or claim. against, property relating to an
obligation owed to, or claim by, a Person other than the owner of the property,
whether such interest is. based on the common law, statute or contract, and
including but not limited to any security interest lien arising from a mortgage,
encumbrance, pledge, conditional sale or trust receipt or a lease, consignment
or bailment for security purposes, any rights of first refusal, charges, claims,
liabilities, limitations, conditions, restrictions or other adverse claims;
provided, however, that "Lien" shall not include the interest retained by the
lessor under a lease which is not a Capital Lease. For the purposes of this
Agreement, the Company shall be deemed to be the owner of any property which it
has acquired or holds subject to a conditional sale agreement, financing lease
or other arrangement pursuant to which title to the property has been retained
by or vested in some other person or entity for security purposes and such
retention or vesting shall be deemed to be a Lien.
"Person" means any individual, corporation, partnership, joint venture, trust or
unincorporated organization or any government or any agency or political
subdivision thereof.
"Qualified Public Offering" means an underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933 covering the
offer and sale of Common Stock of the Company to the public in which the
proceeds received by the Company and selling shareholders, net of underwriting
discounts and commissions, equal or exceed $20,000,000 or such lesser amount as
shall be mutually acceptable to the Company and the Lenders.
37
<PAGE> 41
"Registration Rights Agreement" means the Registration Rights Agreement, dated
as of the date hereof, by and among the Company and the Lenders, as amended,
supplemented or modified from time to time.
"Securities Act" means the Securities Act of 1933 and the rules and regulations
promulgated thereunder, each as amended from time to time.
"Senior Debt" means the aggregate principal amount of any for money borrowed in
accordance with the provisions of Section 5. 1 (b) hereof from an unaffiliated
bank, insurance company or other financial institution.
"Tax" means any federal, state, local, or foreign income, gross receipts,
capital stock, franchise, profits, windfall profits, withholding, payroll,
social security (or similar), unemployment, disability, real property, personal
property, excise, occupation, sales, use, transfer, value added, alternative
minimum, environmental, customs, duties, estimated or other tax, including any
interest, penalty or addition thereto, whether disputed or not.
"Tax Returns" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto and including any amendment thereof.
The following terms shall have the meanings assigned to them in the
provisions of this Agreement referred to below:
Advent - 10.1
Affiliate - 2.17
Base Balance Sheet - Section 2.6
CERCLIS - 2.20(a)
Closing - Section 1.3
Closing Date - Section 1.3
Common Stock - 2.3
Company - preamble
Conversion Shares - 2.2
Convertible Preferred Stock - 1.2(d)
Debentures - Preamble
Employee Program - 2.17
Employee Stock Plan - 2.3
Environmental Law - Section 2.20(c)
ERISA - Section 2.17
Event of Default -
Section 8.1 GAAP - 2.7
Hazardous Material - Section 2.20(c)
Hazardous Waste - Section 2.20(c)
38
<PAGE> 42
Intellectual Property - 2.12
Interest - Section 1.2(a)
Involuntary Petition - Section 8.1(g)
IRS - Section 2. 10
Lender Representatives - 5.4
Lenders - preamble
Material Agreement - 2.11
Maturity Date - 1.1
Offer - 9.2(a)
Offered Shares - 9.2(a)
PCBs - Section 2.20(a)
Pension Plan - Section 2.17
Permitted Transferees - 9.1(a)
Preferred Shares - 2.2
Proposed Transferee - 9.2(a)
Pro Rata Share - 9.3(a)
Shares - 9.1(b)
Third Party Purchaser - 9.3(a)
SECTION 14. GENERAL
14.1 AMENDMENTS, WAIVERS AND CONSENTS. For the purposes of this
Agreement and all agreements, documents and instruments executed pursuant
hereto, except as otherwise specifically set forth herein or therein, no course
of dealing between the Company and any Lender and no delay on the part of any
party hereto in exercising any rights hereunder or thereunder shall operate as a
waiver of the rights hereof and thereof. No covenant or other provision hereof
or thereof may be waived otherwise than by a written instrument signed by the
party so waiving such covenant or other provision; PROVIDED, HOWEVER, that
except as otherwise provided herein or therein, changes in or additions to, and
any consents required by, or requests or demands made pursuant to, this
Agreement may be made, and compliance with any term, covenant, condition or
provision set forth herein may be omitted or waived (either generally or in a
particular instance and either retroactively or prospectively) by a written
instrument or instruments signed by a majority in interest of the Lenders and
the Company. Any amendment or waiver effected in accordance with this Section
14.1 shall be binding upon each holder of Debentures purchased under this
Agreement at the time outstanding (including securities into which such
Debentures have been converted), each future holder of all such securities and
the Company.
14.2 SURVIVAL OF COVENANTS: ASSIGNABILITY OF RIGHTS. All covenants,
agreements, representations and warranties of the Company made herein and to be
performed prior to or at the Closing and in the certificates, lists, exhibits,
schedules or other written information delivered or furnished to any Lender
pursuant to the terms of this Agreement shall be presumed to have been material
and to have been relied upon by such Lender, and, except as otherwise provided
in this Agreement, shall survive the delivery of the Debentures and shall bind
the Company's successors and
39
<PAGE> 43
assigns, whether so expressed or not, and, except as otherwise provided in this
Agreement, all such covenants, agreements, representations and warranties shall
inure to the benefit of the Lenders' successors and assigns and to transferees
of the Debentures or any securities received upon conversion thereof, whether so
expressed or not. Notwithstanding the foregoing or anything to the contrary
contained in this Agreement: (a) the Lenders' transfer or assignment of their
rights hereunder are expressly subject to such successor or assignee, as a
condition to such transfer or assignment, agreeing in writing with the Company
and the Founders to be bound by all of the provisions hereof; (b) all
representations and warranties of the Company or the Founders contained or
referenced in Section 2 hereof shall survive only for a period of two (2) years
from the date of this Agreement, and any claim based upon any misrepresentations
or breach of warranty by the Company or the Founders under Section 2 must be
made within such period.
14.3 GOVERNING LAW; JURISDICTION; VENUE. THIS AGREEMENT SHALL BE DEEMED
TO BE A CONTRACT MADE UNDER, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE COMMONWEALTH OF MASSACHUSETTS. The Company and each Founder hereby agree
that the state and federal court of The Commonwealth of Massachusetts shall have
jurisdiction to hear and determine any claims or disputes between the Lenders
and the Company or either of the Founders pertaining directly or indirectly to
this Agreement and all documents, instruments and agreements executed pursuant
hereto, or to any matter arising therefrom (unless otherwise expressly provided
for therein). To the extent permitted by law, the Company and each of the
Founders hereby expressly submit and consent in advance to such jurisdiction in
any action or proceeding commenced by the Lenders in any of such courts, and
agrees that service of such summons and complaint or other process or papers may
be made by registered or certified mail addressed to. the Company and to each of
the Founders at the address to which notices are to be sent pursuant to this
Agreement. The Company and each of the Founders waive any claim that Boston,
Massachusetts is an inconvenient form or an improper forum based on lack of
venue. The choice of forum set forth in this section 14.4 shall not be deemed to
preclude the enforcement of any judgment obtained in such forum or the taking of
any action to enforce the same in any other appropriate jurisdiction.
14.4 SECTION HEADINGS. The descriptive headings in this Agreement have
been inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provision thereof or hereof.
14.5 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original; but such counterparts shall together constitute but one
and the same document.
14.6 NOTICES AND DEMANDS. Any notice or demand which, by any provision
of this Agreement or any agreement, document or instrument executed pursuant
hereto or thereto, except as otherwise provided therein, is required or provided
to be given shall be deemed to have been sufficiently given observed and
received for all purposes when delivered in hand, by facsimile transmission with
receipt acknowledged or by express delivery providing receipt of delivery, to
the
40
<PAGE> 44
following addresses and numbers: if to the Company, at its address as shown on
the signature page hereof, or at any other address designated by the Company to
the Lenders in writing; if to a Lender, at its mailing address and facsimile
number, if applicable, as shown on Exhibit A hereto, or at any other address or
facsimile number designated by such Lender to the Company and the other Lenders
in writing; and if to an assignee of a Lender, at its address or facsimile
number as designated to the Company and the other Lenders in writing. Unless the
context otherwise indicates, Advent VII L.P. shall be the Lenders'
representative for receiving all notices and giving all consents required or
permitted to be given hereunder. Any consent given by Advent VII L.P. to the
Company or the Founders shall be binding on each of the Lenders and their
respective successors and assigns.
14.7 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such,
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions of this Agreement.
14.8 EXPENSES. The Company shall pay all costs and expenses that it
incurs (including, without limitation, those of its accountants and lawyers)
with respect to the negotiation, execution, delivery, performance and
enforcement of this Agreement and the agreements, documents and instruments
contemplated hereby or executed pursuant hereto, and the Lenders shall pay all
costs and expenses that they incur with respect to the negotiation, execution
and delivery of this Agreement and the agreements, documents and instruments
contemplated hereby or executed pursuant hereto, except that upon and after the
Closing pursuant to this Agreement, the Company shall reimburse the Lenders for
all out-of pocket costs thereafter incurred by them on account of any filing
fees, transfer taxes or documentary stamp taxes due on account of the issuance
of the Debentures, the Preferred Shares or the Conversion Shares, or in
connection with their attendance at Board of Directors meetings as provided in
Section 6.11, or enforcement of this Agreement, the Registration Rights
Agreement or the terms of the Preferred Shares upon or after a breach thereunder
(including the reasonable legal fees and disbursements of their counsel).
14.9 INTEGRATION. This Agreement, including the exhibits, documents and
instruments referred to herein or therein, constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
41
<PAGE> 45
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Wilburn Smith
------------------------------------
Name: Wilburn Smith
Title: President
ADVENT VII L.P.
By: TA Associates VII L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: /s/ Jacqueline C. Morby
------------------------------------
Jacqueline C. Morby
Managing Director
ADVENT ATLANTIC AND PACIFIC II L.P.
By: TA Associates AAP II Partners,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: /s/ Jacqueline C. Morby
------------------------------------
Jacqueline C. Morby
Managing Director
42
<PAGE> 46
CHESTNUT CAPITAL INTERNATIONAL
III LIMITED PARTNERSHIP
By: TA Associates VI L.P.,
its Attorney-in-Fact
By: TA Associates, Inc.,
its General Partner
By: /s/ Jacqueline C. Morby
------------------------------------
Jacqueline C. Morby
Managing Director
ADVENT NEW YORK L.P.
By: TA Associates VI L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: /s/ Jacqueline C. Morby
------------------------------------
Jacqueline C. Morby
Managing Director
ADVENT INDUSTRIAL II L.P.
By: TA Associates VI L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: /s/ Jacqueline C. Morby
------------------------------------
Jacqueline C. Morby
Managing Director
TA VENTURE INVESTORS LIMITED
PARTNERSHIP
By: /s/ Jacqueline C. Morby
------------------------------------
Jacqueline C. Morby
General Partner
43
<PAGE> 47
FOUNDERS:
/s/ Wilburn Smith
---------------------------------------
Wilburn Smith
/s/ Allan Gardner
---------------------------------------
Allan Gardner
44
<PAGE> 48
EXHIBIT A
LIST OF LENDERS
<TABLE>
<CAPTION>
Aggregate Amount of Debentures
Name Purchased
---- ------------------------------
<S> <C>
Advent VII L.P. $6,000,000
c/o TA Associates
115 High Street, Suite 2500
Boston, Massachusetts 02110
Facsimile Number: (617) 574-6728
Advent Atlantic and Pacific II L.P. $3,572,000
c/o TA Associates
125 High Street, Suite 2500
Boston, Massachusetts 02110
Facsimile Number: (617) 574-6728
Chestnut Capital International M Limited Partnership $ 450,000
c/o TA Associates
125 High Street, Suite 2500
Boston, Massachusetts 02110
Facsimile Number: (617) 574-6728
Advent New 'York L.P. $ 600,000
c/o TA Associates
125 High Street, Suite 2500
Boston, Massachusetts 02110
Facsimile Number: (617) 574-6728
Advent Industrial II L.P. $1,288,000
c/o TA Associates
125 High Street, Suite 2500
Boston, Massachusetts 02110
Facsimile Number: (617) 574-6728
TA Venture Investors Limited Partnership $ 90,000
c/o TA Associates
125 High Street, Suite 2500
Boston, Massachusetts 02110
Facsimile Number: (617) 574-6728
TOTAL $12,000,000
</TABLE>
45
<PAGE> 1
EXHIBIT 10.7
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
CONVERTIBLE DEBENTURE
DUE DECEMBER 1, 2000
$6,000,000 DECEMBER 19, 1994
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, SMITH-GARDNER & ASSOCIATES, INC., a Florida
corporation (the "Maker"), promises to pay to Advent VII L.P. (hereinafter
called the "Payee"), or to its order, at its address c/o TA Associates, 125
High Street, Suite 2500, Boston, Massachusetts 02110, the principal sum of Six
Million Dollars ($6,000,000), together with interest in arrears on the unpaid
principal balance from time to time outstanding from the date hereof until the
entire principal amount due hereunder is paid in full at the rates provided in
that certain Debenture Purchase Agreement of even date herewith by and between
the Payee, certain other entities and the Maker (the "Agreement"). Principal
shall be paid, and interest shall accrue and be paid, as provided in the
Agreement.
This Debenture is one of the Debentures referred to in and issued
pursuant to the Agreement, and is entitled to the benefits of the terms and
provisions of the Agreement, including without limitation the terms and
provisions relating to payment and conversion of the Debentures. The
outstanding principal amount of this Debenture shall be paid in full as
provided in the Agreement and may only be prepaid in accordance with the
provisions of the Agreement.
Upon the occurrence of an Event of Default as defined in the
Agreement, the Lenders (as such parties are defined in the Agreement) may
declare the entire unpaid principal balance hereunder and any accrued and
unpaid interest thereon immediately due and payable without notice, demand,
presentment or protest and may exercise any of its rights under the Agreement.
In the event that the Payee or any subsequent holder of this Debenture shall
exercise or endeavor to exercise any of its remedies hereunder or under the
Agreement, the Maker shall pay on demand all reasonable costs and expenses
incurred in connection therewith including, without limitation, reasonable
attorneys' fees, and the Payee may take judgment for all such amounts in
addition to all other sums due hereunder.
The Maker, to the extent permitted by applicable law, waives
presentment for payment, protest and demand, and notice of protest, demand
and/or dishonor and nonpayment of this Debenture, notice of any Event of
Default under the Agreement except as specifically provided therein, and all
other notices or demands otherwise required by law that the Maker may lawfully
<PAGE> 2
waive. No unilateral consent or waiver by the Payee with respect to any action
or failure to act which, without consent, would constitute a breach of any
provision of this Debenture or the Agreement shall be valid and binding unless
in writing and signed by a majority in interest of the Lenders as provided in
accordance with Section 14.1 of the Agreement.
The rights and obligations of the Maker and all provisions hereof
shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law" shall mean the law in effect as of the date hereof, provided, however,
that in the event there is a change in the law which results in a higher
permissible rate of interest, then this Debenture shall be governed by such new
law as of its effective date. If, from any circumstance whatsoever, fulfillment
of any provision hereof or the Agreement at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled shall automatically be
reduced to the limit of such validity, and if from any circumstances the Payee
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced hereby and not to the payment of
interest. This provision shall control every other provision of all agreements
between the Maker and the Payee.
IN WITNESS WHEREOF, the Maker has caused this Debenture to be
executed by its duly authorized representative as of the day and year first
above written.
WITNESS: SMITH-GARDNER & ASSOCIATES, INC.
/s/ Allan Gardner By: /s/ Wilburn Smith
- --------------------------- -----------------------------
Allan Gardner
Name: Wilburn Smith
---------------------------
Title: President
---------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.8
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
CONVERTIBLE DEBENTURE
DUE DECEMBER 1, 2000
$3,572,000 DECEMBER 19, 1994
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, SMITH-GARDNER & ASSOCIATES, INC., a Florida
corporation (the "Maker"), promises to pay to Advent Atlantic and Pacific II
L.P. (hereinafter called the "Payee"), or to its order, at its address c/o TA
Associates, 125 High Street, Suite 2500, Boston, Massachusetts 02110, the
principal sum of Three Million Five Hundred Seventy Two Thousand Dollars
($3,572,000), together with interest in arrears on the unpaid principal balance
from time to time outstanding from the date hereof until the entire principal
amount due hereunder is paid in full at the rates provided in that certain
Debenture Purchase Agreement of even date herewith by and between the Payee,
certain other entities and the Maker (the "Agreement"). Principal shall be
paid, and interest shall accrue and be paid, as provided in the Agreement.
This Debenture is one of the Debentures referred to in and issued
pursuant to the Agreement, and is entitled to the benefits of the terms and
provisions of the Agreement, including without limitation the terms and
provisions relating to payment and conversion of the Debentures. The
outstanding principal amount of this Debenture shall be paid in full as
provided in the Agreement and may only be prepaid in accordance with the
provisions of the Agreement.
Upon the occurrence of an Event of Default as defined in the
Agreement, the Lenders (as such parties are defined in the Agreement) may
declare the entire unpaid principal balance hereunder and any accrued and
unpaid interest thereon immediately due and payable without notice, demand,
presentment or protest and may exercise any of its rights under the Agreement.
In the event that the Payee or any subsequent holder of this Debenture shall
exercise or endeavor to exercise any of its remedies hereunder or under the
Agreement, the Maker shall pay on demand all reasonable costs and expenses
incurred in connection therewith including, without limitation, reasonable
attorneys' fees, and the Payee may take judgment for all such amounts in
addition to all other sums due hereunder.
The Maker, to the extent permitted by applicable law, waives
presentment for payment, protest and demand, and notice of protest, demand
and/or dishonor and nonpayment of this Debenture, notice of any Event of
Default under the Agreement except as specifically provided therein, and all
other notices or demands otherwise required by law that the Maker may lawfully
waive. No unilateral consent or waiver by the Payee with respect to any action
or failure to act which, without consent, would constitute a breach of any
provision of this Debenture or the Agreement shall be valid and binding unless
in writing and signed by a majority in interest of the Lenders as provided in
accordance with Section 14.1 of the Agreement.
<PAGE> 2
The rights and obligations of the Maker and all provisions hereof
shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law", shall mean the law in effect as of the date hereof, provided, however,
that in the event there is a change in the law which results in a higher
permissible rate of interest, then this Debenture shall be governed by such new
law as of its effective date. If, from any circumstance whatsoever, fulfillment
of any provision hereof or the Agreement at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled shall automatically be
reduced to the limit of such validity, and if from any circumstances the Payee
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced hereby and not to the payment of
interest. This provision shall control every other provision of all agreements
between the Maker and the Payee.
IN WITNESS WHEREOF, the Maker has caused this Debenture to be
executed by its duly authorized representative as of the day and year first
above written.
WITNESS: SMITH-GARDNER & ASSOCIATES, INC.
/s/ Allan Gardner By: /s/ Wilburn Smith
- --------------------------- -----------------------------
Allan Gardner
Name: Wilburn Smith
---------------------------
Title: President
---------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.9
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
CONVERTIBLE DEBENTURE
DUE DECEMBER 1, 2000
$1,288,000 DECEMBER 19, 1994
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, SMITH-GARDNER & ASSOCIATES, INC., a Florida
corporation (the "Maker"), promises to pay to Advent Industrial II L.P.
(hereinafter called the "Payee"), or to its order, at its address c/o TA
Associates, 125 High Street, Suite 2500, Boston, Massachusetts 02110, the
principal sum of One Million Two Hundred Eighty-eight Thousand Dollars
($1,288,000), together with interest in arrears on the unpaid principal balance
from time to time outstanding from the date hereof until the entire principal
amount due hereunder is paid in full at the rates provided in that certain
Debenture Purchase Agreement of even date herewith by and between the Payee,
certain other entities and the Maker (the "Agreement"). Principal shall be
paid, and interest shall accrue and be paid, as provided in the Agreement.
This Debenture is one of the Debentures referred to in and issued
pursuant to the Agreement, and is entitled to the benefits of the terms and
provisions of the Agreement, including without limitation the terms and
provisions relating to payment and conversion of the Debentures. The
outstanding principal amount of this Debenture shall be paid in full as
provided in the Agreement and may only be prepaid in accordance with the
provisions of the Agreement.
Upon the occurrence of an Event of Default as defined in the
Agreement, the Lenders (as such parties are defined in the Agreement) may
declare the entire unpaid principal balance hereunder and any accrued and
unpaid interest thereon immediately due and payable without notice, demand,
presentment or protest and may exercise any of its rights under the Agreement.
In the event that the Payee or any subsequent holder of this Debenture shall
exercise or endeavor to exercise any of its remedies hereunder or under the
Agreement, the Maker shall pay on demand all reasonable costs and expenses
incurred in connection therewith including, without limitation, reasonable
attorneys' fees, and the Payee may take judgment for all such amounts in
addition to all other sums due hereunder.
The Maker, to the extent permitted by applicable law, waives
presentment for payment, protest and demand, and notice of protest, demand
and/or dishonor and nonpayment of this Debenture, notice of any Event of
Default under the Agreement except as specifically provided therein, and all
other notices or demands otherwise required by law that the Maker may lawfully
waive. No unilateral consent or waiver by the Payee with respect to any action
or failure to act which, without consent, would constitute a breach of any
provision of this Debenture or the
<PAGE> 2
Agreement shall be valid and binding unless in writing and signed by a majority
in interest of the Lenders as provided in accordance with Section 14.1 of the
Agreement.
The rights and obligations of the Maker and all provisions hereof
shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law" shall mean the law in effect as of the date hereof, provided, however,
that in the event there is a change in the law which results in a higher
permissible rate of interest, then this Debenture shall be governed by such new
law as of its effective date. If, from any circumstance whatsoever, fulfillment
of any provision hereof or the Agreement at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled shall automatically be
reduced to the limit of such validity, and if from any circumstances the Payee
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced hereby and not to the payment of
interest. This provision shall control every other provision of all agreements
between the Maker and the Payee.
IN WITNESS WHEREOF, the Maker has caused this Debenture to be
executed by its duly authorized representative as of the day and year first
above written.
WITNESS: SMITH-GARDNER & ASSOCIATES, INC.
/s/ Allan Gardner By: /s/ Wilburn Smith
- --------------------------- -----------------------------
Allan Gardner
Name: Wilburn Smith
---------------------------
Title: President
---------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.10
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
CONVERTIBLE DEBENTURE
DUE DECEMBER 1, 2000
$600,000 DECEMBER 19, 1994
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, SMITH-GARDNER & ASSOCIATES, INC., a Florida
corporation (the "Maker"), promises to pay to Advent New York L.P. (hereinafter
called the "Payee"), or to its order, at its address c/o TA Associates, 125
High Street, Suite 2500, Boston, Massachusetts 02110, the principal sum of Six
Hundred Thousand Dollars ($600,000), together with interest in arrears on the
unpaid principal balance from time to time outstanding from the date hereof
until the entire principal amount due hereunder is paid in full at the rates
provided in that certain Debenture Purchase Agreement of even date herewith by
and between the Payee, certain other entities and the Maker (the "Agreement").
Principal shall be paid, and interest shall accrue and be paid, as provided in
the Agreement.
This Debenture is one of the Debentures referred to in and issued
pursuant to the Agreement, and is entitled to the benefits of the terms and
provisions of the Agreement, including without limitation the terms and
provisions relating to payment and conversion of the Debentures. The
outstanding principal amount of this Debenture shall be paid in full as
provided in the Agreement and may only be prepaid in accordance with the
provisions of the Agreement.
Upon the occurrence of an Event of Default as defined in the
Agreement, the Lenders (as such parties are defined in the Agreement) may
declare the entire unpaid principal balance hereunder and any accrued and
unpaid interest thereon immediately due and payable without notice, demand,
presentment or protest and may exercise any of its rights under the Agreement.
In the event that the Payee or any subsequent holder of this Debenture shall
exercise or endeavor to exercise any of its remedies hereunder or under the
Agreement, the Maker shall pay on demand all reasonable costs and expenses
incurred in connection therewith including, without limitation, reasonable
attorneys' fees, and the Payee may take judgment for all such amounts in
addition to all other sums due hereunder.
The Maker, to the extent permitted by applicable law, waives
presentment for payment, protest and demand, and notice of protest, demand
and/or dishonor and nonpayment of this Debenture, notice of any Event of
Default under the Agreement except as specifically provided therein, and all
other notices or demands otherwise required by law that the Maker may lawfully
waive. No unilateral consent or waiver by the Payee with respect to any action
or failure to act which, without consent, would constitute a breach of any
provision of this Debenture or the
<PAGE> 2
Agreement shall be valid and binding unless in writing and signed by a majority
in interest of the Lenders as provided in accordance with Section 14.1 of the
Agreement.
The rights and obligations of the Maker and all provisions hereof
shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law" shall mean the law in effect as of the date hereof, provided, however,
that in the event there is a change in the law which results in a higher
permissible rate of interest, then this Debenture shall be governed by such new
law as of its effective date. If, from any circumstance whatsoever, fulfillment
of any provision hereof or the Agreement at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled shall automatically be
reduced to the limit of such validity, and if from any circumstances the Payee
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced hereby and not to the payment of
interest. This provision shall control every other provision of all agreements
between the Maker and the Payee.
IN WITNESS WHEREOF, the Maker has caused this Debenture to be
executed by its duly authorized representative as of the day and year first
above written.
WITNESS: SMITH-GARDNER & ASSOCIATES, INC
/s/ Allan Gardner By: /s/ Wilburn Smith
- --------------------------- -----------------------------
Allan Gardner
Name: Wilburn Smith
---------------------------
Title: President
---------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.11
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
CONVERTIBLE DEBENTURE
DUE DECEMBER 1, 2000
$450,000 DECEMBER 19, 1994
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, SMITH-GARDNER & ASSOCIATES, INC., a Florida
corporation (the "Maker"), promises to pay to Chestnut Capital International
III Limited Partnership (hereinafter called the "Payee") or to its order, at
its address c/o TA Associates, 125 High Street, Suite 2500, Boston,
Massachusetts 02110, the principal sum of Four Hundred Fifty Thousand Dollars
($450,000), together with interest in arrears on the unpaid principal balance
from time to time outstanding from the date hereof until the entire principal
amount due hereunder is paid in full at the rates provided in that certain
Debenture Purchase Agreement of even date herewith by and between the Payee,
certain other entities and the Maker (the "Agreement"). Principal shall be
paid, and interest shall accrue and be paid, as provided in the Agreement.
This Debenture is one of the Debentures referred to in and issued
pursuant to the Agreement, and is entitled to the benefits of the terms and
provisions of the Agreement, including without limitation the terms and
provisions relating to payment and conversion of the Debentures. The
outstanding principal amount of this Debenture shall be paid in full as
provided in the Agreement and may only be prepaid in accordance with the
provisions of the Agreement.
Upon the occurrence of an Event of Default as defined in the
Agreement, the Lenders (as such parties are defined in the Agreement) may
declare the entire unpaid principal balance hereunder and any accrued and
unpaid interest thereon immediately due and payable without notice, demand,
presentment or protest and may exercise any of its rights under the Agreement.
In the event that the Payee or, any subsequent holder of this Debenture shall
exercise or endeavor to exercise any of its remedies hereunder or under the
Agreement, the Maker shall pay on demand all reasonable costs and expenses
incurred in connection therewith including, without limitation, reasonable
attorneys' fees, and the Payee may take judgment for all such amounts in
addition to all other sums due hereunder.
The Maker, to the extent permitted by applicable law, waives
presentment for payment, protest and demand,.and notice of protest, demand
and/or dishonor and nonpayment of this Debenture, notice of any Event of
Default under the Agreement except as specifically provided therein, and all
other notices or demands otherwise required by law that the Maker may lawfully
waive. No unilateral consent or waiver by the Payee with respect to any action
or failure to act which, without consent, would constitute a breach of any
provision of this Debenture or the
<PAGE> 2
Agreement shall be valid and binding unless in writing and signed by a majority
in interest of the Lenders as provided in accordance with Section 14.1 of the
Agreement.
The rights and obligations of the Maker and all provisions hereof
shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law" shall mean the law in effect as of the date hereof, provided, however,
that in the event there is a change in the law which results in a higher
permissible rate of interest, then this Debenture shall be governed by such new
law as of its effective date. If, from any circumstance whatsoever, fulfillment
of any provision hereof or the Agreement at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled shall automatically be
reduced to the limit of such validity, and if from any circumstances the Payee
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced hereby and not to the payment of
interest. This provision shall control every other provision of all agreements
between the Maker and the Payee.
IN WITNESS WHEREOF, the Maker has caused this Debenture to be
executed by its duly authorized representative as of the day and year first
above written.
WITNESS: SMITH-GARDNER & ASSOCIATES, INC.
/s/ Allan Gardner By: /s/ Wilburn Smith
- --------------------------- -----------------------------
Allan Gardner
Name: Wilburn Smith
---------------------------
Title: President
---------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.12
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION.
CONVERTIBLE DEBENTURE
DUE DECEMBER 1, 2000
$90,000 DECEMBER 19, 1994
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, SMITH-GARDNER & ASSOCIATES, INC., a Florida
corporation (the "Maker"), promises to pay to TA Venture Investors Limited
Partnership (hereinafter called the "Payee"), or to its order, at its address
c/o TA Associates, 125 High Street, Suite 2500, Boston, Massachusetts 02110,
the principal sum of Ninety Thousand Dollars ($90,000), together with interest
in arrears on the unpaid principal balance from time to time outstanding from
the date hereof until the entire principal amount due hereunder is paid in full
at the rates provided in that certain Debenture Purchase Agreement of even date
herewith by and between the Payee, certain other entities and the Maker (the
"Agreement"). Principal shall be paid, and interest shall accrue and be paid,
as provided in the Agreement.
This Debenture is one of the Debentures referred to in and issued
pursuant to the Agreement, and is entitled to the benefits of the terms and
provisions of the Agreement, including without limitation the terms and
provisions relating to payment and conversion of the Debentures. The
outstanding principal amount of this Debenture shall be paid in full as
provided in the Agreement and may only be prepaid in accordance with the
provisions of the Agreement.
Upon the occurrence of an Event of Default as defined in the
Agreement, the Lenders (as such parties are defined in the Agreement) may
declare the entire unpaid principal balance hereunder and any accrued and
unpaid interest thereon immediately due and payable without notice, demand,
presentment or protest and may exercise any of its rights under the Agreement.
In the event that the Payee or any subsequent holder of this Debenture shall
exercise or endeavor to exercise any of its remedies hereunder or under the
Agreement, the Maker shall pay on demand all reasonable costs and expenses
incurred in connection therewith including, without limitation, reasonable
attorneys' fees, and the Payee may take judgment for all such amounts in
addition to all other sums due hereunder.
The Maker, to the extent permitted by applicable law, waives
presentment for payment, protest and demand, and notice of protest, demand
and/or dishonor and nonpayment of this Debenture, notice of any Event of
Default under the Agreement except as specifically provided therein, and all
other notices or demands otherwise required by law that Maker may lawfully
waive. No unilateral consent or waiver by the Payee with respect to any action
or failure to act which, without consent, would constitute a breach of any
provision of this Debenture or the Agreement shall
<PAGE> 2
be valid and binding unless in writing and signed by a majority in interest of
the Lenders as provided in accordance with Section 14.1 of the Agreement.
The rights and obligations of the Maker and all provisions hereof
shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to the Payee for the use,
forbearance or detention of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law" shall mean the law in effect as of the date hereof, provided, however,
that in the event there is a change in the law which results in a higher
permissible rate of interest, then this Debenture shall be governed by such new
law as of its effective date. If, from any circumstance whatsoever, fulfillment
of any provision hereof or the Agreement at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled shall automatically be
reduced to the limit of such validity, and if from any circumstances the Payee
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced hereby and not to the payment of
interest. This provision shall control every other provision of all agreements
between the Maker and the Payee.
IN WITNESS WHEREOF, the Maker has caused this Debenture to be
executed by its duly authorized representative as of the day and year first
above written.
WITNESS: SMITH-GARDNER & ASSOCIATES, INC.
/s/ Allan Gardner By: /s/ Wilburn Smith
- --------------------------- -----------------------------
Allan Gardner
Name: Wilburn Smith
---------------------------
Title: President
---------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is dated as of the 19th day of December, 1994, by and
among Smith-Gardner & Associates, Inc., a Florida corporation (the "Company"),
Wilburn Smith and Allan Gardner (each a "Founder" and collectively the
"Founders") and the persons designated as Lenders on the signature pages hereto
(collectively the "Lenders," and each individually a "Lender").
WHEREAS, the parties to this Agreement are simultaneously entering
into a certain Debenture Purchase Agreement (the "Purchase Agreement") dated as
of the date hereof whereby the Lenders have agreed to purchase convertible
debentures due in the year 2000 (the "Debentures") from the Company in an
aggregate principal amount of $12,000,000; and
WHEREAS, the execution of this Agreement is an inducement and a
condition precedent to the purchase by the Lenders of the Debentures under the
Purchase Agreement.
NOW, THEREFORE, the Company, the Founders and the Lenders, in
consideration of the premises and mutual covenants herein, intending to be
legally bound, hereby agree as follows:
1. OPTIONAL REGISTRATIONS. If at any time or times after the date
hereof, the Company shall determine to register any shares of its capital stock
(whether in connection with a primary offering, a secondary offering or any
combination thereof) under the Securities Act (other than in connection with a
registration effected solely to implement an employee, benefit plan or a
business combination transaction or any other similar transaction for which a
registration statement on Form S-4 is applicable), the Company will promptly
give written notice thereof to the holders of Registrable Securities (as
hereinafter defined in Section 4 below) then outstanding (including holders of
the Debentures and the Convertible Preferred Stock and hereinafter referred to
as the "Holders"). In connection with any such registration, if within 30 days
after their receipt of such notice, the Company receives a written request from
the Holders of the Registrable Securities for the inclusion of some or all of
the Registrable Securities owned by them in such registration (such request to
state the number of Registrable Securities intended to be disposed of by such
Holders), the Registrant (as defined below) will use its best efforts to effect
the registration under the Securities Act of all Registrable Securities which
such Holders requested to be registered.
In connection with any offering under this Section 1 involving an
underwriting, the Company shall not be required to include any Registrable
Securities in such underwriting in such quantity as will, in the reasonable
written opinion of the underwriters, jeopardize the success of the offering by
the Company or materially adversely affect the price receivable by the Company
in such offering. In such instance, the Company shall be required to include in
the underwriting only that number of Registrable Securities which the managing
underwriter believes in good faith may be sold without causing such adverse
effect; PROVIDED, HOWEVER, that; (i) other than with respect to an initial
public offering by the Company, all Holders who have requested registration
shall first be entitled to participate in the underwriting PRO RATA based upon
their total ownership of Registrable Securities before any other holders of the
Company's capital stock shall be entitled to participate in such
<PAGE> 2
underwriting; and (ii) with respect to an initial public offering by the
Company and notwithstanding anything herein to the contrary, the number of
secondary shares available for registration in such offering shall, in the
event of an underwriter cutback, be allocated among the Holders and the
Founders on a PRO RATA basis based upon the number of shares of Registrable
Securities and Common Stock held by such persons and entities. Except as set
forth in the proceeding sentence, no other securities requested to be included
in a registration for the account of anyone other than the Holders shall be
included in a registration to which Section I applies unless all Registrable
Securities requested to be included in such registration in accordance with
this Section 1 are so included.
All expenses of the registration and offering (including the
reasonable fees and expenses of not more than one independent counsel for the
Holders in an amount of up to $10,000) shall be borne by the Registrant, except
that the Holders shall bear underwriting and selling commissions attributable
to their Registrable Securities being registered and transfer taxes on shares
being sold by such Holders. Without in any way limiting the types of
registrations to which this Section I shall apply, in the event that the
Company shall effect a "shelf registration" under Rule 415 promulgated under
the Securities Act, or any other similar rule or regulation ("Rule 415") (other
than a shelf registration effected solely to implement an employee benefit plan
or a transaction to which Rule 145 or any other similar rule of the Commission
under the Securities Act is applicable), the Company shall take all necessary
action, including, without limitation, the filing of post-effective amendments,
to permit the Holders to include their shares in such registration in
accordance with the terms of this Section 1.
2. REQUIRED REGISTRATIONS. If on any two (2) occasions on or after
the earlier of (a) 180 days after the initial public offering of the Company,
or (b) June 30, 1997, fifty percent (50%) in interest of the Holders shall
notify the Company in writing that they intend to offer or cause to be offered
for public sale all or any portion of their Registrable Securities with an
aggregate anticipated offering price of at least $5,000,000 (any such notice to
specify the intended method of distribution), the Company will notify all of
the Holders of Registrable Securities who would be entitled to notice of a
proposed registration under Section 1 above of its receipt of such notification
from such Holders; PROVIDED, HOWEVER, that if the Holders have not exercised
both demand registration rights by the time that: (i) the Holders have had the
opportunity to sell at least fifty percent (50%) of their Registrable
Securities in registered offerings; and (ii) the Company is eligible to
register shares pursuant to an S-3 offering, the above-referenced two (2)
occasions shall be limited to one (1) for so long as the Company continues
thereafter to be eligible to register shares pursuant to an S-3 offering. Upon
the written request of any such Holder delivered to the Company within 15 days
after receipt from the Company of such notification, the Company will either:
(i) elect to make a primary offering in which case the rights of such Holders
shall be as set forth in Section 1 above (except that the Company shall not be
permitted to limit the number of shares which may be registered by any Holder);
or (ii) use its best efforts to cause such of the Registrable Securities as may
be requested by any Holders (including the Holder or Holders giving the initial
notice of intent to register hereunder) to be registered under the Securities
Act in accordance with the terms of this Section 2, all to the extent required
to permit the distribution in accordance with the intended method thereof as
aforesaid. If so requested by the Holders exercising their rights for a
registration under this Section 2, regardless of the form used for such
registration, the Company shall take such steps as are required to register
such Holder's
2
<PAGE> 3
Registrable Securities for sale on a delayed or continuous basis under Rule
415, and to keep such registration effective for 180 days or until all of such
Holder's Registrable Securities registered thereunder are sold, whichever is
shorter. All expenses of such registrations and offerings (other than
underwriting and selling commissions attributable to the Registrable
Securities) and the reasonable fees and expenses of not more than one
independent counsel for the Holders in an amount of up to $10,000 shall be
borne by the Company. The Company may postpone the filing of any registration
statement required hereunder for a reasonable period of time, not to exceed 90
days during any twelve month period, if the Company has made a good faith,
reasonable determination, evidenced by a resolution of its Board of Directors,
that such filing would either: (A) require the disclosure of a material
transaction and such disclosure would have a material adverse effect on the
Company; or (B) otherwise have a material adverse effect on the Company because
of unusual market conditions or other circumstances. The Company shall not be
required to cause a registration statement requested pursuant to this Section 2
to become effective prior to 180 days following the effective date of a
registration statement initiated by the Company, if the request for
registration has been received by the Company subsequent to the giving of
written notice by the Company, made in good faith, to the Holders of
Registrable Securities to the effect that the Company is commencing to prepare
a Company-initiated registration statement (other than a registration effected
solely to implement an employee benefit plan or a transaction to which Rule 145
or any other similar rule of the Commission under the Securities Act is
applicable); PROVIDED, HOWEVER, that the Company shall use its best efforts to
achieve such effectiveness promptly following such 180-day period if the
request pursuant to this Section 2 has been made prior to the expiration of
such 180-day period. Any registration effected pursuant to this Section 2 and
so designated by the Holders shall be subject to this Section 2, regardless of
the form in which such registration is effected. The rights and obligations set
forth in this Section 2 shall terminate on the seventh anniversary of the date
hereof.
3. FORM S-3. If the Company becomes eligible to use Form S-3 under
the Securities Act or a comparable successor form, the Company shall use its
best efforts to continue to qualify at all times for registration of its
capital stock on Form S-3 or such successor form. In addition to their rights
under Section 2 hereof, one or more of the Holders shall have the right to
request and have effected registrations of shares of Registrable Securities
from time to time on Form S-3 or such successor form for a public offering of
shares of Registrable Securities (such requests shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended method of disposition of such shares by such Holders). The Company
shall give notice to all of the Holders of Registrable Securities of the
receipt of a request for registration pursuant to this Section 3 and shall
provide a reasonable opportunity for such Holders to participate in such a
registration. Subject to the foregoing, the Company will use its best efforts
to effect promptly the registration of all shares of Registrable Securities on
Form S-3 or such successor form to the extent requested by the Holder or
Holders thereof; PROVIDED, HOWEVER, that the Company will not be obligated to
effect such a registration for Registrable Securities having an aggregate
anticipated offering price of less than $2,500,000. If so requested by any
Holder in connection with a registration under this Section 3, the Company
shall take such steps as are required to register such Holder's Registrable
Securities for sale on a delayed or continuous basis under Rule 415, and to
keep such registration effective for 180 days or until all of such Holder's
Registrable Securities registered
3
<PAGE> 4
thereunder are sold, whichever is shorter. All expenses incurred in connection
with a registration requested pursuant to this Section 3 (other than
underwriting and selling commissions attributable to the Registrable
Securities) and the reasonable fees and expenses of not more than one
independent counsel for the Holders in an amount of up to $10,000 shall be
borne by the Company. The Company may postpone the filing of any registration
statement required hereunder for a reasonable period of time, not to exceed 90
days during any twelve month period, if the Company has made a good faith,
reasonable determination, evidenced by a resolution of its Board of Directors,
that such filing would either: (A) require the disclosure of a material
transaction and such disclosure would have a material adverse effect on the
Company; or (B) otherwise have a material adverse effect on the Company because
of unusual market conditions or other circumstances. The Company shall not be
required to cause more than two registration statements requested pursuant to
this Section 3 to become effective in any 12-month period. The Company shall
not be required to cause a registration statement requested pursuant to this
Section 3 to become effective prior to 180 days following the effective date of
a registration statement initiated by the Company, if the request for
registration has been received by the Company subsequent to the giving of
written notice by the Company, made in good faith, to the Holders of
Registrable Securities to the effect that the Company is commencing to prepare
a Company-initiated registration statement (other than a registration effected
solely to implement an employee benefit plan or a transaction to which Rule 145
or any other similar rule of the Commission under the Securities Act is
applicable); PROVIDED, HOWEVER, that the Company shall use its best efforts to
achieve such effectiveness promptly following such 180-day period if the
request pursuant to this Section 3 has been made prior to the expiration of
such 180-day period.
4. DEFINITIONS. For the purposes of this Agreement: (a) the term
"Registrable Securities" shall mean: (i) any shares of Common Stock that have
been issued upon, or are at such time issued to a Lender or issuable upon
conversion of the Debentures and/or the Convertible Preferred Stock; and (ii)
any Common Stock issued or issuable with respect to any of such shares in (i)
above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization; PROVIDED, HOWEVER, that as to any particular Registrable
Securities, such securities shall cease to be Registrable Securities: (A) when
a registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance therewith; (B) when they have been distributed
pursuant to Rule 144 or Rule 144A (or any successor provisions thereto) under
the Securities Act; and (C) when they shall have otherwise been transferred and
subsequent disposition of them shall not require registration or qualification
under the Securities Act or any similar state law then in force; and (b) the
term "Registrant" shall refer to the Company. Capitalized terms used in this
Agreement, unless specifically defined herein, shall have the meanings assigned
to them in the Purchase Agreement.
5. FURTHER OBLIGATIONS OF THE COMPANY. Whenever under the preceding
sections of this Agreement, the Company is required hereunder to register any
Registrable Securities, it agrees that it shall also do the following:
4
<PAGE> 5
(a) Use its best efforts to diligently prepare and file with
the Securities and Exchange Commission (the "Commission") a registration
statement and such amendments and supplements to said registration statement
and the prospectus used in connection therewith as may be necessary to keep
said registration statement effective and to comply with the provisions of the
Securities Act with respect to the sale of securities covered by said
registration statement for the lesser of: (i) 180 days; or (ii) the period
necessary to complete the proposed public offering;
(b) Furnish to each selling Holder such number of copies of
each preliminary and final prospectus and such other documents as such Holder
may reasonably request to facilitate the public offering of his Registrable
Securities;
(c) Enter into any reasonable underwriting agreement
containing customary terms required by the proposed underwriter for the selling
Holders, if any;
(d) Use its best efforts to register or qualify the
securities covered by said registration statement under the securities or
"blue-sky" laws of such jurisdictions as any selling Holder may reasonably
request, provided that the Company shall not be required to register or qualify
the securities in any jurisdictions which require it to qualify to do business
or subject itself to general service of process therein;
(e) Immediately notify each selling Holder, at any time when
a prospectus relating to his Registrable Securities is required to be delivered
under the Securities Act, of the happening of any event as a result of which
such prospectus contains an untrue statement of a material fact or omits any
material fact necessary to make the statements therein not misleading, and, at
the request of any such selling Holder, prepare a supplement or amendment to
such prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(f) Cause all such Registrable Securities to be quoted on
the market or listed on each securities exchange, as applicable, on which
similar securities issued by the Company are then quoted or listed; and
(g) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission and make generally available
to its security holders, in each case as soon as practicable, but not later
than 45 days after the close of the period covered thereby (90 days in case the
period covered corresponds to a fiscal year of the Company), an earnings
statement of the Company which will satisfy the provisions of Section 11(a) of
the Securities Act.
6. INDEMNIFICATION; CONTRIBUTION.
(a) Incident to any registration statement referred to in
this Agreement, and subject to applicable law, the Company will enter into a
commercially reasonable indemnification
5
<PAGE> 6
arrangement with each underwriter and will indemnify and hold harmless each
Holder of Registrable Securities (including its respective directors, officers,
employees and agents) so registered, and each person who controls any of them
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages, expenses
and liabilities, joint or several (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are
based on: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement (including any related
preliminary or definitive prospectus, or any amendment or supplement to such
registration statement or prospectus); (ii) any omission or alleged omission to
state in such document a material fact required to be stated in it or necessary
to make the statements in it not misleading; or (iii) any violation by the
Company of the Securities Act, the Exchange Act, any state securities or "blue
sky" laws or any rule or regulation thereunder in connection with such
registration; PROVIDED, HOWEVER, that the Company will not be liable to the
extent that such loss, claim, damage, expense or liability arises from and is
based on: (A) an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information furnished in
writing to the Company by any underwriter of the offering, Holder or
controlling person expressly for use in such registration statement; or (B) any
preliminary prospectus, to the extent that any such loss, claim, damage or
liability results solely from an untrue statement of a material fact contained
in, or the omission of a material fact from, such preliminary prospectus which
untrue statement or omission was corrected in the final prospectus, if the
Company shall sustain the burden of proving that a Holder sold Registrable
Securities to the person alleging such loss, claim, damage or liability without
sending or giving, at or prior to the written confirmation of such sale, a copy
of the final prospectus. With respect to such untrue statement or omission or
alleged untrue statement or omission in the information furnished in writing to
the Company by such Holder expressly for use in such registration statement,
each underwriter and such Holder will indemnify and hold harmless the Company
(including its directors, officers, employees and agents), each other Holder of
Registrable Securities (including its respective directors, officers, employees
and agents) so registered, and each person who controls any of them within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, expenses and liabilities,
joint or several, to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, to the same extent provided in the
immediately preceding sentence (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted). In no event, however, shall
the liability of a Holder for indemnification under this Section 6(a) exceed
the lesser of: (i) that proportion of the total of such losses, claims, damages
or liabilities indemnified against equal to the proportion of the total
Registrable Securities sold under such registration statement which is being
sold by such Holder; or (ii) the proceeds received by such Holder from its sale
of Registrable Securities under such registration statement.
6
<PAGE> 7
(b) If the indemnification provided for in Section 6(a)
above for any reason is held by a court of competent jurisdiction to be
unavailable to an indemnified party in respect of any losses, claims, damages,
expenses or liabilities referred to therein, then each indemnifying party under
this Section 6, in lieu of indemnifying such indemnified party thereunder,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, expenses or liabilities: (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the other selling Holders and the underwriters from the offering of
the Registrable Securities; or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, the other selling Holders and the
underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, expenses or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the selling Holders and the underwriters shall be deemed to be in the
same respective proportions as the net proceeds from the offering (before
deducting expenses) received by the Company and the selling Holders and the
underwriting discount received by the underwriters, in each case as set forth
in the table on the cover page of the applicable prospectus, bear to the
aggregate public offering price of the Registrable Securities. The relative
fault of the Company, the selling Holders and the underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, the
selling Holders or the underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Holders, and the underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 6(b) were determined by pro rata or per capita allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. In no event,
however, shall a Holder be required to contribute any amount under this Section
6(b) in excess of the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified against equal to the
proportion of the total Registrable Securities sold under such registration
statement which is being sold by such Holder; or (ii) the proceeds received by
such Holder from its sale of Registrable Securities under such registration
statement. No person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(c) The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in this
Section 6 shall be deemed to include, subject to the limitations set forth
above, any reasonable legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. The indemnification and contribution provided for in this Section 6
will remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified parties or any officer, director, employee, agent
or controlling person of the indemnified parties.
7. RULE 144 REQUIREMENTS. If the Company becomes, and for so long as
it remains, subject to the reporting requirements of either Section 13 or 15(d)
of the Securities Exchange Act
7
<PAGE> 8
of 1934, as amended, the Company will use its best efforts to file with the
Commission such information as the Commission may require under either of said
Sections; and in such event, the Company shall use its best efforts to provide
such current public information as may be required as a condition to the
availability of Rule 144 under the Securities Act (or any successor or similar
exemptive rules hereafter in effect). The Company shall furnish to any Holder
of Registrable Securities upon request a written statement executed by the
Company as to the steps it has taken to comply with the current public
information requirement of Rule 144 or such successor rules.
8. TRANSFER OF REGISTRATION RIGHTS. The registration rights of the
Lenders under this Agreement may be transferred to any transferee of the
Registrable Securities outstanding at the time of such transfer. Each such
transferee shall be deemed to be a "Holder" for purposes of this Agreement. The
Lenders shall notify the Company at the time of such transfer.
9. MARKET STAND-OFF. Each Holder and Founder agrees, if requested by
any underwriter for an offering of Common Stock of the Company, not to sell or
otherwise transfer or dispose of any Common Stock (or other securities of the
Company) held by it for up to 180 days following the effective date of any
registration statement of the Company filed under the Act, subject, with
respect to the Holders, to the condition that all other Holders, Founders, and
directors and executive officers of the Company enter into similar agreements;
PROVIDED, HOWEVER, that this Section 9 shall not be construed to prohibit the
redemption of any Redeemable Preferred Stock held by the Holders.
10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Lenders as' follows:
(a) The execution, delivery and performance of this
Agreement by the Company have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any court or
other agency of government, the Articles of Incorporation or By-laws of the
Company or any provision of any indenture, agreement or other instrument to
which it or any of its properties or assets is bound, conflict with, result in
a breach of or constitute (with due notice or lapse of time or both) a default
under any such indenture, agreement or other instrument or result in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company.
(b) This Agreement has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy and other laws of general application
relating to creditor's rights or general principles of equity.
11. SURVIVAL OF COVENANTS. All covenants and agreements contained in
this Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto (including without limitation transferees of any Registrable
Securities), whether so expressed or not.
8
<PAGE> 9
12. NOTICES AND DEMANDS. Any notice or demand which, by any provision
of this Agreement or any agreement, document or instrument executed pursuant
hereto or thereto, except as otherwise provided therein, is required or
provided to be given shall be deemed to have been sufficiently given or served
and received for all purposes when delivered in hand, by facsimile transmission
with receipt acknowledged or by express delivery providing receipt of delivery,
to the following addresses and numbers: if to the Company, at its address as
shown on the signature page hereof, or at any other address designated by the
Company to the Lenders in writing; if to a Lender, at its mailing address and
facsimile number, if applicable, as shown on EXHIBIT A hereto, or at any other
address or facsimile number designated by such Lender to the Company and the
other Lenders in writing; and if to an assignee of a Lender, at its address or
facsimile number as designated to the Company and the other Lenders in writing.
13. GOVERNING LAW. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of The
Commonwealth of Massachusetts.
14. SEVERABILITY. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any
manner affect or render illegal, invalid or unenforceable any other provision
of this Agreement, and this Agreement shall be carried out as if any such
illegal, invalid or unenforceable provision were not contained herein.
9
<PAGE> 10
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the day and year first above written.
SMITH-GARDNER & ASSOCIATES, INC.
By: /S/ Wilburn Smith
-----------------------------------
Name: Wilburn Smith
Title: President
LENDERS:
ADVENT VII L.P.
By: TA Associates VII L.P., its General
Partner
By: TA Associates, Inc., its General
Partner
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
ADVENT ATLANTIC AND PACIFIC II
L.P.
By: TA Associates AAP II Partners, its
General Partner
By: TA Associates, Inc., its General
Partner
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
10
<PAGE> 11
CHESTNUT III LIMITED PARTNERSHIP
By: TA Associates VI L.P., its
Attorney-in-Fact
By: TA Associates, Inc., its General
Partner
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
CHESTNUT CAPITAL
INTERNATIONAL III LIMITED
PARTNERSHIP
By: TA Associates VI L.P., its
Attorney-in-Fact
By: TA Associates, Inc., its General
Partner
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
ADVENT NEW YORK L.P.
By: TA Associates VI L.P., its General
Partner
By: TA Associates, Inc., its General
Partner
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
11
<PAGE> 12
ADVENT INDUSTRIAL II ________
By: TA Associates VI L.P., its General
Partner
By: TA Associates, Inc., its General
Partner
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
TA VENTURE INVESTORS LIMITED
PARTNERSHIP
By: /s/ Jacqueline C. Morby
-----------------------------------
Jacqueline C. Morby
Managing Director
FOUNDERS:
/s/ Wilburn Smith
---------------------------------------
Wilburn Smith
/s/ Allan Gardner
---------------------------------------
Allan Gardner
12
<PAGE> 1
EXHIBIT 10.14
NON-COMPETITION AGREEMENT
THIS AGREEMENT is dated as of December 19, 1994 between Smith-Gardner &
Associates, Inc., a Florida corporation (together with any successor entity
hereinafter referred to as the "Company") and Wilburn Smith (the "Executive").
WHEREAS, pursuant to a certain Debenture Purchase Agreement (the
"Purchase Agreement") dated as of December 19, 1994 by and among the Company,
the Executive, and the lenders named therein (the "Lenders"), the Lenders have
agreed to purchase convertible debentures due in the year 2000 (the
"Debentures") from the Company in an aggregate principal amount of $12,000,000;
WHEREAS, the Executive is a substantial shareholder of the Company and
the extension of credit represented by the Debentures will significantly benefit
the Company, which benefit will inure, in part, to the Executive; and
WHEREAS, the execution of this Agreement is an inducement and a
condition precedent to the purchase by the Lenders of the Debentures under the
Purchase Agreement.
NOW, THEREFORE, the Executive, intending to be legally bound,
hereby agrees as follows:
1. NONCOMPETITION AGREEMENT. For the period of the Executive's
employment with the Company as an officer, director, employee or a consultant
and continuing thereafter until the third anniversary of the date of termination
of the Executive's employment with the Company (such period hereinafter referred
to as the "Non-Competition Term"), the Executive will not, without the written
consent of the Company and a majority in interest of the Lenders, directly or
indirectly engage or participate in or assist, as owner, part-owner,
shareholder, partner, director, officer, trustee, employee, agent or consultant
or in any other material capacity, any business organization whose activities or
products are competitive with the activities or products of the Company or any
subsidiary or parent of the Company; provided that the Executive may make
passive investments in a competitive enterprise the shares of which are publicly
traded if the Executive's investment constitutes less than 1% of the issued and
outstanding capital stock of such enterprise. The foregoing agreement not to
compete shall apply in any and all countries in which the activities of the
Company or any subsidiary or parent of the Company shall have been conducted, or
the products or services of the Company sold or licensed, on or before the date
upon which the Executive's employment by the Company ceases.
2. NON-SOLICITATION. For the Non-Competition Term, the Executive will
not, without the written consent of the Company and a majority in interest of
the Lenders, solicit or encourage, or cause others to solicit or encourage, any
employees of the Company to terminate their employment with the Company or any
customers of the Company to terminate their relationship with the Company.
Without implied limitation, the foregoing shall include hiring or attempting to
hire for or on behalf of any competitor any officer or other employee to
terminate his or her relationship or
<PAGE> 2
employment with the Company, and soliciting on behalf of any competitor any
customer of the Company.
3. REMEDIES FOR BREACH. If the Executive breaches any of the terms of
this Agreement, in addition to any other remedies which it may have, the Company
may obtain an injunction to restrain or prevent such breach or further breach
and may terminate the Executive's employment and participation in any employee
plans in accordance with the employment policies of the Company as in effect
from time to time, and the Executive shall forfeit any further salary from the
Company. The failure of the Company to require the performance of any term or
obligation provided for herein, or the waiver by the Company of any breach of
this Agreement, shall not prevent enforcement of such term or obligation, or be
deemed a waiver of any subsequent breach.
4. MISCELLANEOUS. This Agreement shall be governed by and construed
under the laws of the State of Florida and shall not be modified or discharged
in whole or in part except by an agreement in writing signed by the parties
hereof and approved by a majority in interest of the Lenders. This Agreement
shall be assignable by the Company to and shall inure to the benefit of
successors of the Company by way of merger, consolidation or transfer of
substantially all of the assets of the Company. In case any one or more of the
provisions or parts of a provision contained in this Agreement shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement, but this Agreement shall be construed
as if such invalid or illegal or unenforceable provision or part of a provision
had never been contained herein; provided, however, with respect to Section 1
and Section 2, if such Sections would be enforceable if the scope was limited
with respect to time periods, geographic areas or the definition of the business
of the Company, the parties hereby agree that this Agreement shall be construed
to include such limitations.
5. THIRD PARTY BENEFICIARY. The Lenders, shall be deemed to be third
party beneficiaries of this Agreement and shall be entitled to enforce this
Agreement, as if they had been signatories hereto.
6. ACKNOWLEDGMENTS. The Executive represents that he is knowledgeable
about the business of the Company and further represents that he is capable of
pursuing, and willing to pursue, a career to earn a proper livelihood without
violating the terms of this Agreement. The Executive recognizes and agrees that
the enforcement of this Agreement is necessary to ensure the preservation,
protection and continuity of the business, trade secrets and goodwill of the
Company. The Executive agrees that, due to the proprietary nature of the
Company's business, the restrictions set forth in this Agreement are reasonable
as to time and scope.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
SMITH-GARDNER & ASSOCIATES, INC.
/s/ Wilburn Smith By: /s/ Allan Gardner
- ------------------------------ -------------------------------
Wilburn Smith
2
<PAGE> 1
EXHIBIT 10.15
NON-COMPETITION AGREEMENT
THIS AGREEMENT is dated as of December 19, 1994, between Smith-Gardner
& Associates, Inc., a Florida corporation (together with any successor entity
hereinafter referred to as the "Company") and Allan Gardner (the "Executive").
WHEREAS, pursuant to a certain Debenture Purchase Agreement (the
"Purchase Agreement") dated as of December 19, 1994 by and among the Company,
the Executive, and the lenders named therein (the "Lenders"), the Lenders have
agreed to purchase convertible debentures due in the year 2000 (the
"Debentures") from the Company in an aggregate principal amount of $12,000,000;
WHEREAS, the Executive is a substantial shareholder of the Company and
the extension of credit represented by the Debentures will significantly benefit
the Company, which benefit will inure, in part, to the Executive; and
WHEREAS, the execution of this Agreement is an inducement and a
condition precedent to the purchase by the Lenders of the Debentures under the
Purchase Agreement.
NOW, THEREFORE, the Executive, intending to be legally bound, hereby
agrees as follows:
1. NONCOMPETITION AGREEMENT. For the period of the Executive's
employment with the Company as an officer, director, employee or a consultant
and continuing thereafter until the third anniversary of the date of termination
of the Executive's employment with the Company (such period hereinafter referred
to as the "Non-Competition Term"), the Executive will not, without the written
consent of the Company and a majority in interest of the Lenders, directly or
indirectly engage or participate in or assist, as owner, part-owner,
shareholder, partner, director, officer, trustee, employee, agent or consultant
or in any other material capacity, any business organization whose activities or
products are competitive with the activities or products of the Company or any
subsidiary or parent of the Company; provided that the Executive may make
passive investments in a competitive enterprise the shares of which are publicly
traded if the Executive's investment constitutes less than 1% of the issued and
outstanding capital stock of such enterprise. The foregoing agreement not to
compete shall apply in any and all countries in which the activities of the
Company or any subsidiary or parent of the Company shall have been conducted, or
the products or services of the Company sold or licensed, on or before the date
upon which the Executive's employment by the Company ceases.
2. NON-SOLICITATION. For the Non-Competition Term, the Executive will
not, without the written consent of the Company and a majority in interest of
the Lenders, solicit or encourage, or cause others to solicit or encourage, any
employees of the Company to terminate their employment with the Company or any
customers of the Company to terminate their relationship with the Company.
Without implied limitation, the foregoing shall include hiring or attempting to
hire for or on behalf of any competitor any officer or other employee to
terminate his or her relationship or
<PAGE> 2
employment with the Company, and soliciting on behalf of any competitor any
customer of the Company.
3. REMEDIES FOR BREACH. If the Executive breaches any of the terms of
this Agreement, in addition to any other remedies which it may have, the Company
may obtain an injunction to restrain or prevent such breach or further breach
and may terminate the Executive's employment and participation in any employee
plans in accordance with the employment policies of the Company as in effect
from time to time, and the Executive shall forfeit any further salary from the
Company. The failure of the Company to require the performance of any term or
obligation provided for herein, or the waiver by the Company of any breach of
this Agreement, shall not prevent enforcement of such term or obligation, or be
deemed a waiver of any subsequent breach.
4. MISCELLANEOUS. This Agreement shall be governed by and construed
under the laws of the State of Florida and shall not be modified or discharged
in whole or in part except by an agreement in writing signed by the parties
hereof and approved by a majority in interest of the Lenders. This Agreement
shall be assignable by the Company to and shall inure to the benefit of
successors of the Company by way of merger, consolidation or transfer of
substantially all of the assets of the Company. In case any one or more of the
provisions or parts of a provision contained in this Agreement shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement, but this Agreement shall be construed
as if such invalid or illegal or unenforceable provision or part of a provision
had never been contained herein; provided, however, with respect to Section 1
and Section 2, if such Sections would be enforceable if the scope was limited
with respect to time periods, geographic areas or the definition of the business
of the Company, the parties hereby agree that this Agreement shall be construed
to include such limitations.
5. THIRD PARTY BENEFICIARY. The Lenders, shall be deemed to be third
party beneficiaries of this Agreement and shall be entitled to enforce this
Agreement, as if they had been signatories hereto.
6. ACKNOWLEDGMENTS. The Executive represents that he is knowledgeable
about the business of the Company and further represents that he is capable of
pursuing, and willing to pursue, a career to earn a proper livelihood without
violating the terms of this Agreement. The Executive recognizes and agrees that
the enforcement of this Agreement is necessary to ensure the preservation,
protection and continuity of the business, trade secrets and goodwill of the
Company. The Executive agrees that, due to the proprietary nature of the
Company's business, the restrictions set forth in this Agreement are reasonable
as to time and scope.
IN WITNESS WHTEREOF, the parties have executed this Agreement as of the
date first written above.
By: Smith-Gardner & Associates, Inc.
/s/ Alan Gardner /s/ Wilburn Smith
- --------------------------------- ------------------------------------
Alan Gardner Wilburn Smith
- 2 -
<PAGE> 1
EXHIBIT 10.16
FORM OF NON-COMPETE AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into this _____ day of
__________________, 199 by and between SMITH-GARDNER & ASSOCIATES, INC., a
Florida corporation (the "Company"), and __________________________________ (the
"Employee").
R E C I T A L S
WHEREAS, during the course of the Company's employment, the Employee
will become familiar with many secret processes, methods of manufacture,
formulae, and with development of new and improved designs, processes, methods
of manufacture, customers, and ideas which are original or proprietary to the
Company;
WHEREAS, great loss and damage would be sustained by the Company if,
during the term of this Agreement or following the Employee's termination, the
Employee were to make any of the formulae, processes, customers, methods of
manufacture or techniques learned during the term of employment available to
other persons engaged in competition with the Company or use the same in
competition with the Company; and
WHEREAS, the parties desire to define the duties and responsibilities
of each of the parties hereto, and the Company desires to employ the Employee
only if the Employee agrees to the terms and conditions hereafter stated.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. EXCLUSIVE EMPLOYMENT. During the Employee's employment by the
Company, the Employee agrees to devote his/her exclusive time to the business of
the Company. The Employee agrees not to accept other employment that may
conflict with the performance of the duties prescribed by the Company during the
term of this Agreement, except with the written consent of the Company. During
the term of this Agreement, the Company may, from time to time, direct that the
Employee perform work for third parties, it being specifically understood that
any such work shall be in the Employee's capacity as an employee of the Company.
2. WORK PRODUCT. All copyrights, patents, trade secrets, or other
intellectual property rights associated with any ideas, concepts, techniques,
inventions, processes, or works of authorship created by the Employee, solely or
jointly with others, during the Employee's employment with the Company, and
during the year next following the termination of employment of the Employee
with the Company, and which relate to any of the products, designs or systems
developed, invented, created or designed by the Employee or the Company during
the period of the Employee's employment with the Company (collectively, the
"Work Product") shall be considered work made
<PAGE> 2
for hire by the Employee and shall be owned exclusively by the Company. The
Employee agrees to assign, and shall automatically assign at the time of
creation of the Work Product, without any requirement of further consideration,
any right, title, or interest the Employee may have in such Work Product to the
Company. Upon the request of the Company, the Employee agrees to perform such
acts as may be necessary or desirable to transfer, perfect and defend the
Company's ownership of any Work Product, as determined by the Company in its
sole and absolute discretion, including: (i) executing, acknowledging and
delivering any requested affidavits and documents of assignment and conveyance;
(ii) obtaining and assisting in the enforcement of copyrights and, if
applicable, patents with respect to any Work Product in the United States and
elsewhere; (iii) providing testimony in connection with any proceedings
affecting the right, title or interest of the Company in any Work Product; and
(iv) executing and delivering any other documents and performing any other acts
deemed necessary or desirable by the Company in its sole and absolute discretion
to protect the Company's ownership of the Work Product.
3. CONFIDENTIALITY.
(a) The Employee acknowledges and agrees that (i) all
Confidential Information (as herein defined) is the sole and exclusive property
of the Company and that the Company owns all world wide copyrights, trade secret
rights, confidential and proprietary information rights and all other property
rights with respect to such Confidential Information, and (ii) any disclosure of
Confidential Information to the Employee shall not confer upon the Employee any
license, interest or right of any kind or nature in or to the Confidential
Information or any use thereof.
(b) The Employee will hold in confidence and not use in any
manner, reproduce, distribute, transmit or transfer, directly or indirectly, in
any form, by any means or for any purpose, any Confidential Information
communicated, discussed, delivered or made available by the Company to or
received by the Employee, except to the extent authorized to do so in writing by
an officer of the Company.
(c) "Confidential Information" means any and all information,
including Trade Secrets, that is disclosed by the Company to the Employee,
regardless of its nature, and any and all Work Product; provided, however, that
the following shall not be deemed Confidential Information: (A) information that
was already known to the Employee, without obligation to keep it confidential,
at the time of its receipt from the Company; (B) information that was received
by the Employee in good faith from a third party lawfully in possession thereof
and having no obligation to keep such information confidential; or (C)
information that was publicly known at the time of its receipt by the Employee
or has become publicly known other than by a breach of this Agreement or other
action by the Employee. "Trade Secrets" means information, including, but not
limited to, any technical or nontechnical data, formulas, patterns,
computations, programs, devices, methods, inventions, techniques, drawings,
processes, designs, financial data, financial or business plans, product plans,
or lists of actual or potential customers or suppliers, which (i) derive
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by,
- 2 -
<PAGE> 3
other persons who can obtain economic value from its disclosure or use, and (ii)
is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
4. TERM OF AGREEMENT. This Agreement will remain in effect during any
period in which the Employee is employed by the Company; provided, however, the
provisions of paragraph 2 shall survive the termination hereof and shall remain
in full force and effect for the period as stated therein and the provisions of
paragraph 3 shall remain in full force and effect indefinitely. The Employee
hereby acknowledges that the execution by the Company of this Agreement shall
not confer upon the Employee any right to employment or continuance of
employment by the Company.
5. THIRD PARTY AGREEMENTS. The Employee hereby represents that the
Employee is not bound by the terms of any agreement with any previous employer
or other party which restricts in any way the Employee's use or disclosure of
any information or the Employee's engagement in any business. Further, the
Employee represents that the Employee's employment by the Company will not
violate any agreements the Employee may have with any such previous employer or
other party and that, during Employee's employment with the Company, the
Employee will not make use of any information in violation of any agreements
with or rights of any such previous employer or other party.
6. OTHER.
(a) The parties agree that any breach of this Agreement by the
Employee will result in irreparable injury to the Company, and the Company
shall, in addition to all other remedies provided by law, be entitled to an
injunction to prevent a breach or contemplated breach of any covenant of the
Employee herein contained.
(b) It is mutually agreed that each of the covenants herein
contained is reasonable, as well as independent and severable. Each such
covenant shall remain in full force and effect regardless of the enforceability
of any other covenant herein, or of the breach thereof by either party.
(c) This Agreement contains the entire agreement between the
parties, and no understandings exist between the parties other than as expressed
herein. This Agreement may be amended or modified only by written agreement.
(d) It is agreed between the parties hereto that the
interpretation and enforcement of this Agreement shall be governed by the laws
of the State of Florida.
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<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
COMPANY:
SMITH-GARDNER & ASSOCIATES, INC.
By:
------------------------------------
Name:
Title:
EMPLOYEE:
---------------------------------------
Name:
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<PAGE> 1
EXHIBIT 10.18
CLIENT SYSTEMS, LLC
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement") is made and entered into
this 17th day of March, 1998, by and between Client Systems, LLC, a Colorado
limited liability company (the "Distributor") and Smith Gardner & Associates,
a(n) _______________ Sole Proprietor, Partnership, Limited Liability Company,
Limited Liability Partnership, "C" Corporation or "S" Corporation (the
"Reseller").
R E C I T A L S:
Reseller acknowledges that he/she has completed the appropriate
reseller application for each Vendor Reseller wishes to represent (where
applicable). Reseller further acknowledges that the application, when once
approved by said Vendor, appoints Reseller as an authorized, non-exclusive
Reseller for the products listed on or contained within said instrument of
authorization or any addenda thereto (the "Authorization Agreement").
1. TERM. The term of this Agreement shall be co-terminous with any and
all Authorized Agreement(s), unless earlier terminated as provided herein.
2. RESELLER RESPONSIBILITIES. Reseller hereby certifies that as a
Reseller:
(a) The products purchased hereunder for Reseller purposes
shall be incorporated in a system consisting of hardware, and/or software,
and/or services which Reseller manufactures, develops, sells or provides (the
"Added Value") which Reseller sells or leases to end-users as a regular course
of business.
(b) Reseller is aware that Hewlett-Packard, Oracle or any
other vendor having appointed Reseller as an authorized, non-exclusive Reseller
(the "Vendor") may withdraw its permission for sales to Reseller with or without
cause at any time by notifying Distributor and Reseller in writing, as outlined
in the respective agreement with said Vendor.
(c) Distributor requires documentation, per order, from
Reseller regarding end-user customer prior to processing orders. Each order
requires end-user company name, end-user company contact name, street address
(cannot be a P.O. box), City, State, Postal Code, Country (where products will
be installed and put into service), telephone number, and facsimile number.
3. LIMITS ON DISTRIBUTOR RESPONSIBILITIES.
(a) Distributor accepts no responsibility for the performance
of the Reseller's application in the end-user's environment.
<PAGE> 2
(b) Distributor will not be liable for delays in performance
or for the nonperformance due to unforeseen circumstances or causes beyond its
reasonable control.
4. RELATIONSHIP. Reseller's relationship with Distributor will be that
of an independent contractor. Neither party will have, nor represent that it
has, any power, right or authority to bind the other party, or to assume or
create any obligation or responsibility, expressed or implied, on behalf of the
other party's name except as expressly permitted.
5. PRICING.
(a) Pricing is subject to change without prior notice.
(b) Net Reseller price does not include state and local taxes.
(c) Reseller must provide completed sales tax exemption
certificates for his/her state and all states into which Reseller requests
Distributor to ship product. The sales and use tax exemption certificate(s) must
be received prior to opening a new account or shipping into a newly designated
state.
(d) Distributor will invoice Reseller for those taxes, based
on point of delivery, unless the appropriate resale exemption certificates are
on file at Distributor's order entry point, or Distributor agrees the sale is
otherwise exempt.
(e) Reseller is responsible for reporting all use tax with
respect to all orders placed by Reseller for his/her own use.
(f) All standard Vendor terms and conditions of sale apply, as
outlined in the Authorized Agreement(s) or any addenda thereto.
6. INTERNATIONAL ORDERS. Reseller must apply for international access
with each Vendor Reseller wishes to represent internationally. Upon being
granted said access, Distributor will work with designated Vendor and products
quoted will reflect the "export" price and configuration. The "export" price and
configuration differs from the domestic price and configuration in several ways
including the following:
(a) The "export" price provides competitive parity with the
destination country (the term "export" does not explicitly and/or implicitly
imply the cost of actually exporting the order).
(b) The configuration may vary based on the destination
country; the options, such as voltage requirements, may be different dependent
upon the destination country.
(c) All shipments are shipped FOB shipping point. All
shipments will be shipped to the Reseller unless Reseller specifies another
DOMESTIC address in writing on the purchase order
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<PAGE> 3
or via facsimile or e-mail. Reseller is responsible for all duty, taxes and
any/all additional costs associated with said international order.
7. SHIPPING. All shipments are shipped FOB shipping point. The standard
method of shipping is ground. Shipments for all orders will be shipped ground
free of charge. Requests for expedited methods of shipping must be specified on
the Reseller's purchase order or must be received in writing via facsimile or
e-mail and will be assessed an additional charge.
8. WILL CALL. Distributor will provide Reseller the option and
convenience of picking up his/her order at Distributor's warehouse. Pick-up
hours are from 8:00 am. to 5:00 p.m. Mountain Standard Time.
9. RETURN POLICIES AND PROCEDURES. All shipments should be inspected
and tested upon receipt. Reseller is responsible for proper usage, installation
and support of all products. If product is believed to be defective or if there
is a shipping or billing problem, Reseller is required to:
(a) Call Distributor immediately at (303) 337-7300.
(b) Save all original packing materials.
(c) Claims for incorrect shipments, billing errors, or DOA
products must be made within ten (10) days from receipt of shipment.
(d) If Reseller finds it necessary to return product(s) for
credit, Reseller must call Distributor at (303) 337-7300. Within twenty-four
(24) hours of an approved return, Distributor will issue an RMA number to
Reseller via facsimile. RMA numbers are valid for ten (10) business days from
issuance. Reseller must clearly display RMA number on the packing slip and
shipping label on the outside of each carton returned. Distributor may refuse
any return received without an RMA number. PRODUCTS MUST BE RETURNED IN THEIR
ORIGINAL PACKAGING OR BOXING and must be in the same condition as received with
all manuals, diskettes, cables, warranty cards and packing material. Returns
must be shipped freight prepaid to Distributor.
(e) Reseller, unless otherwise directed by Distributor, is
responsible for the freight and insurance for product(s) returned from Reseller
or end-user to Distributor. Distributor, at its discretion, may reject any
returned product(s) and return said shipment to Reseller. Should Distributor
find cause to reject returned product, Reseller will be responsible for the
freight and insurance costs associated with the shipment of product from
Distributor back to Reseller.
(f) Distributor agrees to be bound by Vendor restrictions on
return of product. Current Vendor restrictions apply to all software whose
license seals have been broken.
- 3 -
<PAGE> 4
10. DAMAGED SHIPMENTS.
(a) If shipment is visibly damaged and deemed unacceptable
upon receipt, Reseller should refuse shipment and notify Distributor
immediately.
(b) If shipment is visibly damaged upon receipt but
acceptable, Reseller must note the damage when signing for the shipment.
(c) If shipment has concealed damage, Reseller should report
the damage to Distributor within twenty-four (24) hours of receipt.
11. NEW ACCOUNT POLICIES AND PROCEDURES. New Reseller accounts are
normally processed within three (3) business days and require the following
information:
(a) A completed Client Systems credit application, with trade
reference information and current financial statements that are to be updated
quarterly (audited statements are preferred).
Net-30 credit terms are available upon approval of
credit, at Client Systems sole discretion. Credit lines will be determined based
upon the financial strength and overall credit worthiness of Reseller based on
the financial statements provided and on the information obtained from
Reseller's trade references.
(b) A completed Client Systems, LLC Two-Tier Distribution
Agreement.
(c) A sales and use tax exemption certificate for every state
into which Reseller will sell product.
(d) A completed Reseller Authorization Agreement for each
Vendor Reseller wishes to represent (where applicable).
12. PAYMENT TERMS AND CONDITIONS. Client Systems extends an Early
Payment Discount to its partners. Your company will receive a 1% discount off
the net invoice amount if Client Systems receives payment for the full invoice
amount within 15 days of the invoice date! (Otherwise, Net 30 terms apply.)
Terms are net thirty (30) days from date of shipment. Reseller agrees to make
payment in full to Distributor for all amounts due according to Distributor's
invoice. If Reseller shall fail to pay any invoice or any other amounts or
charges due hereunder by the date upon which such payment is due, the unpaid
balance of such payments shall bear interest at the per annum rate of eighteen
(18%) percent from the date due to the date of payment. All payments shall be
paid by Reseller to Distributor at Client Systems, LLC, Department 563, Denver,
Colorado 80291-0563 or at such other place as may from time to time be
designated by notice from by Distributor to Reseller.
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<PAGE> 5
13. CASH IN ADVANCE. Should Reseller fail to be in compliance with the
open account terms and conditions, Reseller will be placed on a "cash in
advance" status.
14. RETURNED CHECKS. If a Reseller's check is returned to Distributor's
bank, Reseller will be assessed a thirty-five ($35.00) dollar service charge per
check and will be required to wire transfer the amount due within forty-eight
(48) hours of notification by Distributor or the amount due will be placed for
collection.
15. NOTICES. Any notice required or permitted to be given pursuant
hereto, or in connection herewith, shall be deemed sufficient if in writing, to
the other party and sent by registered or certified United States Mail, return
receipt requested, postage prepaid, or sent by reputable overnight courier.
Notice shall be deemed to be received on the date of execution of the return
receipt or the date upon which the Postal Service or overnight courier first
attempted delivery of such notice and the same is undelivered or refused.
If to Distributor: Reseller Relations Administrator
Client Systems, LLC
2452 South Trenton Way
Denver, Colorado 80231
If to Reseller: -------------------------------
-------------------------------
-------------------------------
Any party may change the notice address for purposes of this Section by
giving the other parties at least ten (10) days written notice of new address in
the manner set forth above.
16. TERMINATION. Distributor and/or Reseller shall have the right to
terminate this Agreement by giving the other party thirty (30) days written
notice of such termination. However, termination of this Agreement does not
relieve Reseller's obligation to pay Distributor all amounts due and owing under
this Agreement.
17. GOVERNING LAW. In view of the fact that the principal office of
Distributor is located in the State of Colorado, it is understood and agreed
that the construction and interpretation of this Agreement shall at all times
and in all respects be governed by the laws of the State of Colorado.
18. SEVERABILITY. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any one or more of the
provisions hereof shall not affect the validity or enforceability of the other
provisions hereof.
19. JURISDICTIONAL CONSENT. The parties hereto agree, stipulate and
consent that the court and authorities of the State of Colorado and the Federal
District Court for the District of Colorado
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<PAGE> 6
shall have sole jurisdiction and venue over all controversies which may arise
with respect to the execution, interpretation and compliance with this
Agreement, and Reseller hereby waives any other jurisdiction and venue to which
he/she may be entitled by virtue of domicile or otherwise.
20. ATTORNEYS' FEES. In the event of a breach of this Agreement by
Reseller, and if Distributor places this Agreement in the hands of any attorney
for enforcement of the terms of this Agreement, whether suit is brought or not,
or for recovery of damages and other remedies as herein provided, Reseller shall
pay all costs of enforcement and litigation together with reasonable attorneys'
fees.
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<PAGE> 7
IN WITNESS WHEREOF, Distributor and Reseller have duly executed this
Agreement as of the day and year first above written.
DISTRIBUTOR:
CLIENT SYSTEMS, LLC
By: /s/ Bud Michael
---------------------------------------
Its: Vice President
-----------------------------------
Date: 3/7/98
----------------------------------
RESELLER:
------------------------------------------
By: /s/ Gary G. Hegna
---------------------------------------
Its: President and CEO
-----------------------------------
Date: 3/6/98
----------------------------------
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<PAGE> 1
EXHIBIT 10.19
POWERHOUSE VALUE-ADDED RESELLER AGREEMENT
- --------------------------------------------------------------------------------
By and Between:
COGNOS CORPORATION
A DELAWARE CORPORATION LOCATED AT
67 SOUTH BEDFORD STREET
SUITE 200W
BURLINGTON, MA 01803
----------------------------------------------------
CONTRACTUAL CONTACT PERSON/TELEPHONE NUMBER
(HEREIN REFERRED TO AS "COGNOS")
-AND-
SMITH-GARDNER & ASSOCIATES, INC.
A FLORIDA CORPORATION LOCATED AT
5455 M. NORTH FEDERAL HIGHWAY
BOCA RATON, FLORIDA 33487
WILL SMITH (407) 241-9505
-------------------------
CONTRACTUAL CONTACT PERSON/TELEPHONE
(HEREIN REFERRED TO AS " VAR")
<PAGE> 2
1.0 DEFINITIONS
For the purpose of this Agreement, the following are defined terms:
1.1 The term "Software" shall mean the information processing
program(s), in object code or binary form only, and Related
Documentation (as hereinafter defined) developed and/or marketed by
COGNOS under the trade names set out in Schedule A for use on the
computer makes and models set out in Schedule A.
1.2 The term "Shrink-Wrapped Software" is included within the meaning
of the term Software and shall mean Software commonly distributed in a
sealed package which references the user to a COGNOS License Agreement
enclosed therein.
1.3 The term "Demonstration Software" is included within the meaning of
the term Software and shall mean a version of the Software which is
intended to be used for demonstration or evaluation purposes only and
which may contain coded instructions which inactivate or erase the
program within a specified time period or which is marked or otherwise
identified as being meant for demonstration or evaluation purposes.
1.4 The term "Related Documentation" is included within the meaning of
the term Software and shall mean the user manuals and any other
documentation which accompanies the Software on delivery.
1.5 The term "Sublicense" shall mean the written license set forth in
Schedule B, pursuant to which end users shall be licensed to use the
Software, or, with respect to Shrink-Wrapped Software, the written
license agreement that is embedded with the Shrink-Wrapped Software and
pursuant to which end users shall be licensed to use the Software. The
corresponding verb "sublicense" shall mean the act of granting an end
user the right to use the Software by means of binding the end user to
a "Sublicense".
1.6 The term "Sublicensee" shall mean an end user of. the Software who
has signed a Sublicense or who, in respect of shrink-wrapped Software,
has become a licensee of the Software by opening the sealed Software
container.
1.7 The term "Territory" shall mean the geographical area and
territories set out in Schedule A. This Agreement may be extended to
other geographical areas only by amendment in writing signed by both
parties.
1.8 The term "CPU" shall mean central processing unit.
1.9 The term "Subdistributor" shall mean an entity to which VAR has
granted, pursuant to Section 3. 1, a subset of the rights granted
herein by COGNOS to VAR.
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<PAGE> 3
1.10 The term "Effective Date" shall mean the date last written below.
1.11 The term "Agreement" shall mean this PowerHouse Value-Added
Reseller Agreement entered into as of the Effective Date including all
Schedules attached hereto.
2.0 ACKNOWLEDGMENT OF COGNOS OWNERSHIP RIGHTS
2.1 VAR acknowledges that the Software and its Related Documentation
contain confidential and proprietary information and trade secrets
belonging to COGNOS and its licensors, that title and ownership rights
to the Software shall remain exclusively with COGNOS and its licensors,
and that VAR's rights to the Software are strictly limited to those
specifically granted in this Agreement.
2.2 Except as expressly permitted herein, VAR shall not make any copies
of the Software without the express written consent of COGNOS.
2.3 VAR shall not reverse compile the Software. VAR shall not remove or
alter any designations and marks on the Software. VAR shall not make
the Software available on a service bureau basis or in a time-sharing
environment without the express prior written consent of COGNOS.
3.0 LICENSE GRANT
3.1 COGNOS hereby grants to VAR, and VAR hereby accepts, subject to the
terms and conditions contained in this Agreement, a non-exclusive,
nontransferable license to manufacture, copy, market, demonstrate and
sublicense the Software to Sublicensees for use on CPUs located in the
Territory. Upon advance approval by COGNOS, VAR may grant to
Subdistributors in the Territory the right to market, demonstrate, and
sublicense the Software to Sublicensees for use on CPU's located in the
Territory, provided such Subdistributors first execute written
agreements with VAR containing terms and conditions substantially the
same as those contained herein including, without limitation, those for
the protection of COGNOS.
3.2 VAR's rights hereunder are always contingent upon VAR entering into
and maintaining in good standing a separate internal license and
support agreement (or alternatively a lease agreement) for the
Software. Any breach of such license and support (or lease) agreement,
including a failure to make any payment thereunder, shall entitle
COGNOS to unilaterally revoke any rights granted under this Agreement
without prior notice to VAR.
3.3 VAR's rights hereunder are further contingent upon VAR adding value
to the Software by providing to the Sublicensee products and/or
services as set out in Schedule C.
Page 3 of 21
<PAGE> 4
3.4 VAR's right to sublicense the Software to an end user is further
contingent upon VAR's prior submission to COGNOS of two (2) original
and complete Sublicenses executed by VAR and the end user, or, with
respect to Shrink-Wrapped Software, ensuring that the Sublicense is
included in the sealed Software container delivered to the end user.
VAR will provide notice to COGNOS of any change to a Sublicense, and
such change must be approved by COGNOS in writing prior to execution by
VAR and the end user.
3.5 VAR's rights hereunder are further contingent on VAR having at all
times at least two (2) employees trained by COGNOS in the use and
installation of the Software.
4.0 VAR'S OBLIGATIONS
4.1 VAR agrees to pay to COGNOS the fees and charges set out in Article
6.0.
4.2 VAR agrees to not make, without the prior written consent of
COGNOS, any claim about COGNOS or the Software other than presenting
current information that has been either published by COGNOS or
developed jointly under this Agreement.
4.3 VAR agrees that on all matters relating to the use of COGNOS's
tradename, logo and trademarks, including, without limitation, all
advertising and marketing materials, VAR shall obtain prior written
approval of COGNOS in order to assure proper use.
4.4 VAR agrees to provide to COGNOS, concurrently with the Effective
Date and also within thirty (30) days of COGNOS's request therefor, a
business plan respecting the future marketing and sublicensing efforts
contemplated by VAR.
4.5 VAR agrees to provide support services as described in Schedule D
for all copies of the Software provided by VAR to Sublicensees.
4.6 VAR's right to leave Demonstration Software on a prospective
Sublicensees's CPU is contingent upon VAR obtaining from the
prospective Sublicensee prior to installation a duly executed
Sublicense for a thirty (30) day trial. Demonstration Software may not
be left on a Sublicensee's CPU for a period in excess of thirty (30)
days without the written consent of COGNOS.
4.7 VAR agrees to use its best efforts to market, demonstrate, and
sublicense the Software to end users in the Territory.
4.8 Within two (2) weeks of COGNOS's request, VAR agrees to provide
COGNOS with a written report detailing all Sublicensees by company
name, address, and contact name, trade name of Software licensed, and
CPU make, model, and serial number (only CPU model if Shrink-Wrapped
Software), and also setting forth all sublicense fees paid or due
hereunder.
Page 4 of 21
<PAGE> 5
4.9 VAR agrees to enforce the Sublicense terms and conditions and, if
VAR in COGNOS's sole opinion fails to do so, then, at COGNOS's option
and effective immediately without the need for any further action, VAR
will be deemed to have assigned to COGNOS all rights under such
Sublicense as are required for COGNOS to enforce such terms and
conditions in its own name.
4.10 VAR agrees to provide COGNOS with a complete listing of VAR's
current installed end user base, which listing shall be attached hereto
as Schedule F.
5.0 COGNOS' OBLIGATIONS
5.1 COGNOS agrees to supply VAR with copies of the Software ordered by
VAR for distribution to Sublicensees promptly upon receipt of a
Sublicense as set forth in Section 3.4 of this Agreement. VAR may order
copies of the Software from COGNOS by providing COGNOS with a purchase
order which: (a) references this Agreement; (b) specifies the Software
to be licensed, (c) designates the make, model, serial number, and
location of the CPU to be licensed (only location and machine type if
Shrink-Wrapped Software); (d) states the ship-to address; and, (e)
indicates the then-current COGNOS local list price less any applicable
discount set forth in Schedule D. Alternatively, COGNOS will deliver to
VAR one (1) set of master diskettes for the current versions of each of
the items of Software listed in Schedule A. VAR should use the Master
Diskettes to copy and manufacture the Software for distribution to
sublicensees.
5.2 COGNOS agrees to supply VAR in a timely and efficient manner all
promotional material and Related Documentation ordered by VAR.
5.3 COGNOS shall provide VAR with Software support services under the
COGNOS Priority Support Program.
5.4 COGNOS agrees to make available, at its then current time and rate
schedule therefore, training for VAR's sales and support staff in the
marketing, sale, operation and use of the Software. Any additional
services requested by VAR shall be made available to VAR by COGNOS at
COGNOS's then current rates.
6.0 LICENSE FEES AND CHARGES
6.1 VAR shall pay COGNOS a fee equal to the then-current COGNOS local
list price (Single Copy local list price for Shrink-Wrapped Software)
for each copy of the Software sublicensed by VAR in the country in the
Territory where the licensed CPU is located less the discount set forth
in Schedule D.
6.2 VAR shall pay to COGNOS annually in arrears a fee for support
services as provided in Schedule D.
Page 5 of 21
<PAGE> 6
6.3 All fees are stated and payable in United States Dollars. The
exchange rate that COGNOS shall apply in order to translate the
Sublicense fee from the local list price currency into the currency of
payment stipulated herein shall be the closing exchange rate published
by the First National Bank of Boston on the date of receipt by COGNOS
of the Sublicense. All sales and other taxes relating to a Sublicense,
including those levied by federal, state, municipal or other
governmental authority, shall be paid by VAR.
6.4 All monies payable under this Agreement are due upon receipt of
invoice. VAR agrees to pay interest on accounts overdue by more than
thirty (30) days at a rate of one and one half percent (1.5%) per month
or the maximum legal interest rate whichever is less.
6.5 COGNOS reserves the right to change the terms of payment herein
when VAR's previous payment record shows that VAR is consistently in
arrears by sixty (60) days or more. VAR will be advised in writing of
any change in the payment terms.
6.6 COGNOS reserves the right to establish new list prices from time to
time. COGNOS will honor outstanding written quotations of VAR for sixty
(60) days after the effective date of the price change provided those
written quotations are delivered to COGNOS within twenty (20) days of
the notification.
6.7 In the event VAR introduces COGNOS to a software license
opportunity, VAR shall be entitled to a finders fee equal to 10% of the
total license fee received by COGNOS, provided that: (a) COGNOS was not
previously aware of the opportunity; (b) VAR has submitted to COGNOS a
completed Cooperative Marketing Form (Schedule E); and, (c) COGNOS
completes a license with the end user through VAR's continuing
assistance and COGNOS is paid the appropriate license fee by the end
user.
7.0 CONFIDENTIAL INFORMATION
7.1 In order for VAR and COGNOS to effectively carry out their
respective obligations hereunder, each party may from time to time
disclose to the other party confidential information. Confidential
information shall be clearly designated in writing as confidential, or
if verbally disclosed, identified as being confidential, and within ten
(10) days of such disclosure, a written memorandum shall be sent to the
receiving party confirming that the information is confidential.
Confidential information does not include:
(a) information generally available to or known to the public;
(b) information previously known;
(c) information independently developed outside the scope of this
Agreement; or
(d) information lawfully disclosed by a third party.
7.2 Each party acknowledges a relationship of trust and confidence with
respect to the confidential information of the other. Each party agrees
that it shall not disclose confidential information of the other to any
third party without the express written consent of the other
Page 6 of 21
<PAGE> 7
party, that it shall not make use of any such confidential information
other than for performance of this Agreement, and that it shall use at
least the same degree of care to avoid disclosure of such information
as it uses with respect to its own confidential information.
7.3 VAR acknowledges that its obligations set forth in Section 7.2
above shall apply to the Software, Related Documentation, and all of
the terms of this Agreement.
8.0 WARRANTY
OTHER THAN THE WARRANTY SET FORTH IN SCHEDULE B, COGNOS DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE SOFTWARE PROVIDED
UNDER THIS AGREEMENT INCLUDING, BUT NOT LIMITED TO, THOSE OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
9.0 LIMITATION OF LIABILITY
9.1 Neither party shall be liable or deemed to be in default for any
delay or failure to perform its obligations hereunder if such failure
results directly or indirectly from any cause beyond its reasonable
control.
9.2 COGNOS SHALL IN NO EVENT BE LIABLE TO VAR, SUBDISTRIBUTORS, OR
SUBLICENSEES, FOR LOSS OF PROFITS, OR SPECIAL, INDIRECT, INCIDENTAL,
CONSEQUENTIAL OR EXEMPLARY DAMAGES, INCLUDING COSTS OR LEGAL EXPENSES,
IN CONNECTION WITH THE SUPPLY, USE, OR PERFORMANCE OF THE SOFTWARE.
9.3 COGNOS'S TOTAL LIABILITY TO VAR, SUBDISTRIBUTORS, OR SUBLICENSEES
FOR ANY CLAIM FOR DAMAGES UNDER THIS AGREEMENT SHALL BE LIMITED TO
DIRECT DAMAGES AND SHALL NOT EXCEED THE SUM OF TWENTY THOUSAND DOLLARS
(U.S.) ($20,000.00) PER INCIDENT OR ONE HUNDRED THOUSAND DOLLARS (U.S.)
($100,000.00) IN THE AGGREGATE.
10.0 TERM AND TERMINATION
10.1 The term of this Agreement shall commence on the Effective Date
and shall continue in force for two (2) years from such date.
10.2 Thereafter the Agreement may be renewed upon mutual written
agreement of the parties.
Page 7 of 21
<PAGE> 8
10.3 Either party ("Terminating Party") may immediately terminate this
Agreement or suspend any rights granted hereunder upon notice to the
other in the event that the other ("Defaulting Party"): (a) breaches
any material term of this Agreement; (b) merges or becomes amalgamated
with another firm, person or corporation with which the Terminating
Party in its sole opinion deems itself to be in competition; (c) sells
or transfers fifty percent (50%) or more of its voting or potential
voting shares; (d) ceases conducting business in the normal course, is
adjudged bankrupt or insolvent, or becomes subject to any proceeding
for the protection of the rights of its creditors; or (e) fails to
perform any obligation under this Agreement within fifteen (15) days
after notice from the Terminating Party.
10.4 On expiration or termination, each party shall promptly remit to
the other all unpaid monies due under this Agreement.
10.5 All obligations set forth in Sections 2.0 and 7.0 shall survive
expiration or termination of this Agreement.
11.0 GENERAL PROVISIONS
11.1 Schedules A, B, C, D and E as amended from time to time are hereby
incorporated into and form part of this Agreement.
11.2 VAR hereby grants COGNOS the right, which COGNOS will exercise
reasonably and at its own expense, to enter VAR's premises during
business hours on forty-eight (48) hours notice for the purpose of
examining VAR's relevant books and records or to have such books and
records examined by its certified public accountant to verify the
locations and hardware into which copies of the Software have been
installed by VAR as well as VAR's fulfillment of its obligations set
forth herein.
11.3 VAR is an independent contractor and the parties are not agents or
legal representatives of each other and have no power of attorney to
represent, act for, bind or commit each other except as described in
this Agreement. Neither execution nor performance of this Agreement
shall be construed to have established any joint venture or partnership
between COGNOS and VAR.
11.4 No delay or failure in exercising any right hereunder and no
partial or single exercise thereof shall be deemed to constitute a
waiver of such right or any other rights hereunder. No consent to a
breach of any express or implied term of this Agreement shall
constitute a consent to any subsequent breach.
11.5 In the event that any provision of this Agreement shall not be
enforceable, the remainder of this Agreement shall remain in full force
and effect.
Page 8 of 21
<PAGE> 9
11.6 VAR agrees that it shall not have the right to assign its rights
under this Agreement without the prior written consent of COGNOS.
11.7 All covenants, agreements and conditions of this Agreement shall
be binding upon and enure to the benefit of both parties hereto and
their representatives as allowed herein.
11.8 This Agreement and any matter relating thereto shall be governed,
construed and interpreted in accordance with the laws of the
Commonwealth of Massachusetts.
11.9 This Agreement constitutes the full and entire understanding and
agreement between VAR and COGNOS with respect to the marketing,
demonstration and sublicensing of the Software and supersedes all
negotiations, commitments, purchase order, memoranda and any other
writings with respect thereto. No modifications or amendments to the
terms of this Agreement shall be effective unless in writing and signed
by the duly authorized representatives of VAR and COGNOS.
11.10 Any notices, requests or demands shall be in writing and
delivered or mailed to the other at the address written on the front
page of this Agreement. Each party shall promptly give written notice
of any change in its address or addressee. All notices shall be sent
either by registered or certified mail, postage prepaid, or by
facsimile transmission with answerback. Notices shall be deemed to be
received on the fifth business day after mailing, or by facsimile
transmission with answerback, upon transmission. In the case of a mail
interruption such notices, requests or demands shall be delivered by
prepaid courier delivery or facsimile transmission with answerback.
This Agreement is effective the 18th day of February, 1994.
---------------------------- ---------------------------------
SMITH-GARDNER & ASSOCIATES, COGNOS CORPORATION
INC.
/s/ Wilburn Smith /s/ John B. Thomas
---------------------------- ---------------------------------
Signature Signature
Wilburn Smith John B. Thomas
---------------------------- ---------------------------------
Printed Name Printed Name
President V.P. Partner Channels
---------------------------- ---------------------------------
Title Title
Page 9 of 21
<PAGE> 10
SCHEDULE A
SOFTWARE AND TERRITORY
SOFTWARE
Tradenames Hardware Platforms
- ---------- ------------------
PowerHouse Development Hewlett Packard MPE/ix
PowerHouse RunTime
PowerHouse Reporting Only (no Dictionary)
InQuizitive
PowerPlay Administrator IBM PC and Compatibles
PowerPlay Enterprise
Impromptu Administrator
Impromptu Enterprise
TERRITORY
United States
Page 10 of 21
<PAGE> 11
SCHEDULE B
SUBLICENSE AGREEMENT
COGNOS CORPORATION, 67 South Bedford Street, Suite 200W, Burlington, MA 01803
(hereinafter referred to as COGNOS) by its acceptance hereof, grants that:
VAR
Name
------------------------------------------------------------------------
Address
------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone Contact
------------------------------------ -----------------------------
(hereinafter referred to as the VAR) has sublicensed to the following:
SUBLICENSEE
Name
------------------------------------------------------------------------
Address
------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone Contact
------------------------------------ -----------------------------
(hereinafter referred to as the SUBLICENSEE) a non-exclusive, non-transferable
limited right to use from the date hereof for:
a thirty (30) day evaluation period
------
a ninety-nine (99) year license period
------
subject to the within TERMS AND CONDITIONS, on the following computers:
CPU #1
-------------- ----------------- ----------------------
Make Model Serial Number
CPU #2
-------------- ----------------- ----------------------
Make Model Serial Number
Media:
-----------------
(for which the VAR value-added product is also licensed) located at the
following sites:
CPU #1
Name
---------------------------------------------------------------------
Address
---------------------------------------------------------------------
---------------------------------------------------------------------
Telephone Contact
------------------------------------- -------------------------
VAR product(s)
-----------------------------------------------------------------
Page 11 of 21
<PAGE> 12
CPU #2
Name
---------------------------------------------------------------------
Address
---------------------------------------------------------------------
---------------------------------------------------------------------
Telephone Contact
---------------------------------------- ----------------------
VAR product(s)
-----------------------------------------------------------------
the following COGNOS products:
CPU #1
-------------------------------------------------------------------------
CPU #2
-------------------------------------------------------------------------
(hereinafter referred to as COGNOS SOFTWARE or the SOFTWARE).
Accepted this day of of 19 by: Accepted this day of 19 by:
---- -------- -- --- ----- --
- ------------------------------- --------------------------------
SUBLICENSEE Company Name VAR Company Name
- ------------------------------- --------------------------------
Authorized Signature Authorized Signature
- ------------------------------- --------------------------------
Printed Name Printed Name
- ------------------------------- --------------------------------
Title Title
Accepted this day of 19 by:
--- ---------- --
COGNOS CORPORATION
--------------------------------
Regional Manager
Page 12 of 21
<PAGE> 13
TERMS & CONDITIONS
1. The VAR warrants that it is a currently authorized distributor of COGNOS
SOFTWARE.
2. The SOFTWARE is licensed for use only on a single standard computer system of
make, model, serial number and location of use as designated. The SUBLICENSEE
shall obtain the written authorization of COGNOS prior to moving the SOFTWARE to
any other replacement computer system. COGNOS shall not unreasonably withhold
authorization provided that the SUBLICENSEE shall have paid any fees applicable
to use of the SOFTWARE on a different computer model.
3. The SUBLICENSEE is prohibited from offering the SOFTWARE in a service bureau
or time-sharing environment unless such use is authorized in writing by COGNOS.
4. The SUBLICENSEE acknowledges and agrees that title and ownership of the
SOFTWARE and patents, trademarks and copyrights related thereto are the
exclusive property of COGNOS and the SUBLICENSEE shall only acquire the right to
use the SOFTWARE in accordance with the within Agreement.
5. The SUBLICENSEE acknowledges that the SOFTWARE is COGNOS proprietary
information and trade secret whether or not any portion thereof is or may be
copyrighted or patented. The SOFTWARE or any derivation thereof may not be
copied onto any medium by the SUBLICENSEE or any other person, firm or
corporation without the written consent of COGNOS save and except for archival
or emergency restart purposes or to replace a defective copy or for program
error verification.
6. The SUBLICENSEE acknowledges that all SOFTWARE and other materials provided
under this Agreement are valuable assets and trade secrets of COGNOS and the
SUBLICENSEE agrees to hold the SOFTWARE and other materials in confidence and to
take all necessary steps to ensure that the SOFTWARE and other materials are
kept confidential.
7. COGNOS warrants that:
(a) the medium on which the program is furnished is warranted to be
free of defects in materials and workmanship under normal use for a period of
thirty (30) days from the date of delivery of the Software;
(b) THE WARRANTY UNDER (A) ABOVE IS IN LIEU OF ALL OTHER WARRANTIES,
EITHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND
(c) the program contained on the medium is provided without warranty of
any kind and the Sublicensee is responsible for the entire risk with respect to
the quality and performance of the program.
Page 13 of 21
<PAGE> 14
Neither COGNOS nor the VAR shall be liable whatsoever for loss of
profits or special, indirect, consequential or exemplary damages, including
costs or legal expenses, in connection with the supply, use or performance of
the SOFTWARE. The total liability of COGNOS and the VAR hereunder in any event
shall not exceed the sublicense fee paid for the SOFTWARE.
8. The SUBLICENSEE will not sublicense, rent or otherwise convey or make
available the COGNOS SOFTWARE outside of its own company. This Agreement may not
be assigned without the written consent of the VAR and COGNOS.
9. The SOFTWARE will be maintained by VAR or jointly by VAR and COGNOS. During a
Support term COGNOS shall (a) ensure that the SOFTWARE continues to operate in
accordance with its related documentation, (b) use its best efforts to correct
problems associated with the SOFTWARE, and (c) issue program and documentation
enhancements to the SOFTWARE which are released in that term. All enhancements
are subject to the restricted use provisions of this Agreement. Support when
purchased must be purchased for all copies of the SOFTWARE licensed to the user
and is provided only for the most current production release of the SOFTWARE.
Any unauthorized modification or use of the SOFTWARE shall render all Support
obligations null and void. In the event the hardware vendor discontinues support
of a feature upon which Support is dependent, COGNOS shall not be required to
continue Support for such feature.
10. The COGNOS SOFTWARE will be maintained as follows:
site # COGNOS Product(s) Sublicensee
(Initials)
Maintained by VAR:
-------- -------------------- ------------
-------- -------------------- ------------
-------- -------------------- ------------
-------- -------------------- ------------
Maintained by COGNOS and
VAR (jointly) -------- -------------------- ------------
-------- -------------------- ------------
-------- -------------------- ------------
-------- -------------------- ------------
Page 14 of 21
<PAGE> 15
SCHEDULE C
VALUE ADDED PRODUCTS AND/OR SERVICES
VAR's right to sublicense the Software is contingent upon VAR having licensed to
the end user on the same CPU application software product(s) marketed under the
name of MACS II which have a value at least equivalent to the list price of the
sublicensed Software.
Page 15 of 21
<PAGE> 16
SCHEDULE D
FEES, DISCOUNTS, AND SUPPORT
FEES
SUBLICENSE FEES
VAR shall pay COGNOS a fee for each copy of the Software sublicensed by VAR.
Sublicense fees shall be determined by subtracting the then current VAR discount
from the then current local list price for the Software.
On or before February 28, 1994, VAR shall pay COGNOS One Hundred and Twenty-Five
Thousand Dollars ($125,000.00) as a non-refundable prepayment against future
sublicense fees due COGNOS. The actual sublicense fees will be reconciled
against this prepayment. When the actual sublicense fees due to COGNOS exceed
the prepayment amount, then VAR shall remit such additional sublicense fees to
COGNOS in accordance with the provisions of this Agreement.
MANUALS
VAR shall pay COGNOS 85% of the then current local list price for all manuals.
SALES LITERATURE
VAR may purchase COGNOS sales literature at COGNOS's cost.
SUPPORT
VAR has two options for supporting Sublicensees of COGNOS Software.
FIRST LINE SUPPORT - First line support for all Software licensed by VAR will be
priced on an annual basis, in arrears, at 8% of the then-current local list
price of the Software less the VAR's discount set forth following.
If the VAR is responsible for providing first line support to their
Sublicensees, the Sublicensee will call the VAR for telesupport assistance. If
the VAR cannot resolve the problem, the VAR can call COGNOS telesupport for
assistance. The Sublicensee cannot call COGNOS telesupport directly under this
support arrangement.
COGNOS provides the VAR with new product releases and technical newsletters for
distribution to its Sublicensees.
Page 16 of 21
<PAGE> 17
Support renewals are invoiced to the VAR and are priced at 8% of the
then-current local list price of the Software less the then-current VAR discount
set forth following.
JOINT SUPPORT - Joint support for all Software licensed by VAR will be priced on
an annual basis at COGNOS's then-current local list price therefor.
With joint support the Sublicensee can call either the VAR or COGNOS for
telesupport. COGNOS provides the VAR with new product releases and technical
newsletters for distribution to their Sublicensees.
Support renewals are invoiced to VAR at COGNOS's then-current local list price
therefor.
Page 17 of 21
<PAGE> 18
SCHEDULE D
VAR DISCOUNT
INSTALLED END USER CUSTOMER DISCOUNTS
For the purposes of this Agreement, COGNOS shall make available to VAR a seventy
percent (70%) discount off the then-current local list price for the Software
for all Software license orders from VAR's installed end user base as listed in
Schedule F in accordance with the terms and conditions indicated below.
NEW BUSINESS DISCOUNTS
For the purposes of this Agreement, COGNOS shall make available to VAR for new
business orders the following discounts in accordance with the terms and
conditions indicated below:
Level of Discount Volume Level Commitment Discount
- ----------------- ----------------------- --------
A $ 0 - $49,999 15%
B $ 50,000 - $99,999 30%
C $100,000 - $174,999 40%
D $175,000 - $249,999 50%
E $250,000 - $499,999 55%
F $500,000 - $749,999 60%
G $750,000 - $999,999 65%
H $1,000,000+ + 70%
DESKTOP DISCOUNTS
For purposes of this Agreement, COGNOS shall make available to VAR for orders of
the Impromptu and PowerPlay items of Software, a twenty-five percent (25%)
discount off the then-current local list price in accordance with the terms and
conditions indicated below.
TERMS AND CONDITIONS APPLICABLE TO DISCOUNTS
1. The above Discounts apply to Software license fees only. Fees for education,
consulting, support, and other services that VAR may purchase from COGNOS are
not subject to the Discounts described herein.
Page 18 of 21
<PAGE> 19
2. The term "Year" as used herein shall mean the period commencing upon the
Effective Date and expiring one year thereafter, and each additional
twelve-month period thereafter during the term of the Agreement.
3. During each Year, VAR will select a Level of Discount commensurate with VAR's
Volume Level Commitment for that Year. For the first Year of the term of the
Agreement VAR selects LEVEL D. For Software license orders received by COGNOS
during such first Year, the Discount shall be a flat rate applied equally to
COGNOS's then-current local list price for the Software.
4. Only net Sublicense fees, new Support fees, new internal Software license
fees and new internal Support fees count towards the Volume Level Commitment.
5. At the end of the first Year, in the event VAR has achieved a higher Level of
Discount, COGNOS shall apply the higher Discount to all Software license orders
received in that Year and shall credit VAR the difference between the Discount
taken and the Discount actually achieved. Alternatively, in the event VAR has
not achieved the selected Level of Discount, COGNOS shall invoice VAR the
difference between the Discount taken and the Discount actually achieved.
6. During each subsequent Year of the term of the Agreement, COGNOS shall
invoice VAR the then-current local list price less the Discount commensurate
with the Level of Discount actually achieved in the preceding Year or, if
mutually agreed, at the Level of Discount commensurate with a different Volume
Level Commitment. The procedures listed in paragraph 5 above shall be used if
VAR achieves a higher or lower actual Level of Discount in that Year.
7. Software upgrades for VAR's installed end user customers shall be governed by
the New Business Discounts.
8. VAR's end user customers shall be entitled to a trade-in allowance equivalent
to what the end user customer paid for software if the end user customer
upgrades the software or trades in a CPU license for a higher machine group CPU
license.
9. Additional Copy pricing (as described in the COGNOS Products/Policies) shall
apply only if the additional copy of Software is licensed simultaneously with
the first copy.
Page 19 of 21
<PAGE> 20
SCHEDULE E
COOPERATIVE MARKETING FORM
SMITH-GARDNER & ASSOCIATES, INC.
- --------------------------------------------------------------------------------
PROSPECT COMPANY NAME
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
TECHNICAL CONTACT NAME TITLE PHONE
- --------------------------------------------------------------------------------
DECISION MAKER TITLE PHONE
OPPORTUNITY SIZE: MODEL CPU CPU SERIAL #(IF APPLICABLE)
- ---------------------- ------------------------------------------------
TOTAL # OF COPIES
------------------------------------------------
REQUIREMENT FOR THE SOFTWARE:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------------------
FORECASTED CLOSE DATE OF THE SOFTWARE
COGNOS ACCOUNT REPRESENTATIVE - LYNNE RIDEOUT
- -------------------------- -------- ---------------------------- ---------
THIRD PARTY REPRESENTATIVE DATE COGNOS FIELD SALES REP. DATE
- ------------------------------ ---------------------------- ----------
THIRD PARTY ADDRESS U.S. MANAGER, DATE
THIRD PARTY OPERATIONS
- ------------------------------
THIRD PARTY ADDRESS
Page 20 of 21
<PAGE> 21
SCHEDULE F
VAR'S CURRENT INSTALLED END USER LIST
Page 21 of 21
<PAGE> 1
EXHIBIT 10.20
---------------------------
DYNAMIC INFORMATION SYSTEMS
-----------
CORPORATION
DISC SOFTWARE VAR PROGRAM
INDEPENDENT SOFTWARE DEVELOPER
DYNAMIC INFORMATION SYSTEMS CORPORATION
910 15TH STREET, SUITE 640, DENVER, COLORADO 80202
(HEREIN REFERRED TO AS "DISC")
-AND-
COMPANY NAME: SMITH, GARDNER, & ASSOCIATES
-------------------------------------------------------------------
STREET: 5455 NORTH FEDERAL HIGHWAY, SUITE M
-------------------------------------------------------------------------
STREET:
-------------------------------------------------------------------------
CITY: BOCA RATON
-------------------------------------------------------------------------
STATE AND ZIP: FL 33487
-------------------------------------------------------------------------
TECHNICAL CONTACT/TELEPHONE:
----------------------------------------------------
CONTRACTUAL CONTACT/TELEPHONE: TOM QUIGLEY 407 241-9505
---------------------------------------------------
(HEREIN REFERRED TO AS "VAR")
<PAGE> 2
1.0 DEFINITIONS
- --------------------------------------------------------------------------------
For the purpose of this Agreement, the following are defined terms:
1.1 The term "Software" shall mean the information processing program(s), in
object code or binary form only, and related documentation developed by DISC and
marketed under the trade name:
OMNIDEX AND DBMGR VAR VERSION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
for use on the following computer makes and models:
HP3000 (ALL MODELS)
- --------------------------------------------------------------------------------
1.2 The term "Demonstration Software" is included in the term Software and shall
mean a version of the Software which contains coded instructions which
inactivate or erase the program within a specified time period.
1.3 The term "Run-Time Software" is included in the term Software and shall mean
a version of the Software which does not have application development
capabilities and only performs execute functions.
1.4 The term "Related Documentation" is included in the term Software and shall
mean the user manuals which provide the functional specifications for the
Software.
1.5 The term "Sublicense" shall mean the sublicense agreement attached as
Appendix B containing terms pursuant to which end users shall be licensed to use
the Software.
1.6 The term "Sublicensee" shall mean an end user of the Software who has signed
a Sublicense Agreement.
1.7 The term "CPU" shall mean central processing unit.
2.0 ACKNOWLEDGMENT OF DISC OWNERSHIP RIGHTS
- --------------------------------------------------------------------------------
2.1 VAR acknowledges that the Software contains proprietary information and
trade secrets belonging to DISC, and that title and ownership rights to the
software shall remain exclusively with DISC and its licensors and that VAR's
rights to the Software are strictly limited to those specifically granted in
this Agreement. VAR agrees that it shall hold the Software and other
confidential information provided under this Agreement in strict confidence and
shall not make any use thereof other than for the performance of this Agreement.
2.2 Except as expressly permitted herein, VAR shall not make any copies of the
Software without the express written consent of DISC.
3.0 LICENSE GRANT
- --------------------------------------------------------------------------------
3.1 DISC hereby grants to VAR, and VAR hereby accepts, subject to the terms and
conditions contained in this Agreement, a non-exclusive, non-transferable
license to market, demonstrate and sublicense the Software to end users for use
on CPUs.
3.2 VAR's right to sublicense the Software is always contingent upon VAR
entering into and maintaining in good standing a separate license and support
agreement (or alternatively a lease agreement) for the Software. Any breach of
such license and support (or lease) agreement, including
2
<PAGE> 3
a failure to make any payment thereunder, shall entitle DISC to unilaterally
revoke any rights granted under this Agreement.
3.3 VAR's right to sublicense the Software is further contingent upon VAR having
licensed to the end user on the same CPU application software product(s)
marketed under the name of
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
having a value at least equivalent to the list price of the sublicensed
Software.
3.4 VAR's right to sublicense the Software to any particular end user is further
contingent upon VAR providing to DISC prior to software distribution both:
* (a) two original copies of a Sublicense Agreement in the form of
Appendix B, which have been duly executed by both VAR and the end
user; and
* (b) all the information requested on the Sublicense Agreement. Any
change to the text of the Sublicense Agreement must be approved by
DISC prior to execution.
3.5 VAR's right to sublicense the Software is further contingent on VAR having
at all times at least two employees trained by DISC in the use and installation
of the Software. All training shall be at VAR's expense.
3.6 VAR's right to leave Demonstration Software on a prospective end user's CPU
is contingent upon VAR obtaining from the end user prior to installation a duly
executed Sublicense Agreement for a thirty (30) day trial. VAR agrees to send
the Sublicense Agreement to DISC no later than ten (10) days from the date of
installation. Demonstration Software may not be left on an end user's CPU for a
period in excess of thirty (30) days for evaluation or any other purpose without
the written consent of DISC.
4.0 VAR'S OBLIGATIONS
- --------------------------------------------------------------------------------
4.1 VAR agrees in good faith to use its best efforts to market, demonstrate and
sublicense the Software to end users.
4.2 VAR agrees to comply with DISC's standard operating policies and procedures
in the marketing, demonstrating and sublicensing of the Software.
4.3 VAR agrees to not make without the prior written consent of DISC any claim
about DISC or the Software other than presenting current information that has
been either published by DISC or developed jointly under this Agreement. VAR
shall submit a copy of ail advertising and marketing materials relating to the
Software to DISC for review and approval prior to use by VAR.
4.4 The VAR shall fully acknowledge the use of Software in its Package. Any
advertising or publicity material which describes features provided by Software
must acknowledge the use of software and the authors, DISC (Dynamic Information
Systems Corporation).
4.5 VAR agrees that on all matters relating to the use of DISC's tradename, logo
and trademarks, VAR shall obtain prior written approval of DISC in order to
assure proper use.
3
<PAGE> 4
4.6 VAR agrees to provide to DISC at least thirty (30) days prior to the
expiration of each term of this Agreement a proposed business plan respecting
the future marketing and sublicensing efforts contemplated by VAR.
4.7 VAR agrees to provide support to all Sublicensees of Run-Time Software.
4.8 Upon signing this Agreement, VAR shall elect one of the royalty schedules in
Appendix A, dependent upon the use of Software as either a standard component of
the VAR Software or as an optional feature. Upon thirty (30) days prior notice
and approval by DISC, VAR may change royalty schedules. DISC will not
unreasonably withhold approval of such changes.
5.0 DISC'S OBLIGATIONS
- --------------------------------------------------------------------------------
5.1 DISC agrees to provide VAR in a timely and efficient manner all DISC
Sublicense Agreements, promotional material, Software, Demonstration Software
and Related Documentation ordered by VAR.
5.2 DISC agrees to provide training to VAR's sales and support staff in the use,
sale and operation of the Software in accordance with a time and rate schedule
to be mutually agreed upon.
5.3 DISC agrees to inform the appropriate personnel in its sales force of the
existence of this Agreement and distribute to such sales force any promotional
material prepared hereunder.
5.4 DISC shall, upon receipt of two duly executed original copies of a
Sublicense Agreement for Run-Time Software, authorize VAR to make a copy of
Run-Time Software for the Sublicensee by returning one fully executed original
copy of the Sublicense Agreement to VAR.
6.0 LICENSE FEES AND CHARGES
- --------------------------------------------------------------------------------
6.1 VAR shall pay DISC a fee as provided in Appendix A for each copy of the
Software sublicensed.
6.2 VAR shall pay DISC an annual support fee as provided in Appendix A for each
copy of Run-Time Software sublicensed by VAR for which VAR provides annual
support services.
6.3 All fees are stated and payable in United States dollars and all sales and
other taxes and duties relating to a Sublicense, including those levied by
federal, state, municipal or other governmental authority shall be paid by VAR.
6.4 All monies payable under this agreement are payable immediately upon
installation of Software for a Sublicensee. In lieu of immediate payment VAR may
apply for credit terms for sublicense fees. An application for credit terms must
be accompanied by a current Statement of Financial Position, a bank reference,
and two credit references from other suppliers; DISC reserves the right to
request additional information. Upon acceptance for credit terms all monies
payable under this agreement will be due net thirty (30) days from date of
installation of Software for Sublicensee. VAR agrees to pay interest on overdue
accounts at a rate of one and one-half percent (1.5%) per month or the maximum
legal interest rate whichever is less.
6.5 DISC reserves the right to change the terms of payment herein when VAR's
previous payment record shows that VAR is consistently in arrears by sixty (60)
days or more. VAR will be advised in writing of any change in the payment terms.
6.6 DISC reserves the right to establish new list prices upon (30) days prior
written notice. DISC will honor outstanding written quotations of VAR for sixty
(60) days after notice of the price change provided those written quotations are
delivered to DISC within twenty (20) days of the notification.
4
<PAGE> 5
6.7 In the event VAR fails to report a sale of DISC Software according to
procedures in Appendix B, VAR shall be liable for the additional amount equal to
that owed by VAR for the sublicense of DISC Software. Also, in this event, the
VAR's three principal officers or shareholders designated by DISC shall be
jointly and severally liable for the amount related to the sublicense of DISC
Software to the end user and the additional amount described in this paragraph.
7.0 CONFIDENTIAL INFORMATION
- --------------------------------------------------------------------------------
7.1 In order for VAR and DISC to effectively carry out their respective
obligations hereunder, each party may from time to time disclose to the other
party confidential information. Confidential information shall be clearly
designated in writing as confidential or if verbally disclosed shall be covered
by a written memorandum within ten (10) days of the verbal disclosure.
Confidential information does not include:
* (a) information generally available to or known to the public;
* (b) information previously known;
* (c) information independently developed outside the scope of this
Agreement; or
* (d) information lawfully disclosed by a third party.
7.2 Each party shall only disclose confidential information to its employees
requiring such information in the performance of this Agreement and shall not
disclose such information to any third party without the express written consent
of the other party.
8.0 SUITABILITY OF USE
- --------------------------------------------------------------------------------
8.1 OTHER THAN THE WARRANTY CONTAINED IN THE SUBLICENSE AGREEMENT, DISC MAKES NO
EXPRESS OR IMPLIED WARRANTY WITH RESPECT TO THE SOFTWARE PROVIDED UNDER THIS
AGREEMENT INCLUDING, BUT NOT LIMITED TO, THOSE OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE.
9.0 WARRANTY
- --------------------------------------------------------------------------------
9.1 Neither party shall be liable or deemed to be in default for any delay or
failure to perform its obligations hereunder if such failure results directly or
indirectly from any cause beyond its reasonable control.
9.2 DISC shall in no event be liable to VAR or Sublicensees for loss of profits,
or special, indirect, consequential or exemplary damages, including costs or
legal expenses, in connection with the supply, use or performance of the
Software.
9.3 DISC's liability for any claim for damages under this Agreement shall be
limited to direct damages and shall not exceed the first copy license fee
charged to VAR for the Software.
5
<PAGE> 6
10.0 TERM AND TERMINATION
- --------------------------------------------------------------------------------
10.1 The term of the Agreement shall commence as of the date of acceptance by
DISC and shall continue in force for one year from such date.
10.2 Thereafter the Agreement shall automatically be renewed for successive one
(1) year periods unless terminated by either party.
10.3 DISC may immediately terminate this Agreement or suspend any rights granted
hereunder upon notice to VAR in the event that VAR:
* (a) breaches any material term of this Agreement;
* (b) merges or becomes amalgamated with another firm, person or
corporation;
* (c) sells or transfers fifty percent (50%) or more of VAR's voting
or potential voting shares;
* (d) ceases conducting business in the normal course, is adjudged
bankrupt or insolvent, or becomes subject to any proceeding for
the protection of the rights of its creditors; or
* (e) fails to perform any obligation under this Agreement within
fifteen (15) days after notice from DISC.
* (f) If DISC assigns primary distribution rights of Software to an
unrelated third party in the United States.
10.4 VAR may immediately terminate this Agreement upon notice to DISC in the
event that DISC:
* (a) ceases conducting business in the normal course, or is
adjudged bankrupt or insolvent, and the business is not carried on
by a successor in interest; or
* (b) fails to perform any obligation under this Agreement within
fifteen (15) days after notice from VAR.
10.5 Either party may terminate this Agreement for convenience on sixty (60)
days notice to the other party.
10.6 On termination, VAR shall immediately return to DISC all materials which
were delivered to VAR by DISC hereunder, including:
* (a) all copies of the Software which are not under Sublicense to
end users; and
* (b) all advertising, promotional and other materials for the
Software in VAR's possession which were delivered to VAR by DISC
be hereunder, including sales literature and manuals which have
not been sold to end users. DISC shall reimburse VAR for all such
materials returned that are not outdated.
6
<PAGE> 7
10.7 On termination, VAR shall remit to DISC all unpaid monies due under this
Agreement.
10.8 All obligations of non-disclosure regarding confidential information and
trade secrets shall survive termination and remain in force for a ten (10) year
period following such termination.
11.0 GENERAL PROVISIONS
- --------------------------------------------------------------------------------
11.1 VAR hereby grants DISC the right, at its own expense, to enter VAR's
premises during business hours on forty-eight (48) hours notice and examine
VAR's relevant books and records or to have such books and records examined by
its certified public accountant to verify the locations and hardware into which
copies of the Software have been installed by VAR.
11.2 VAR is an independent contractor and the parties are not agents, or legal
representatives of each other and have no power of attorney to represent, act
for, bind or commit each other except as described in this Agreement. Neither
execution nor performance of this Agreement shall be construed to have
established any joint venture or partnership between DISC and VAR.
11.3 No delay or failure in exercising any right hereunder and no partial or
single exercise thereof shall be deemed to constitute a waiver of such right or
any other rights hereunder. No consent to a breach of any express or implied
term of this Agreement shall constitute a consent to any subsequent breach.
11.4 In the event that any provision of this Agreement shall not be enforceable
the remainder of this Agreement shall remain in full force and effect.
11.5 VAR agrees that it shall not have the right to assign its rights under this
Agreement without the written consent of DISC.
11.6 All covenants, agreements and conditions of this Agreement shall be
governed, construed and interpreted in accordance with the laws of Colorado and
where applicable, the United States.
11.7 This Agreement constitutes the full and entire understanding and agreement
between VAR and DISC with respect to the marketing demonstration and
sublicensing of the Software and supersedes all previous negotiations,
commitments and writings with respect thereto. No modifications or amendments to
the terms of this Agreement shall be effective unless in writing and signed by
the duly authorized representatives of VAR and DISC.
11.8 Any notices, requests or demands shall be in writing and delivered or
mailed to the other at the address written on the front page of this Agreement.
Each party shall promptly give written notice of any change in its address or
addressee. All notices s shall be sent by registered or certified mail, postage
prepaid, and shall be deemed to be received on the fifth business day after
mailing. But in the case of a mail interruption such notices, requests or
demands shall be delivered by prepaid courier delivery.
<TABLE>
<CAPTION>
<S> <C>
Agreed this ___ day of December, 1989, Agreed this ______ day of December, 1989,
by: by:
- -------------------------------------- -----------------------------------------
DISC VAR
/s/ Terrence D. O'brien /s/ Allan J. Gardner
- -------------------------------------- -----------------------------------------
Signature Signature
Terrence D. O'brien Allan J. Gardner
- -------------------------------------- -----------------------------------------
Printed Name Printed Name
Vice President Partner
- -------------------------------------- -----------------------------------------
Title Title
</TABLE>
7
<PAGE> 8
APPENDIX A
FEES
- --------------------------------------------------------------------------------
SUBLICENSE FEES
VAR shall pay DISC a fee for each copy of the Software sublicensed by VAR.
Sublicense fees shall be charged for each CPU on which Software is installed as
follows:
Royalty Schedule 1;
If VAR agrees that a VAR version of the Software will be included with each
installation of VAR's product, the royalties will be:
CPU Type Royalty
-------- -------
Class 1 Micro 3000's and Series III $1,000
Class 2 4X and 5X $2,000
Class 3 6X, 7X, 92X and 93X $2,500
Class 4 95X $3,000
Existing Users (all CPU types) $1,000
Annual Support Per Copy $ 0
Note: If at any time the VAR elects not to include OMNIDEX in a VAR Software
copy, VAR royalty payments shall revert to Schedule 2 from that date forward.
Royalty Schedule 2:
If VAR chooses to offer the Software as an optional module of VAR's product,
then the royalties will be:
CPU Type Royalty
-------- -------
Class 1 Micro 3000s and Series III $2,500
Class 2 4X and 5X $4,000
Class 3 6X, 7X 92X and 93X $5,000
Class 4 95X $6,000
Existing Users (all CPU types) $2,000
Annual Support Per Copy $ 0
Schedule 1 accepted by: Schedule 2 accepted by:
/s/ Allan J. Gardner
- -------------------------------- ---------------------------------
Signature Signature
12/24/87
- -------------------------------- ---------------------------------
Date Date
MANUALS
VAR shall pay DISC 85% of the then current list price for all manuals.
SALES LITERATURE
VAR may purchase DISC sales literature at DISC cost.
A current DISC price list will be attached to this appendix at contract signing.
VAR shall receive thirty (30) days prior written notice of any price changes.
8
<PAGE> 9
APPENDIX A
DBMGR ROYALTIES:
CPU TYPE ROYALTY
HP 3000(all) $350
DBMGR LIMITED COMMAND SET VERSION (LCVS) ROYALTIES:
HP3000(all) $250
9
<PAGE> 10
APPENDIX B
STEPS REQUIRED TO COPY AND SHIP RUN-TIME SOFTWARE
- --------------------------------------------------------------------------------
1. VAR sends two fully completed original copies of a Sublicense Agreement for
Run-Time Software to DISC. Sublicense agreements must be signed by the
Sublicensee and VAR. Any changes to the text of the Sublicense Agreement must be
approved by DISC prior to execution.
2. DISC forwards Sales Order Agreement and one copy of the Sublicense Agreement
to Sales Administration in Denver for processing and returns the other fully
executed Sublicense Agreement to VAR.
3. Receipt of fully executed Sublicense Agreement authorizes VAR to copy and
ship Run-Time Software.
4. DISC Sales Administration then invoices VAR for Sublicensed Software and
annual support.
10
<PAGE> 11
SUBLICENSE AGREEMENT
Dynamic Information Systems Corporation, 910 15th Street, Suite 640, Denver, CO
80202 (hereinafter referred to as DISC) by its acceptance hereof, grants that:
Company Name
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
Telephone Contact
- ------------------------------------ -------------------------------------
(hereinafter referred to as the VAR) has sublicensed to the following:
SUBLICENSEE
- -----------
Company Name
--------------------------------------------------------------------
Address
-------------------------------------------------------------------------
Telephone Contact
- ------------------------------------ -------------------------------------
(hereinafter referred to as the SUBLICENSEE) a non-exclusive, non-transferable
perpetual limited right to use from the date hereof subject to the within TERMS
AND CONDITIONS, on the following computers:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CPU#1 ______________ ___________________ CPU #2 ______________ ___________________
HP 3000 Model Serial Number HP 3000 Model Serial Number
(for additional sites, please list on separate sheet.)
the following DISC products:
</TABLE>
- --------------------------------------------------------------------------------
(hereinafter referred to as DISC SOFTWARE or the SOFTWARE.)
TERMS AND CONDITIONS
1. The VAR warrants that it is a currently authorized distributor of DISC
SOFTWARE.
2. The SOFTWARE is licensed for Run-Time use only on a single standard computer
system of make, model, serial number and location of use as designated. The
SUBLICENSEE shall obtain the written authorization of DISC prior to moving the
SOFTWARE to any other replacement computer system. DISC shall not unreasonably
withhold authorization provided that the SUBLICENSEE shall have paid any fees
applicable to use of the SOFTWARE on a different computer model. Run-Time
software is defined as a version of the SOFTWARE which does not have application
development capabilities and only performs execute functions.
3. The SUBLICENSEE is prohibited from offering the SOFTWARE in a service bureau
or time-sharing environment unless such use is authorized in writing by DISC.
4. The SUBLICENSEE acknowledges and agrees that title and ownership of the
SOFTWARE and patents, trademarks and copy rights related thereto are the
exclusive property of DISC and the SUBLICENSEE shall only acquire the right to
use the SOFTWARE in accordance with the within Agreement.
5. The SUBLICENSEE acknowledges that the SOFTWARE is DISC proprietary
information and trade secret whether or not any portion thereof is or may be
copyrighted or patented. The SOFTWARE or any derivation thereof may not be
copied onto any medium by the SUBLICENSEE or any other person, firm or
corporation without the written consent of DISC save and except for archival or
emergency restart purposes or to replace a defective copy or for program error
verification.
6. The SUBLICENSEE acknowledges that all SOFTWARE and other materials provided
under this Agreement are valuable assets and trade secrets of DISC and the
SUBLICENSEE agrees to hold the SOFTWARE and other materials in confidence and to
take all necessary steps to insure that the SOFTWARE and other materials are
kept confidential.
7. DISC Warrants for a thirty (30) day period from SOFTWARE delivery that the
SOFTWARE when properly installed shall operate in accordance with its related
documentation. If, during the warranty period DISC is advised of any failure of
the use of best efforts of problems to be solved by DISC at the request of the
SUBLICENSEE, the sublicense granted herein shall be terminated and the
sublicense fee for the SOFTWARE shall be returned. THIS WARRANTY IS IN LIEU OF
ALL OTHER WARRANTIES EXPRESSED, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED
TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. DISC SPECIFICALLY DENIES ANY IMPLIED OR EXPRESS REPRESENTATION THAT THE
SOFTWARE WILL: (i) FIT THE SUBLICENSEE'S REQUIREMENTS; (ii) OPERATE
UNINTERRUPTED OR ERROR-FREE; OR (iii) HAVE ALL PROGRAM DEFECTS CORRECTED.
Neither DISC nor the VAR shall be liable whatsoever for the loss of profits or
special, indirect, consequential or exemplary damages, including costs or legal
expenses, in connection with the supply, use or performance of the SOFTWARE. The
total liability is limited to the fee paid for the SOFTWARE.
8. The SUBLICENSEE will not sublicense, rent or otherwise convey or make
available the DISC SOFTWARE outside of its own company. This Agreement may not
be assigned without the written consent of the VAR and DISC.
9. DISC reserves the right, for the purpose of preventing unauthorized use of
DISC software products, to include now or later a time stamping and/or serial
number checking code requiring the end user to obtain from DISC, or its
designee, instructions to activate or reactivate the software.
10. Software support services for DISC Run-Time SOFTWARE will be provided to the
SUBLICENSEE by the VAR.
<TABLE>
<CAPTION>
<S> <C>
Agreed this ___ day of December, 1989, Agreed this ______ day of December, 1989,
by: by:
- -------------------------------------- -----------------------------------------
SUBLICENSEE Company Name VAR Company Name
- -------------------------------------- -----------------------------------------
Authorized Signature Authorized Signature
- -------------------------------------- -----------------------------------------
Printed Name Printed Name
- -------------------------------------- -----------------------------------------
Title Title
</TABLE>
Accepted this ______ day of ___________, 199_ by:
DYNAMIC INFORMATION SYSTEMS CORPORATION
-------------------------------------------------
11
<PAGE> 1
EXHIBIT 10.21
AGREEMENT FOR TAX INDEMNIFICATION
This AGREEMENT FOR TAX INDEMNIFICATION (the "Agreement") is entered
into effective the 15th day of December, 1998, between Smith-Gardner &
Associates, Inc,. a Florida corporation (the "Company"), and Wilburn W. Smith,
Allan J. Gardner and Thomas Quigley (the "Stockholders").
WHEREAS, the Company is undertaking an initial public offering of its
stock in order to raise additional equity (the "Public Offering");
WHEREAS, the Internal Revenue Service (the "IRS") is currently auditing
the Company's tax returns for fiscal 1995, which audit may result in a
determination that the Company was not qualified as an S corporation;
WHEREAS, the Company and the Stockholders have entered into this
Agreement in connection with the Public Offering;
WHEREAS, the Company will be classified as an S corporation until
immediately prior to the public offering, after which it will be classified as a
C corporation;
WHEREAS, the Stockholders are holders of all of the outstanding common
stock, par value, $.01 per share, of the Company; and
WHEREAS, the Company and the Stockholders wish to provide for tax
indemnification arrangements in connection with the Company's termination as an
S corporation.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
TERMINATION OF S CORPORATION STATUS
The Company's status as an S corporation under Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), will be terminated as of
the earlier of (i) the date of the closing of the Public Offering or (ii) the
date specified in a revocation of S corporation status duly filed by the Company
(such date being referred to hereinafter as the "Termination Date"). The
Company's status as an S corporation under pertinent state tax laws will also be
terminated on the Termination Date. The Company shall use the pro rata
allocation method prescribed in Section 1362(e)(2) of the Code in order to
allocate its taxable income between the short S corporation taxable year ending
the day prior to the Termination Date and the C corporation short taxable year
commencing on the Termination Date; provided that, if the Company has revoked
its S corporation status prior to the date of the Public Offering, it shall use
the "closing-of-the-books" method prescribed in Section 1362(e)(3) of the Code.
<PAGE> 2
ARTICLE II
TAXES
2.1 FILING OF TAX RETURNS. The Company covenants and agrees that: (a)
the Company shall be responsible for and shall effect the filing of all federal,
state, foreign and local returns for the Company with respect to any and all
taxable periods; and (b) the Company shall pay any and all taxes required to be
paid by the Company for all periods covered by the returns as required by
applicable law, subject to reimbursement by the Stockholders to the extent
prescribed herein.
2.2 COMPANY'S INDEMNIFICATION OF THE STOCKHOLDERS FOR ADDITIONAL
PRE-OFFERING TAXES. The Company hereby indemnifies and agrees to hold the
Stockholders harmless from, against and in respect of any federal and state
income tax liability (including penalties, interest and any taxes resulting from
the payments under this section) incurred by the Stockholders as a result of a
final determination of an adjustment (by reason of an amended return, claim for
refund, audit or otherwise) to the Company's tax returns which increases the tax
liability of the Stockholders for taxable periods ending prior to the
Termination Date (including the short taxable period ending the day before the
Termination Date).
2.3 STOCKHOLDERS' INDEMNIFICATION OF THE COMPANY. The Stockholders
hereby indemnify and agree to hold the Company harmless from, against and in
respect of any federal and state income tax liability (including penalties,
interest and any taxes resulting from the payments under this sentence) incurred
by the Company as a result of a final determination that the Company was not an
S corporation for federal or state income tax purposes for any taxable period
ending prior to the Termination Date (including a short taxable period ending
the day before the Termination Date). The Stockholders further hereby indemnify
and agree to hold the Company harmless from, against and in respect of any
federal and state income tax liability (including penalties, interest and any
taxes resulting from the payments under this sentence) incurred by the Company
as a result of final determination of an adjustment (by reason of an amended
return, claim for refund, audit or otherwise) to the Company's or the
Stockholders' tax returns which decreases the Stockholders' tax liability for a
taxable period ending prior to the Termination Date (including the short taxable
period ending the day before the Termination Date) and correspondingly increases
the tax liability of the Company (or its consolidated subsidiaries) for a
taxable period ending after the Termination Date.
2.4 PAYMENTS. The Stockholders or the Company, as the case may be,
shall make any payment required under this Agreement within ten business days
after receipt of notice from the other party that a payment is due by such party
to the appropriate taxing authority, which notice shall be accompanied by
appropriate documentation demonstrating that such payment is due.
2
<PAGE> 3
2.5 COOPERATION. The parties shall cooperate with each other in
connection with the contest of any additional tax liability asserted by any
taxing authority. The parties shall also cooperate with each other in securing a
refund of federal and state income tax for the Stockholders as a result of any
final determinations described in Section 3.3.
2.6 RESPECTIVE LIABILITY. Each of the Stockholders shall be liable to
the Company for his or her allocable share of the total liabilities of the
Stockholders under this Agreement. Such allocable share shall be based on the
Stockholders' relative percentage interests in the Company as of the day before
the Termination Date.
ARTICLE III
MISCELLANEOUS
3.1 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
counterparts collectively shall constitute an instrument representing the
Agreement between the parties hereto.
3.2 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
3.3 GOVERNING LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of Florida without regard to Florida choice of law
rules.
3.4 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified
or supplemented only by a written agreement executed by the parties.
3.5 ASSIGNMENT. This Assignment and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties, nor
is this Agreement intended to confer upon any other person except the parties
any rights or remedies hereunder.
3.6 INTERPRETATION. The title, article and section headings contained
in this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
3.7 SEVERABILITY. In the event that any one or more of the provisions
of this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the
3
<PAGE> 4
parties shall use their best efforts to replace such illegal, invalid or
unenforceable provisions with an enforceable provision approximating, to the
extent possible, the original intent of the parties.
3.8 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Gary G. Hegna
------------------------------------
Gary G. Hegna
STOCKHOLDERS:
/s/ Wilburn W. Smith
----------------------------------------
Wilburn W. Smith
/s/ Allan J. Gardner
----------------------------------------
Allan J. Gardner
/s/ Thomas Quigley
----------------------------------------
Thomas Quigley
4
<PAGE> 1
EXHIBIT 11
SMITH-GARDNER & ASSOCIATES, INC.
PER SHARE COMPUTATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC NET INCOME (LOSS):
Weighted average common shares outstanding, exclusive of
nominal issuances prior to the IPO...................... $5,263,100 5,263,100 5,263,100
Nominal common shares and equivalents issued prior to the
IPO assumed to be outstanding for the entire period..... -- -- --
---------- ---------- ----------
Weighted average common shares outstanding, exclusive at
end of year............................................. 5,263,100 5,263,100 5,263,100
========== ========== ==========
Net income (loss)......................................... $2,080,348 (2,031,996) (3,348,212)
========== ========== ==========
Basic net income (loss) per share......................... $ 0.39 (0.39) (0.64)
========== ========== ==========
DILUTED NET INCOME (LOSS):
Weighted average shares outstanding exclusive of nominal
issuance................................................ 5,263,100 5,263,100 5,263,100
Nominal common shares and equivalents issued prior to the
IPO assumed to be outstanding for the entire period..... -- -- --
Common stock equivalents.................................. 2,255,614 -- --
---------- ---------- ----------
Weighted average common share outstanding, exclusive at
end of year............................................. 7,518,714 5,263,100 5,263,100
========== ========== ==========
Net income (loss)......................................... $2,080,348 (2,031,996) (3,348,212)
Plus: interest expense.................................... 1,200,000 -- --
Less: preferred stock dividends........................... (719,541) -- --
---------- ---------- ----------
$2,560,807 (2,031,996) (3,348,212)
---------- ---------- ----------
Diluted net income (loss) per share......................... 0.34 (0.39) (0.64)
========== ========== ==========
PRO FORMA DATA:
Weighted average common shares outstanding, exclusive of
nominal issuance prior to the IPO....................... 5,263,100
Nominal common shares and equivalents issued prior to the
IPO assumed to be outstanding for the entire period..... --
Weighted average common shares outstanding, exclusive at
end of year............................................. 5,263,100
==========
Pro forma net (loss) (unaudited).......................... (2,399,785)
==========
Pro forma basic and diluted net (loss) per share
(unaudited)............................................. (0.46)
==========
</TABLE>
<PAGE> 2
EXHIBIT 11
SMITH-GARDNER & ASSOCIATES, INC.
PRO FORMA PER SHARE COMPUTATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
PRO FORMA BASIC AND DILUTED
Weighted average common shares outstanding, exclusive of
nominal issuances prior to the IPO........................ 5,263,100
Nominal common shares and equivalents issued prior to the
IPO assumed to be outstanding for the entire period....... --
------------
Weighted average common shares outstanding, exclusive at end
of year................................................... 5,263,100
============
Pro forma net loss.......................................... $ (2,399,785)
============
Pro forma basic and diluted net loss per share.............. $ (0.46)
============
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Stockholders
Smith-Gardner & Associates, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
December 18, 1998
<PAGE> 1
EXHIBIT 23.3
September 4, 1998
Smith-Gardner & Associates, Inc.
1615 S. Congress Avenue
Delray Beach, Florida 33445
Gentlemen:
I hereby agree to become a director of Smith-Gardner & Associates, Inc.
(the "Company") upon the consummation of the Company's initial public offering.
/s/ Jacqueline C. Morby
--------------------------------------
Jacqueline C. Morby
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 SEP-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 168,590 3,566,943
<SECURITIES> 0 0
<RECEIVABLES> 2,314,452 6,620,277
<ALLOWANCES> 409,227 515,080
<INVENTORY> 219,963 700,981
<CURRENT-ASSETS> 2,369,160 10,537,579
<PP&E> 1,308,096 1,830,084
<DEPRECIATION> 622,777 860,269
<TOTAL-ASSETS> 3,135,055 11,958,195
<CURRENT-LIABILITIES> 2,352,718 7,475,631
<BONDS> 0 0
0 0
0 0
<COMMON> 52,631 52,631
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,135,055 11,958,195
<SALES> 18,652,210 24,748,682
<TOTAL-REVENUES> 18,652,210 24,748,682
<CGS> 11,889,278 13,127,955
<TOTAL-COSTS> 11,889,278 13,127,955
<OTHER-EXPENSES> 8,060,211 7,936,777
<LOSS-PROVISION> 485,185 45,852
<INTEREST-EXPENSE> 2,160,000 1,620,000
<INCOME-PRETAX> (3,348,212) 2,131,817
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,348,212) 2,131,817
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,348,212) 2,131,817
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
