<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1999
REGISTRATION NO. 333-63125
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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. [ ]
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
JANUARY 27, 1999
4,410,000 Shares
(Smith-Gardner Logo)
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 Common Stock has been approved for quotation 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>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------------------------------------------
<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 (the "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
$.01 per share and $1,000 per share preference value (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
35,113 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 January 15, 1999 and (ii)
1,500,000 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
802,041 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 January 15, 1999. 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).......... -- (45) (1,378) (1,378) (680) (680) --
Interest income................ 26 50 129 42 109 84 68
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net interest
income (expense)..... 26 (34) (2,449) (2,536) (2,071) (1,646) (1,282)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).............. $4,352 $3,717 $1,663 $(2,450) $(3,368) $(1,211) $2,402
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per share:
Basic........................ $0.83 $0.71 $0.32 $(0.47) $(0.64) $(0.23) $0.46
========== ========== ========== ========== ========== ========== ==========
Diluted...................... $0.83 $0.50 $0.32 $(0.47) $(0.64) $(0.23) $0.40
========== ========== ========== ========== ========== ========== ==========
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 5,263 5,263 5,263 5,263 8,081
========== ========== ========== ========== ========== ========== ==========
Pro forma data:
Net income (loss) before
income
tax (expense) benefit...... $4,352 $3,717 $1,663 $(2,450) $(3,368) $(1,211) $2,402
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 $2,292 $508 $(2,090) $(2,420) $(899) $1,349
========== ========== ========== ========== ========== ========== ==========
Pro forma net (loss) income per
share (unaudited)(2)(3):
Basic...................... $(0.13) $0.29
========== ==========
Diluted.................... $(0.13) $0.27
========== ==========
Number of shares used in
calculating pro forma net
(loss) income per share:
Basic...................... 7,519 7,519
========== ==========
Diluted.................... 7,519 8,081
========== ==========
</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.......................... 1,180 13,614 1,175 1,233 16 3,062 19,266
Total assets 3,005 18,580 4,717 3,666 3,135 11,245 27,828
Convertible debt and accrued
interest(1)............................ -- 8,603 9,942 12,520 14,700 16,050 0
Stockholders' equity (deficit)(1)........ 1,381 5,488 (8,099) (10,550) (13,918) (11,567) 20,312
</TABLE>
(Footnotes on next page)
5
<PAGE> 7
- ---------------
(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 from the date of issuance (December 19, 1994) to the date it first
became convertible (June 30, 1997). 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 $2.5 million and $3.4
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 $2.6 million and $2.2 million in 1996 and
1997, respectively, 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 32.4%, 29.3% 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 and risks associated with the Company's non-use of any hedging
instruments to protect against possible currency fluctuations. 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 $850,000 subject to adjustment based on the Company's cash
earnings through the date of its conversion to C corporation status. 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. The net tangible book
value dilution per share to new investors is expected to be $7.24. 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 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 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.
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 2,350,000 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
13
<PAGE> 15
transactions that they may deem to be in their best interests. See "Description
of Capital Stock -- Certain Anti-takeover Effects."
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 December 31, 1998, the estimated
Distribution would have been approximately $850,000 subject to adjustment based
on the Company's cash earnings through the date of its conversion to C
corporation status. 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.
To date, the Company does not have a quantified business plan with respect to
the expansion of its marketing and sales resources and its facilities and
business abroad. A portion of the net proceeds of this Offering 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 $70,610 to offset their 1997 tax liability.
15
<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 December 31, 1998, the estimated aggregate principal amount of
the Promissory Notes would have been approximately $850,000. 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 $1.5
million. 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.......................................... $ 12,000 $ 0
Promissory Notes.......................................... -- 850
Accrued interest payable.................................. 4,050 0
Redeemable preferred stock, $.01 par value; 10,000,000
shares authorized:
Convertible preferred stock, none issued;................. -- --
Redeemable preferred stock, $1,000 per share preference
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.................................. 3,501 36,168
Accumulated deficit......................................... (15,121) (15,971)
-------- -------
Total stockholders' (deficit) equity...................... (11,567) 20,312
-------- -------
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 35,113 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 January 15, 1999
and (ii) 1,500,000 shares of Common Stock reserved for issuance under the
1998 Stock Option Plan, pursuant to which options to purchase 802,041
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 January 15, 1999. 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 $12,791,796, or $(1.70) 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 $20,312,564
or $1.76 per share. This represents an immediate increase in net tangible book
value of $3.46 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 $7.24 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..................................... $ (1.70)
Increase per share attributable to new investors.......... 3.46
--------
As adjusted net tangible book value per share after this
Offering.................................................. 1.76
--------
Net tangible book value dilution per share to new
investors................................................. $ 7.24
========
</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 January 15, 1999, 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
35,113 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 January 15, 1999, under the 1998 Stock Option Plan there
were options outstanding to purchase a total of 802,041 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 as of September 30, 1998 and for each of the
years in the five year period ended December 31, 1997 and for the nine months
ended September 30, 1998 are derived from the Consolidated Financial Statements
of the Company which have been audited by KPMG LLP, independent public
accountants. The Company's consolidated balance sheets as of December 31, 1996
and 1997 and September 30, 1998, and consolidated statements of operations for
the years ended December 31, 1995, 1996 and 1997 and nine months ended September
30, 1998 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 for the nine
months ended September 30, 1997 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
---------- ---------- ---------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<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)....... -- (45) (1,378) (1,378) (680) (680) --
Interest income............. 26 50 129 42 109 84 68
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest
income (expense),
net............... 26 (34) (2,449) (2,536) (2,071) (1,646) (1,282)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........... $4,352 $3,717 $1,663 $(2,450) $(3,368) $(1,211) $2,402
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per share:
Basic..................... $0.83 $0.71 $0.32 $(0.47) $(0.64) $(0.23) $0.46
========== ========== ========== ========== ========== ========== ==========
Diluted................... $0.83 $0.49 $0.32 $(0.47) $(0.64) $(0.23) $0.40
========== ========== ========== ========== ========== ========== ==========
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 8,081
========== ========== ========== ========== ========== ========== ==========
Pro forma data:
Net income (loss) before
income
tax (expense) benefit... $4,352 $3,717 $1,663 $(2,450) $(3,368) $(1,211) $2,402
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 $2,292 $508 $(2,090) $(2,420) $(899) $1,349
========== ========== ========== ========== ========== ========== ==========
Pro forma net (loss) income
per share
(unaudited)(2)(3):
Basic................... $(0.13) $0.29
========== ==========
Diluted................. $(0.13) $0.27
========== ==========
Weighted average number of
shares used in calculating
pro forma net (loss)
income per share:
Basic................... 7,519 7,519
========== ==========
Diluted................. 7,519 8,081
========== ==========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
------------------------------------------------ -----------------------
AS ADJUSTED
1993 1994 1995 1996 1997 ACTUAL (3)
------- ------- ------- ------- -------- -------- ------------
(IN THOUSANDS) (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...................... 1,180 13,614 1,175 1,233 16 3,062 19,266
Total assets......................... 3,005 18,580 4,717 3,666 3,135 11,245 27,828
Convertible debt and accrued
interest(1)........................ -- 8,603 9,942 12,520 14,700 16,050 0
Stockholders' equity (deficit)(1).... 1,381 5,488 (8,099) (10,550) (13,918) (11,567) 20,312
</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 from the date of
issuance (December 19, 1994) to the date the security first became
convertible (June 30, 1997). 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 107.2% while upgrade revenue
declined by 40.9%, 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 64.0% 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
49.7% from the nine months ended September 30, 1997. System upgrades represented
39.0% 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 when the
hardware and software has been delivered and installed, the fee is fixed and
determinable and the 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............. (5.5) (7.4) (3.6) (4.5) --
Interest income....................................... 0.5 0.2 0.6 0.6 0.3
----- ----- ----- ----- -----
Total interest expense, net.................... (9.8) (13.7) (11.0) (10.9) (5.2)
----- ----- ----- ----- -----
Net income (loss) before pro forma income tax (expense)
benefit............................................... 6.7 (13.4) (17.9) (8.1) 9.7
Pro forma provision for income tax (expense) benefit.... (4.6) 1.9 5.1 2.1 (4.3)
----- ----- ----- ----- -----
Pro forma net income (loss)............................. 2.1% (11.5)% (12.8)% (6.0)% 5.4%
===== ===== ===== ===== =====
</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 material contracts with United States Mint in the second
quarter of 1998 and Multiple Zones in the third quarter of 1998. These two
contracts amounted to 37.4% of revenue for the nine months ended September 30,
1998. 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 49.5% 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 54.2% 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 49.7% 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 92.3% 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.
25
<PAGE> 27
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 $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 primarily from higher hardware cost in the amount of $2.4
million associated with increased hardware sales, and $1.6 million in 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 primarily due to
$800,000 of expenses associated with new offices in the United Kingdom and
Australia which were opened during the second half of 1997, $270,000 in
additional personnel cost
26
<PAGE> 28
due to increases in administrative personnel related to an expanding workforce
and client base, and $400,000 of additional communication, equipment and office
expenses as a result of more employees. General and administrative expenses as a
percentage of total revenue 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 22.1% to $1.3 million during the nine months ended
September 30, 1998, compared to $1.6 million in 1997. The decrease was due to a
reduction of OID which was fully amortized as of June 30, 1997. No OID
amortization was recorded during the nine months ended September 30, 1998. 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 43.8% compared
to a benefit of 25.8% 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 $2.2 million to $1.3 million from a
loss of $899,000 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 157.6% to $4.5 million for the year ended
December 31, 1997, compared to $1.7 million in 1996. Revenue from hardware
upgrades decreased by 34.9% 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 107.2% 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 40.9% 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 of
$285,000 offset by increased expenses associated with new offices in the United
Kingdom and Australia totaling $300,000, and $185,000 relating to other
28
<PAGE> 30
administrative expenses. The significant account 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 and (ii)
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 18.4% to
$2.1 million in 1997, compared to $2.5 million in 1996. This decrease was due to
a reduction of OID which was fully amortized as of June 30, 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 28.2% compared to a
benefit of 14.7% 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
$329,000 to $2.4 million from $2.1 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 23.6% from $2.3 million in 1995 to $1.7
million in 1996. Computer hardware upgrades decreased by 50.5% 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 41.5% 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 3.5% to $2.5
million in 1996, compared to $2.4 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 14.7% compared to a provision of 69.5% 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 $508,000 in 1995 compared to a loss of $2.1 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 1,465 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 2,448 2,413 2,640 2,885
------ ------ ------ ------- ------- ------- --------
(Loss) income from operations....... (86) 806 (286) (1,732) 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........................ (340) (340) -- -- -- -- --
Interest income................... 19 30 35 25 16 20 32
------ ------ ------ ------- ------- ------- --------
Total interest expense,
net...................... (621) (610) (415) (425) (434) (430) (418)
------ ------ ------ ------- ------- ------- --------
Net (loss) income................... (707) 196 (701) (2,157) (346) 491 2,257
Pro forma income tax benefit
(expense)......................... 172 (84) 224 636 215 (198) (1,070)
------ ------ ------ ------- ------- ------- --------
Pro forma net (loss) income......... $ (535) $ 112 $ (477) $(1,521) $ (131) $ 293 $ 1,187
====== ====== ====== ======= ======= ======= ========
</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
Other income (expense):
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........................... 8.2 4.9 -- -- -- -- --
Interest income...................... (0.5) (0.4) (0.9) (0.7) (0.3) (0.2) (0.3)
----- ----- ----- ----- ----- ----- -----
Total interest expense, net... 14.9 8.9 10.2 11.9 7.8 5.3 3.8
----- ----- ----- ----- ----- ----- -----
Net (loss) income...................... (16.9) 2.8 (17.3) (60.6) (6.1) 6.0 20.4
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............ (12.8)% (1.6)% (11.8)% (42.7)% (2.2)% 3.6% 10.8%
===== ===== ===== ===== ===== ===== =====
</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) March 31, 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 and principal payments due or payable through
the earlier of (i) the consummation of an initial public offering or (ii) March
31, 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 OID on the loan being amortized from the date of
issuance through June 30, 1997. Non-cash interest expense related to the
amortization of the OID was $1,378,276, $1,378,276 and $679,697 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, $543,000, $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, 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,
$251,000, and $360,000 for the nine months ended September 30, 1998 and in years
ended December 31, 1997, 1996 and 1995, 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 $445,000, which consisted of distributions to stockholders
and deferred offering costs. 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 $7.5 million due to cash generated from operations
and increases in accounts receivable and inventory, offset by an increase in
current liabilities of $4.4 million due to increases in accounts payable,
accrued expenses and deferred revenue. Accounts receivable increased by
approximately $3.5 million from December 31, 1997 to
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<PAGE> 36
September 30, 1998, and by $3.9 million as compared to September 30, 1997. This
increase was primarily attributable to three large upgrade sales in September
totaling $3.4 million and increasing sales by the Company's UK office. Deferred
revenue increased by approximately $1.3 million from December 31, 1997 to
September 30, 1998 and increased by $1.4 million from September 30, 1997. The
increase for the period ending September 30, 1998 compared to the 1997 period
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 Company anticipates accounts receivable associated with the three large
upgrade sales to be paid in full by January 15, 1999. Deferred revenue as of
September 30, 1998 had been recognized at December 31, 1998. 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
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<PAGE> 37
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 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
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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.
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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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.
dELiA*s 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., dELiA*s and KAO Infosystems Co., in the aggregate accounted for 18.6% 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 completed 46 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
48
<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 annual rent under such lease is approximately
$390,000. The Company also leases office space in the United Kingdom and
Australia to house its operations abroad. The annual rent under such leases is
approximately $82,000 and $24,000, respectively. The Company also leases office
space in Boulder, Colorado and Plano, Texas for certain of its marketing and
sales activities. The annual rent under such leases is
49
<PAGE> 51
$3,600 and $4,500, respectively. The aggregate annual facility lease payments of
the Company during the fiscal year ended December 31, 1998 was $493,296. The
Company is currently seeking additional facilities domestically and abroad 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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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
Francis H. Zenie....................... 64 Director
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
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<PAGE> 53
roles for Xerox Corporation, Data General Corporation, Prime Computer
Incorporated and Encore Computer.
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.
Francis H. Zenie became a director of the Company in December 1998. From
1981 to September 1996, Mr. Zenie served as President, Chief Executive Officer
and a director of Zymark Corporation, a provider of laboratory automation
solutions. Mr. Zenie presently serves as a director of CogniToy LLC, InSite
Marketing Technology, Inc., Kinematix Incorporated, Process Packaging & Control,
Inc., Sensors for Medicine and Science, Inc. and SEQ Ltd.
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.
Mr. Zenie currently serves as the Company's only independent director.
Within 90 days after the date of this Prospectus, the Company will add one
additional independent director to its Board of Directors (the "Board"). To
date, the Company has not selected such director.
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
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<PAGE> 54
appointment of the two independent directors, the Board will consist of two
Class I Directors (Ms. Morby and Mr. Zenie), two Class II Directors (Mr. Hegna
and the independent director 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.
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, 1998, 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> 55
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
paid or accrued by the Company for services rendered during the fiscal years
ended December 31, 1998 and 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 YEAR SALARY BONUS OPTIONS COMPENSATION(2)
- --------------------------- ---- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gary G. Hegna....................... 1998 $225,000 $82,000 200,000 $ --
President and Chief Executive 1997 225,000 50,000 475
Officer
Allan J. Gardner.................... 1998 250,000 -- -- --
Executive Vice President -- Advanced 1997 250,000 -- -- --
Technologies
Wilburn W. Smith.................... 1998 250,000 -- -- --
Executive Vice President -- Sales 1997 250,000 -- -- --
Timothy Edkin....................... 1998 112,875 -- 77,017(3) 3,787
Vice President -- Product 1997 107,811 3,000 20,375(4) 539
Development
Sharon Gardner...................... 1998 108,792 -- 110,021(5) 3,658
Vice President -- Marketing 1997 104,965 5,000 361(4)
</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 113 options issued at an exercise price of $2.53 per share, and
76,904 options issued at the initial public offering price.
(4) Consists of options issued under the 1996 Stock Option Plan at an exercise
price of $2.53 per share.
(5) Consists of 105 options issued at an exercise price of $2.53 per share, and
109,916 options issued at the initial public offering price.
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<PAGE> 56
Option Grants in Last Fiscal Year
The following table sets forth certain information for the fiscal year
ended December 31, 1998, 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........ 200,000 29% -- (3) $2,932,010 $4,668,735
Allan J. Gardner..... -- -- -- -- -- --
Wilburn W. Smith..... -- -- -- -- -- --
Timothy Edkin........ 77,017 12% (4) (5) 1,128,250 1,796,550
Sharon Gardner....... 110,021 16% (6) (7) 1,612,149 2,567,077
</TABLE>
- ---------------
(1) Except as otherwise indicated, the exercise price of all outstanding options
granted in the fiscal year ended December 31, 1998 is the initial public
offering price.
(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. An assumed initial public offering price of 9.00 per share is used as
the starting point in calculating the referenced 5% and 10% rates of
appreciation.
(3) All 200,000 options expire on June 29, 2008.
(4) The exercise price for 113 shares of Common Stock subject to options granted
in the fiscal year ended December 31, 1998 is $2.53 per share.
(5) Of the 77,017 options, 158 expire on December 14, 2008, 113 expire on April
14, 2008, 116 expire on July 14, 2008, 118 expire on October 14, 2008 and
76,512 expire on June 29, 2008.
(6) The exercise price for 105 shares of Common Stock subject to options granted
in the fiscal year ended December 31, 1998 is $2.53 per share.
(7) Of the 110,021 options, 105 expire on April 14, 2008, 109,534 expire on June
29, 2008, 108 expire on July 14, 2008, 118 expire on October 14, 2008 and
156 expire on December 14, 2008.
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, 1998.
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, 1998 AT DECEMBER 31, 1998(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary G. Hegna................. 339,708 354,413 2,197,908 2,293,049
Allan J. Gardner.............. -- -- -- --
Wilburn W. Smith.............. -- -- -- --
Timothy Edkin................. 12,202 88,190 78,945 570,591
Sharon Gardner................ 27,634 122,749 178,789 794,183
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1998. Accordingly, these values are based on the estimated fair market value
of the Common Stock of $4.53 per share for options issued before June 30,
1998, and the initial public offering price for options issued thereafter.
55
<PAGE> 57
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"), 1,500,000 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 811,413
shares of Common Stock under the 1996 Stock Option Plan at January 15, 1999. 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
35,113 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, 1,500,000 shares of Common Stock are
reserved for issuance upon the exercise of stock options granted thereunder. As
of January 15, 1999, the Company has granted under the 1998 Stock Option Plan
options to purchase an aggregate of 802,041 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). Options to purchase an
aggregate of 538,003 shares of Common Stock 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> 58
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 this 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 this 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 this 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.
57
<PAGE> 59
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 December 31, 1998, the estimated aggregate principal amount of the Promissory
Notes would have been approximately $850,000.
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.
58
<PAGE> 60
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 31, 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> 61
(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. The address of
TA Associates, Inc. is 175 High Street, Boston, Massachusetts 02110.
(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. The
address of Chestnut Capital International III Limited Partnership is 175
High Street, Boston, Massachusetts 02110.
60
<PAGE> 62
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 forms of the Company's Amended and Restated Articles
of Incorporation (the "Articles of Incorporation") and the Company's Bylaws, as
amended (the "Bylaws"), which will become effective upon the consummation of
this Offering and are filed as exhibits to the registration statement of which
this Prospectus is a part.
COMMON STOCK
As of December 31, 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 January 15, 1999, there were outstanding stock
options to purchase an aggregate of 1,613,454 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
61
<PAGE> 63
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 this 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 this 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 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 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 may be made only
upon delivery to the
62
<PAGE> 64
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 Articles of Incorporation and the 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 Bylaws 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 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.
Limitations on Shareholder Action by Written Consent. The By-laws also
provide that any action required or permitted to be taken at a shareholders'
meeting may be taken without a meeting,
63
<PAGE> 65
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 BankBoston, N.A.
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 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 (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 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. 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 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-
64
<PAGE> 66
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 this 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 this 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 this
Offering. Under Rule 701 under the Securities Act, persons who purchase shares
upon exercise of options granted prior to this Offering are entitled to sell
such shares 90 days after this 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 2,350,000 shares of Common Stock 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 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.
65
<PAGE> 67
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 4,410,000, 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 4,410,000 shares are being offered.
To facilitate this 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 this 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.
The Company has agreed that until 180 days after the date of this
Prospectus, it will not, without the prior written consent of BT Alex. Brown
Incorporated, sell, offer to sell, issue or otherwise
66
<PAGE> 68
distribute any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, subject to certain
limited exceptions. In addition, 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
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock for a period of 180 days after the date of this
Prospectus. 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 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.
At the request of the Company, the Underwriters have reserved up to 5% of
the shares of Common Stock being offered hereby for sale at the initial public
offering price to certain employees of the Company, their business affiliates
and related parties who have expressed an interest in purchasing shares of
Common Stock in the Offering. Such purchases will be made under the same terms
and conditions as will be offered by the Underwriters in the Offering. There can
be no assurance that any of the reserved shares will be so purchased. Any
reserved shares not so purchased will be offered to the general public on the
same basis as the other shares of Common Stock offered hereby.
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., Fort Lauderdale, 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 as of September 30, 1998 and for each of the
years in the three-year period ended December 31, 1997 and for the nine months
ended September 30, 1998, have been included herein and in the Registration
Statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in auditing and accounting.
67
<PAGE> 69
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.
68
<PAGE> 70
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 September 30, 1998 and (unaudited) proforma balance
sheet as of September 30, 1998............................ F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1997 and for
the nine months ended September 30, 1998 and (unaudited)
for the nine months ended September 30, 1997.............. F-4
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity (deficit) for each of the years in
the three-year period ended December 31, 1997 and nine
months ended September 30, 1998........................... F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1997 and for
the nine months ended September 30, 1998 and (unaudited)
for the nine months ended September 30, 1997.............. F-6
Notes to Consolidated Financial Statements.................. F-7 -- F-21
Schedule of Valuation and Qualifying Accounts............... F-22
</TABLE>
F-1
<PAGE> 71
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 September 30, 1998 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997 and
for the nine months ended September 30, 1998, 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, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Fort Lauderdale, Florida
January 6, 1999
F-2
<PAGE> 72
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)
<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 $515,080
in 1998....................... 2,689,739 1,845,225 5,392,013 -- 5,392,013
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 9,824,395 -- 9,824,395
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 11,245,011 -- 11,245,011
============ =========== =========== =========== ===========
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 1,662,183 -- 1,662,183
Advances due to officers........ 200,000 -- -- -- --
Promissory notes................ -- -- -- 850,000 850,000
------------ ----------- ----------- ----------- -----------
Total current liabilities..... 1,695,642 2,352,718 6,762,447 850,000 7,612,447
Convertible debt.................. 11,320,303 12,000,000 12,000,000 (12,000,000) --
Accrued interest payable.......... 1,200,000 2,700,000 4,050,000 -- 4,050,000
------------ ----------- ----------- ----------- -----------
Total liabilities............. 14,215,945 17,052,718 22,812,447 (11,150,000) 11,662,447
Redeemable preferred stock,
10,000,000 shares authorized:
Convertible participating
preferred stock, $.01 par
value; none issued............ -- -- -- -- --
Redeemable preferred stock,
$.01 par value, none issued
and (unaudited) proforma
issued and outstanding 12,000
shares at $1,000 per share
preference value.............. -- -- -- 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............. (14,083,947) (17,451,856) (15,120,649) (850,000) (15,970,649)
------------ ----------- ----------- ----------- -----------
Total stockholders' deficit... (10,549,754) (13,917,663) (11,567,436) (850,000) (12,417,436)
------------ ----------- ----------- ----------- -----------
$ 3,666,191 3,135,055 11,245,011 -- 11,245,011
============ =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 73
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.................... (1,378,276) (1,378,276) (679,697) (679,697) --
Interest income..................... 128,542 41,814 109,067 84,433 67,867
----------- ----------- ----------- ----------- -----------
Net income (loss)................. $ 1,662,072 (2,450,272) (3,367,909) (1,210,419) 2,401,817
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic............................... $ 0.32 (0.47) (0.64) (0.23) 0.46
=========== =========== =========== =========== ===========
Diluted............................. $ 0.32 (0.47) (0.64) (0.23) 0.40
=========== =========== =========== =========== ===========
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........................... 5,263,100 5,263,100 5,263,100 5,263,100 8,081,408
=========== =========== =========== =========== ===========
Pro forma data:
Net income (loss) before income
tax (expense) benefit............. $ 1,662,072 (2,450,272) (3,367,909) (1,210,419) 2,401,817
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)....................... $ 507,529 (2,090,453) (2,419,482) (898,584) 1,348,631
=========== =========== =========== =========== ===========
Pro forma net (loss) income per
share (unaudited):
Basic........................... $ (0.13) $ 0.29
=========== ===========
Diluted......................... $ (0.13) $ 0.27
=========== ===========
Weighted average shares outstanding
used in calculating pro forma net
(loss) income per share
(unaudited):
Basic........................... 7,518,714 7,518,714
=========== ===========
Diluted......................... 7,518,714 8,081,408
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997 AND
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 1,954,253 5,488,446
Net income for the year ended
December 31, 1995.......... -- -- -- -- 1,662,072 1,662,072
Shareholders distribution.... -- -- -- -- (15,250,000) (15,250,000)
---- --------- ------- --------- ----------- -----------
Balance, December 31, 1995..... -- 5,263,100 52,631 3,481,562 (11,633,675) (8,099,482)
Net loss for the year ended
December 31, 1996.......... -- -- -- -- (2,450,272) (2,450,272)
---- --------- ------- --------- ----------- -----------
Balance, December 31, 1996..... -- 5,263,100 52,631 3,481,562 (14,083,947) (10,549,754)
Net loss for the year ended
December 31, 1997.......... -- -- -- -- (3,367,909) (3,367,909)
---- --------- ------- --------- ----------- -----------
Balance, December 31, 1997..... -- 5,263,100 52,631 3,481,562 (17,451,856) (13,917,663)
Net income for the nine
months ended September 30,
1998....................... -- -- -- -- 2,401,817 2,401,817
Non-cash compensation
expense.................... -- -- -- 19,020 -- 19,020
Shareholders distribution.... -- -- -- -- (70,610) (70,610)
---- --------- ------- --------- ----------- -----------
Balance, September 30, 1998.... $ -- 5,263,100 $52,631 3,500,582 (15,120,649) (11,567,436)
==== ========= ======= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
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).......................... $ 1,662,072 (2,450,272) (3,367,909) (1,210,419) 2,401,817
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............................... 1,378,276 1,378,276 679,697 679,697 --
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 (3,592,641)
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 1,278,805
------------ ---------- ---------- ---------- ----------
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> 76
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND 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. The Company has no impaired assets.
(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
established when the product design and working model of the software product
was completed and
F-7
<PAGE> 77
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 when the
hardware and software has been delivered and installed, the fee is fixed and
determinable and the 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.
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
started doing business in these states in 1997. The California and New Jersey
income tax expense is
F-8
<PAGE> 78
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
immaterial to the consolidated financial statements for the year ended December
31, 1997 and for the nine months ended September 30, 1998. 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 $574,192 as of September 30, 1998.
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 unaudited pro 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 for the nine months
ended September 1998 as follows:
F-9
<PAGE> 79
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Net income................................................ $2,401,817
Plus: interest expense on
convertible debt........................................ 1,350,000
Less: preferred stock dividends assuming conversion of
preferred stock......................................... (539,656)
----------
$3,212,161
==========
Weighted average shares outstanding....................... 5,263,100
Common stock equivalents.................................. 2,818,308
----------
8,081,408
==========
Basic net income (loss) per share......................... $ 0.46
==========
Diluted net income (loss) per share....................... $ 0.40
==========
</TABLE>
Common stock equivalents were not considered for the years ended December
31, 1995, 1996 and 1997 since their effect would be antidilutive.
(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 income (loss) per share for the year ended
December 31, 1997 and for the nine months ended September 30, 1998 was computed
by dividing pro forma net income (loss) by the weighted average number of shares
of common stock outstanding. It reflects the impact of the conversion of
preferred stock and S corporation distribution as described in note 1(l) as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Pro forma net (loss) income................................. $(2,419,482) 1,348,631
Add: interest expense on convertible debt................... 2,179,697 1,350,000
Less: preferred stock dividends assuming conversion of
preferred stock........................................... (719,541) (539,656)
----------- ---------
$ (959,326) 2,158,975
=========== =========
Weighted average shares outstanding......................... 7,518,714 7,518,714
Add: common stock equivalents............................... -- 562,694
----------- ---------
7,518,714 8,081,408
=========== =========
Basic pro forma net (loss) income per share............... $ (0.13) $ 0.29
=========== =========
Diluted pro forma net (loss) income per share............. $ (0.13) $ 0.27
=========== =========
</TABLE>
F-10
<PAGE> 80
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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). In addition, it reflects the promissory note which will
be issued for the S corporation distribution as described in note 10. This
amount is estimated at $850,000. This amount is subject to significant
adjustment based on cash earnings through date of conversion to C corporation
status. The adjustment to accumulated deficit reflects the promissory note that
will be issued upon the S-corporation revocation.
(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.
(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
current 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
is in the process of testing the new code in the Company's software. The Company
expects these changes 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.
F-11
<PAGE> 81
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 statements of operations and cash flows for the
nine months ended September 30, 1997 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's consolidated results of operations and cash flows. In
addition, 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
resulted in losses for the years ended December 31, 1996 and 1997. This has
resulted in an accumulated deficit of $(15,120,649) at September 30, 1998.
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. In addition, the Company received a waiver to defer the payment of
principal and interest on its convertible debt through the earlier of (i) the
consummation of an initial public offering or (ii) March 31, 2000. Based on the
new contracts, the 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 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Office equipment............................ $ 948,563 1,144,364 1,580,287
Office furnishings and fixtures............. 110,264 131,553 177,142
Leasehold improvements...................... 15,016 32,179 65,758
---------- --------- ---------
1,073,843 1,308,096 1,823,187
Less accumulated depreciation and
amortization.............................. 390,253 622,777 853,372
---------- --------- ---------
$ 683,590 685,319 969,815
========== ========= =========
</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 sched-
F-12
<PAGE> 82
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
uled 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, $235,440 and $212,655 at December 31, 1996, 1997 and
September 30, 1998 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 well
as equipment leases as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
<S> <C>
1998.............................................. $ 218,457
YEAR ENDING DECEMBER 31,
1999.............................................. 597,435
2000.............................................. 552,822
2001.............................................. 542,348
2002.............................................. 96,938
2003.............................................. 18,849
----------
Total minimum lease payments................................ $2,026,849
==========
</TABLE>
Rental expense, including operating leases with lease terms of less than
one year, was $552,893, $597,905, $669,543 and $918,054 during 1995, 1996, 1997
and for the nine months ended September 30, 1998, respectively.
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- --------- -------------
<S> <C> <C> <C>
Sales tax payable.............................. $ 20,513 92,011 348,554
Sales tax contingencies........................ 614,783 614,783 614,783
Deferred rent.................................. 248,219 235,440 212,655
Accrued payroll................................ 4,831 95,215 185,253
Accrued legal.................................. -- 109,000 100,000
Accrued vacation............................... 99,978 132,162 147,162
Other.......................................... 66,903 142,379 209,540
---------- --------- ---------
$1,055,227 1,420,990 1,817,947
========== ========= =========
</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).
F-13
<PAGE> 83
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 September 30, 1998, 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) March 31,
2000. The Company has agreed with the Lenders to defer all interest and
principal 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) March 31, 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 ("convertible preferred
stock") and one share of redeemable participating preferred stock ("redeemable
preferred stock") for each $1,000 of principal outstanding. The convertible
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 convertible 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 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 from the issue date (December 19, 1994) to the date it first becomes
convertible (June 30, 1997) to achieve an 18 percent effective interest rate.
Convertible debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Stated principal balance...................... 12,000,000 12,000,000 12,000,000
Unamortized OID............................... (679,697) -- --
---------- ---------- ----------
Convertible debt.............................. 11,320,303 12,000,000 12,000,000
========== ========== ==========
</TABLE>
F-14
<PAGE> 84
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 convertible preferred stock.
Holders of the 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 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 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 convertible preferred stock is then convertible. Shares
of 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 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
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, $46,573 and $71,442
provided by the Company in matching contributions for the years ended December
31, 1995, 1996, 1997 and for the nine months ended September 30, 1998,
respectively.
F-15
<PAGE> 85
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and the nine months
ended September 30, 1998, 214,000, 155,000 and 39,843 options, respectively,
were granted to employees. Of these options, 105,983 were exercisable at
September 30, 1998. 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. 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 1,500,000 shares of common stock. At September 30, 1998,
the Company has granted 538,003 options 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.
At September 30, 1998, the officer had 205,881 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, $3.53 and $4.53 as of the grant
dates in 1996, 1997 and 1998 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 exercise price is lower than
fair market value at the date of grant. There was no compensation expense
recorded in 1996 and 1997. Stock compensation expense for the nine months ended
was $19,020. Had the Company determined compensation cost based on fair value at
the grant date for its stock options under Statement No. 123, there would have
been no effect for the year ended December 31, 1996. The Company's net loss for
the year ended December 31, 1997 would have increased by $311,525. The Company's
net income for the nine months ended September 30, 1998 would have decreased by
$202,880.
The weighted-average fair market value per share of options granted to
employees was estimated at $1.60 and $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
</TABLE>
F-16
<PAGE> 86
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Granted.................................. 30,607 2.53
Granted.................................. 547,239 4.53 or IPO
price
Forfeited................................ (6,427)
---------
Balance outstanding at September 30,
1998..................................... 1,323,539
=========
Exercisable at September 30, 1998.......... 311,864 $ 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.
Subsequent to September 30, 1998, additional options to purchase 289,915
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.
The amount of compensation expense in the future reflected for options
issued as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999.............................................. 43,612
2000.............................................. 34,447
2001.............................................. 23,494
2002.............................................. 1,513
</TABLE>
(9) RELATED PARTY TRANSACTIONS
Due to officers represents non-interest 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.
F-17
<PAGE> 87
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
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....... $ (565,104) 833,092 1,145,089 411,542 (816,617)
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................ $ (468,614) (468,614) (231,097) (231,096) --
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>
F-18
<PAGE> 88
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In 1998 the Company began
purchasing its hardware from a distributor of Hewlett Packard due to a change in
Hewlett Packard's distribution channels. Seventy-four percent of its computer
hardware was purchased from this distribution for the nine months ended
September 30, 1998. The Company owed this supplier $1,629,318 at September 30,
1998. 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. Two customers accounted for 22 percent of the company's revenue for the
nine months ended September 30, 1998. Accounts receivable related to these
customers at September 30, 1998 was $2,703,164.
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.
F-19
<PAGE> 89
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
$50,089 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.
(14) 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) SUBSEQUENT EVENTS -- PLANNED INITIAL PUBLIC OFFERING
The Company intends to conduct an initial public offering (IPO) with an
investment banking firm estimated to be completed in February 1999. There is no
assurance that the IPO will occur.
(16) 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.
F-20
<PAGE> 90
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-21
<PAGE> 91
SMITH-GARDNER & ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
BALANCE
AT CHARGED BALANCE
BEGINNING TO AT END
OF BAD DEBT OF
PERIOD EXPENSE DEDUCTIONS PERIOD
--------- ---------- ---------- -------
<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
======== ======= ======== =======
Description:
Reserves and allowances deducted from assets accounts:
Nine months ended September 30, 1998:
Allowance for doubtful accounts....................... $469,227 184,836 (138,983)(a) 515,080
======== ======= ======== =======
</TABLE>
- ---------------
(a) Charges to the reserve account collectible amounts written off and
recoveries which occurred during the year.
F-22
<PAGE> 92
[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> 93
- ------------------------------------------------------
- ------------------------------------------------------
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................................ 51
Certain Transactions...................... 57
Principal and Selling Shareholders........ 59
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 64
Underwriting.............................. 66
Legal Matters............................. 67
Experts................................... 67
Additional Information.................... 68
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
---------------------
UNTIL , 1999 (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
(Smith-Gardner Logo)
Common Stock
-------------------
PROSPECTUS
-------------------
BT Alex. Brown
SoundView Technology
Group
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 94
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...................................... 28,840
--------
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> 95
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> 96
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 Amended and Restated Articles of Incorporation of
the Company.*
3.3 By-Laws of the Company, as amended.*
3.4 Form of 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 Amended and Restated 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 Arbors
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 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>
- ---------------
* Previously filed.
** Filed herewith.
*** Previously filed and amended hereby.
(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> 97
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> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Smith-Gardner & Associates, Inc., has duly caused this Amendment No. 3 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 27th day of January, 1999.
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. 3 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 January 27, 1999
- --------------------------------------------------- Officer and Director
Gary G. Hegna (Principal Executive
Officer)
* Vice President -- Finance, January 27, 1999
- --------------------------------------------------- Chief Financial Officer,
Martin K. Weinbaum Secretary and Treasurer
(Principal Financial and
Accounting Officer)
* Executive Vice President -- January 27, 1999
- --------------------------------------------------- Advanced Technologies and
Allan Gardner Co-Chairman of the Board
* Executive Vice President -- January 27, 1999
- --------------------------------------------------- Sales and Co-Chairman of the
Wilburn Smith Board
Director
- ---------------------------------------------------
Francis H. Zenie
</TABLE>
- ---------------
* Pursuant to a Power of Attorney granted to Gary G. Hegna by such person.
II-5
<PAGE> 99
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 Amended and Restated Articles of Incorporation of
the Company.*
3.3 By-Laws of the Company, as amended.*
3.4 Form of 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 Amended and Restated 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 Arbors
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 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>
- ---------------
* Previously filed.
** Filed herewith.
*** Previously filed and amended hereby.
<PAGE> 1
EXHIBIT 1.1
4,410,000 Shares
SMITH-GARDNER & ASSOCIATES, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
January __, 1999
BT Alex. Brown Incorporated
SoundView Technology Group, Inc.
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Gentlemen:
Smith-Gardner & Associates, Inc., a Florida corporation (the
"Company"), and certain shareholders of the Company whose names are set forth on
SCHEDULE II hereto (the "Selling Shareholders") propose to sell to the several
underwriters (the "Underwriters") named in SCHEDULE I hereto, for whom you are
acting as representatives (the "Representatives"), an aggregate of 4,410,000
shares of the Company's Common Stock, $0.01 par value (the "Firm Shares"), of
which 4,000,000 shares will be sold by the Company and 410,000 shares will be
sold by the Selling Shareholders. The respective amounts of the Firm Shares to
be so purchased by the several Underwriters are set forth opposite their names
in SCHEDULE I hereto, and the respective amounts to be sold by the Selling
Shareholders are set forth opposite their names in SCHEDULE II hereto. The
Company and the Selling Shareholders are sometimes referred to herein
collectively as the "Sellers." The Company also proposes to sell at the
Underwriters' option an aggregate of up to 661,500 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in SCHEDULE I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts
<PAGE> 2
of the several Underwriters. The Firm Shares and the Option Shares (to the
extent the aforementioned option is exercised) are herein collectively called
the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to each of the
Underwriters as follows:
(i) A registration statement on Form S-1 (File No.
333-63125) with respect to the Shares has been prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and has been filed with the Commission. Copies
of such registration statement, including any amendments thereto, the
preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements
and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together
with any registration statement filed by the Company pursuant to Rule
462(b) of the Act, herein referred to as the "Registration Statement,"
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to
below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date
of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed
prior to the time it becomes effective or filed pursuant to Rule 424(a)
under the Act that is delivered by the Company to the Underwriters for
delivery to purchasers of the Shares, together with the term sheet or
abbreviated term sheet filed with the Commission pursuant to Rule
424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(ii) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of
the State of Florida, with corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement. Each of the subsidiaries of the Company as
listed in EXHIBIT A hereto (collectively, the "Subsidiaries") has been
duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. The
Subsidiaries are the only subsidiaries, direct or indirect, of the
Company. The Company and each of the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of their
business requires such qualification except where the failure to be so
qualified would not reasonably be expected
2
<PAGE> 3
to have a material adverse effect on the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company and its
Subsidiaries taken as a whole (a "Material Adverse Effect"). The
outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and
non-assessable and are owned by the Company free and clear of all
liens, encumbrances and equities and claims; and no options, warrants
or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock
or ownership interests in the Subsidiaries are outstanding.
(iii) The outstanding shares of Common Stock of the
Company, including all shares to be sold by the Selling Shareholders,
have been duly authorized and validly issued and are fully paid and
non-assessable; the portion of the Shares to be issued and sold by the
Company have been duly authorized and when issued and paid for as
contemplated herein will be validly issued, fully paid and
non-assessable; and no preemptive rights of shareholders exist with
respect to any of the Shares or the issue and sale thereof. Neither the
filing of the Registration Statement nor the offering or sale of the
Shares as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating
to the registration of any shares of Common Stock.
(iv) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the
Shares conform to the description thereof contained in the Registration
Statement. The form of certificates for the Shares conforms to the
corporate law of the jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing
or suspending the use of any Prospectus relating to the proposed
offering of the Shares nor instituted proceedings for that purpose. The
Registration Statement contains, and the Prospectus and any amendments
or supplements thereto will contain, all statements which are required
to be stated therein by, and will conform, in all material respects, to
the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and
will not contain, any untrue statement of a material fact and do not
omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading. The Prospectus and any amendments and supplements thereto
do not contain, and will not contain, any untrue statement of material
fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, specifically for use in the
preparation thereof.
3
<PAGE> 4
(vi) The consolidated financial statements of the
Company, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the
Subsidiaries, at the indicated dates and for the indicated periods.
Such financial statements and related schedules have been prepared in
accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as
disclosed therein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
financial and statistical data included in the Registration Statement
presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company. The pro forma
financial information included in the Registration Statement and the
Prospectus present fairly the information shown therein, have been
prepared in accordance with the Rules and Regulations applicable to pro
forma financial statements, have been properly compiled on the pro
forma bases described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(vii) KPMG LLP, who have certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding
pending or, to the knowledge of the Company, threatened against the
Company or any of the Subsidiaries before any court or administrative
agency or otherwise which if determined adversely to the Company or any
of the Subsidiaries would reasonably be expected to result in a
Material Adverse Effect or to prevent the consummation of the
transactions contemplated hereby, except as set forth in the
Registration Statement.
(ix) The Company and the Subsidiaries have good and
marketable title to all of the properties and assets reflected in the
financial statements (or as described in the Registration Statement)
hereinabove described, subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial
statements (or as described in the Registration Statement) or which are
not material in amount. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the
Registration Statement.
(x) The Company and the Subsidiaries have filed all
Federal, State, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicated by said returns
and all assessments received by them or any of them to the extent that
such taxes have become due and are not being contested in good faith
and the failure to pay such taxes would reasonably be expected to
result in a Material Adverse Effect. All
4
<PAGE> 5
material tax liabilities have been adequately provided for in the
financial statements of the Company.
(xi) Since the respective dates as of which
information is given in the Registration Statement, as it may be
amended or supplemented, there has not been any Material Adverse Effect
or any development which would reasonably be expected to have a
Material Adverse Effect, whether or not occurring in the ordinary
course of business, and there has not been any material transaction
entered into or any material transaction that is probable, other than
transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be
amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the
Company's financial statements which are included in the Registration
Statement.
(xii) Neither the Company nor any of the Subsidiaries
is or with the giving of notice or lapse of time or both, will be, in
violation of or in default under its Charter or By-Laws or under any
agreement, lease, contract, indenture or other instrument or obligation
to which it is a party or by which it, or any of its properties, is
bound and which would reasonably be expected to have a Material Adverse
Effect. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a party, or of the
Charter or By-Laws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body
having jurisdiction, except for such conflicts, breaches or defaults
which, in the aggregate, would not reasonably be expected to have a
Material Adverse Effect.
(xiii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated (except such
additional steps as may be required by the Commission or the National
Association of Securities Dealers, Inc. (the "NASD")) has been obtained
or made and is in full force and effect.
(xiv) The Company and each of the Subsidiaries hold
all material licenses, certificates and permits from governmental
authorities which are necessary to the conduct of their businesses;
and, except as disclosed in the Registration Statement, to the
Company's knowledge, neither the Company nor any of the Subsidiaries
has infringed, or received notice of alleged infringement of, any
patents, patent rights, trade names, trademarks or copyrights, which
infringement would reasonably be expected to have a Material Adverse
Effect. The
5
<PAGE> 6
Company knows of no material infringement by others of patents, patent
rights, trade names, trademarks or copyrights owned by or licensed to
the Company.
(xv) Neither the Company nor, to the Company's
knowledge, any of its affiliates, has taken or will take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which would reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares. The Company
acknowledges that the Underwriters may engage in passive market making
transactions in the Shares on The Nasdaq Stock Market in accordance
with Rule 103 under Regulation M of the Exchange Act of 1934, as
amended (the "Exchange Act").
(xvi) Neither the Company nor any Subsidiary is an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
(xvii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xviii) The Company and each of the Subsidiaries
carry, or are covered by, insurance in such amounts and covering such
risks as is adequate for the conduct of their respective businesses and
the value of their respective properties and as the Company reasonably
believes is customary for companies engaged in similar industries.
(xix) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to
any "pension plan" (as defined in ERISA) for which the Company would
have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination
of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971
of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and
each "pension plan" for which the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification.
6
<PAGE> 7
(b) Each of the Selling Shareholders severally, but not
jointly, represents and warrants as follows:
(i) Such Selling Shareholder now has and at the
Closing Date and the Option Closing Date, as the case may be (as such
dates are hereinafter defined) will have good and marketable title to
the Firm Shares and the Option Shares to be sold by such Selling
Shareholder, free and clear of any liens, encumbrances, equities and
claims, and full right, power and authority to effect the sale and
delivery of such Firm Shares and Option Shares; and upon the delivery
of, against payment for, such Firm Shares and Option Shares pursuant to
this Agreement, the Underwriters will acquire good and marketable title
thereto, free and clear of any liens, encumbrances, equities and
claims.
(ii) Such Selling Shareholder has full right, power
and authority to execute and deliver this Agreement, the Power of
Attorney, and the Custodian Agreement referred to below and to perform
its obligations under such Agreements. The execution and delivery of
this Agreement and the consummation by such Selling Shareholder of the
transactions herein contemplated and the fulfillment by such Selling
Shareholder of the terms hereof will not require any consent, approval,
authorization, or other order of any court, regulatory body,
administrative agency or other governmental body (except as may be
required under the Act, state securities laws or Blue Sky laws) and
will not result in a breach of any of the terms and provisions of, or
constitute a default under, organizational documents of such Selling
Shareholder, if not an individual, or any indenture, mortgage, deed of
trust or other agreement or instrument to which such Selling
Shareholder is a party, or of any order, rule or regulation applicable
to such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will
not take, directly or indirectly, any action designed to, or which has
constituted, or which would reasonably be expected to cause or result
in the stabilization or manipulation of the price of the Common Stock
of the Company and, other than as permitted by the Act, the Selling
Shareholder will not distribute any prospectus or other offering
material in connection with the offering of the Shares.
(iv) Without having undertaken, for purposes of this
Agreement, to determine independently the accuracy or completeness of
either the representations and warranties of the Company contained
herein or the information contained in the Registration Statement, such
Selling Shareholder has no reason to believe that the representations
and warranties of the Company contained in this Section 1 are not true
and correct, is familiar with the Registration Statement and has no
knowledge of any material fact, condition or information not disclosed
in the Registration Statement which would reasonably be expected to
have a Material Adverse Effect; and the sale of the Firm Shares by such
Selling Shareholder pursuant hereto is not prompted by any information
concerning the Company or any of the Subsidiaries which is not set
forth in the Registration Statement. The
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<PAGE> 8
information pertaining to such Selling Shareholder under the caption
"Principal and Selling Shareholders" in the Prospectus is complete and
accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set
forth, the Sellers agree to sell to the Underwriters and each
Underwriter agrees, severally and not jointly, to purchase, at a price
of $_____ per share, the number of Firm Shares set forth opposite the
name of each Underwriter in SCHEDULE I hereof, subject to adjustments
in accordance with Section 9 hereof. The number of Firm Shares to be
purchased by each Underwriter from each Seller shall be as nearly as
practicable in the same proportion to the total number of Firm Shares
being sold by each Seller as the number of Firm Shares being purchased
by each Underwriter bears to the total number of Firm Shares to be sold
hereunder. The obligations of the Company and of each of the Selling
Shareholders shall be several and not joint.
(b) Certificates in negotiable form for the total number of
the Shares to be sold hereunder by the Selling Shareholders have been
placed in custody with BankBoston, N.A., as custodian (the
"Custodian"), pursuant to the Custodian Agreement executed by each
Selling Shareholder for delivery of all Firm Shares to be sold
hereunder by the Selling Shareholders. Each of the Selling Shareholders
specifically agrees that the Firm Shares represented by the
certificates held in custody for the Selling Shareholders under the
Custodian Agreement are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Shareholders for
such custody are to that extent irrevocable, and that the obligations
of the Selling Shareholders hereunder shall not be terminable by any
act or deed of the Selling Shareholders (or by any other person, firm
or corporation including the Company, the Custodian or the
Underwriters) or by operation of law (including the death of an
individual Selling Shareholder or the dissolution of a corporate
Selling Shareholder) or by the occurrence of any other event or events,
except as set forth in the Custodian Agreement. If any such event
should occur prior to the delivery to the Underwriters of the Firm
Shares or the Option Shares hereunder, certificates for the Firm Shares
or the Option Shares, as the case may be, shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement
as if such event has not occurred. The Custodian is authorized to
receive and acknowledge receipt of the proceeds of sale of the Shares
held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be
made in same day funds via wire transfer to the order of the Company
for the shares to be sold by it and to the order of BankBoston, N.A.,
"as Custodian" for the shares to be sold by the Selling Shareholders,
in each case against delivery of certificates therefor to the
Representatives for the several accounts of the Underwriters. Such
payment and delivery are to be made at the offices of BT Alex. Brown
Incorporated, 1 South Street, Baltimore, Maryland, at 10:00 a.m.,
Baltimore time, on the third business day after the date of this
Agreement or at such other
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<PAGE> 9
time and date not later than five business days thereafter as you and
the Company shall agree upon, such time and date being herein referred
to as the "Closing Date." (As used herein, "business day" means a day
on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or
executive order to be closed.) The certificates for the Firm Shares
will be delivered in such denominations and in such registrations as
the Representatives request in writing not later than the second full
business day prior to the Closing Date, and will be made available for
inspection by the Representatives at least one business day prior to
the Closing Date.
(d) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the several
Underwriters to purchase the Option Shares at the price per share as
set forth in the first paragraph of this Section 2. The option granted
hereby may be exercised in whole or in part by giving written notice
(i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting
forth the number of Option Shares as to which the several Underwriters
are exercising the option, the names and denominations in which the
Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined
by the Representatives but shall not be earlier than three nor later
than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein
referred to as the "Option Closing Date"). If the date of exercise of
the option is three or more days before the Closing Date, the notice of
exercise shall set the Closing Date as the Option Closing Date. The
number of Option Shares to be purchased by each Underwriter shall be in
the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such
Underwriter bears to the total number of Firm Shares, adjusted by you
in such manner as to avoid fractional shares. The option with respect
to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters.
You, as Representatives of the several Underwriters, may cancel such
option at any time prior to its expiration by giving written notice of
such cancellation to the Company and the Attorney-in-Fact. To the
extent, if any, that the option is exercised, payment for the Option
Shares shall be made on the Option Closing Date in same day funds via
wire transfer to the order of the Company against delivery of
certificates therefor at the offices of BT Alex. Brown Incorporated,
1 South Street, Baltimore, Maryland.
(e) If on the Closing Date any Selling Shareholder fails to
sell the Firm Shares which such Selling Shareholder has agreed to sell
on such date as set forth in SCHEDULE II hereto, the Company agrees
that it will sell or arrange for the sale of that number of shares of
Common Stock to the Underwriters which represents Firm Shares which
such Selling Shareholder has failed to so sell, as set forth in
SCHEDULE II hereto, or such lesser number as may be requested by the
Representatives.
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<PAGE> 10
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter reduce the public offering price and change other
selling terms. To the extent, if at all, that any Option Shares are purchased
pursuant to Section 2 hereof, the Underwriters will offer them to the public on
the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will (A) use its best efforts to
cause the Registration Statement to become effective or, if the
procedure in Rule 430A of the Rules and Regulations is followed, to
prepare and timely file with the Commission under Rule 424(b) of the
Rules and Regulations a Prospectus in a form approved by the
Representatives containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A
of the Rules and Regulations and (B) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished
with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations.
(ii) The Company will advise the Representatives
promptly (A) when the Registration Statement or any post-effective
amendment thereto shall have become effective, (B) of receipt of any
comments from the Commission, (C) of any request of the Commission for
amendment of the Registration Statement or for supplement to the
Prospectus or for any additional information, and (D) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the
institution of any proceedings for that purpose. In the event of the
issuance of any such stop order preventing or suspending the use of the
Prospectus, the Company will use its best efforts to obtain as soon as
possible the lifting thereof.
(iii) The Company will cooperate with the
Representatives in endeavoring to qualify the Shares for sale under the
securities laws of such jurisdictions as the Representatives may
reasonably have designated in writing and will make such applications,
file such documents, and furnish such information as may be reasonably
required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so
10
<PAGE> 11
qualified or required to file such a consent. The Company will, from
time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications in
effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order
of, the Representatives, from time to time, as many copies of any
Preliminary Prospectus as the Representatives may reasonably request.
The Company will deliver to, or upon the order of, the Representatives
during the period when delivery of a Prospectus is required under the
Act, as many copies of the Prospectus in final form, or as thereafter
amended or supplemented, as the Representatives may reasonably request.
The Company will deliver to the Representatives at or before the
Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will
deliver to the Representatives such number of copies of the
Registration Statement (including such number of copies of the exhibits
filed therewith that may reasonably be requested) and of all amendments
thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the
Rules and Regulations, and the Exchange Act, and the rules and
regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a
prospectus is required by law to be delivered by an Underwriter or
dealer, any event shall occur as a result of which, in the judgment of
the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to
make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading,
or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare
and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(vi) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any
event not later than 15 months after the effective date of the
Registration Statement, an earnings statement (which need not be
audited) in reasonable detail, covering a period of at least 12
consecutive months beginning after the effective date of the
Registration Statement, which earnings statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been
so made available.
(vii) The Company will, for a period of five years
from the Closing Date, deliver to the Representatives copies of annual
reports and copies of all other documents, reports and information
furnished by the Company to its shareholders or filed with any
11
<PAGE> 12
securities exchange pursuant to the requirements of such exchange or
with the Commission pursuant to the Act or the Exchange Act. The
Company will deliver to the Representatives similar reports with
respect to significant subsidiaries, as that term is defined in the
Rules and Regulations, which are not consolidated in the Company's
financial statements.
(viii) No offering, sale, short sale or other
disposition of any shares of Common Stock of the Company or other
securities convertible into or exchangeable or exercisable for shares
of Common Stock or derivative of Common Stock (or agreement for such)
will be made for a period of 180 days after the date of this Agreement,
directly or indirectly, by the Company otherwise than hereunder or with
the prior written consent of BT Alex. Brown Incorporated. The foregoing
sentence shall not apply to (A) shares of Common Stock issued by the
Company upon the exercise of options granted under the stock option
plans of the Company in existence as of the date hereof (the "Option
Plans"), (B) options to purchase Common Stock granted under the Option
Plans, and (C) shares of Common Stock or options or warrants to
purchase Common Stock issued or granted in connection with acquisitions
or corporate stategic partner transactions approved by the Company's
Board of Directors.
(ix) The Company will use its best efforts to list,
subject to notice of issuance, the Shares on the the Nasdaq Stock
Market.
(x) The Company has caused each officer and director
of the Company and the Selling Shareholders to furnish to you, on or
prior to the date of this agreement, a letter or letters, in form and
substance satisfactory to the Underwriters, pursuant to which each such
person shall agree not to offer, sell, sell short, pledge or otherwise
dispose of any shares of Common Stock of the Company or other capital
stock of the Company, or any other securities convertible, exchangeable
or exercisable for Common Shares or derivative of Common Shares owned
by such person or request the registration for the offer or sale of any
of the foregoing (or as to which such person has the right to direct
the disposition of) for a period of 180 days after the date of this
Agreement, directly or indirectly, except with the prior written
consent of BT Alex. Brown Incorporated ("Lockup Agreements").
(xi) The Company shall apply the net proceeds of its
sale of the Shares as set forth in the Prospectus and shall file such
reports with the Commission with respect to the sale of the Shares and
the application of the proceeds therefrom as may be required in
accordance with Rule 463 under the Act.
(xii) The Company shall not invest, or otherwise use
the proceeds received by the Company from its sale of the Shares in
such a manner as would require the Company or any of the Subsidiaries
to register as an investment company under the Investment Company Act
of 1940, as amended (the "1940 Act").
(xiii) The Company will maintain a transfer agent
and, if necessary under the jurisdiction of incorporation of the
Company, a registrar for the Common Stock.
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<PAGE> 13
(xiv) The Company will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.
(b) Each of the Selling Shareholders covenants and agrees with
the several Underwriters that:
(i) No offering, sale, short sale, pledge or other
disposition of any shares of Common Stock of the Company or other
capital stock of the Company or other securities convertible,
exchangeable or exercisable for Common Stock or derivative of Common
Stock owned by the Selling Shareholder or request the registration for
the offer or sale of any of the foregoing (or as to which the Selling
Shareholder has the right to direct the disposition of) will be made
for a period of 180 days after the date of this Agreement, directly or
indirectly, by such Selling Shareholder otherwise than hereunder or
with the prior written consent of BT Alex. Brown Incorporated (the
"Lockup Agreements").
(ii) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the Tax
Equity and Fiscal Responsibility Act of 1982 and the Interest and
Dividend Tax Compliance Act of 1983 with respect to the transactions
herein contemplated, each of the Selling Shareholders agrees to deliver
to you prior to or at the Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) Such Selling Shareholder will not take,
directly or indirectly, any action designed to cause or result in, or
that has constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.
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<PAGE> 14
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company and the
Selling Shareholders; the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement; the filing fees of the Commission;
the filing fees of the NASD; transfer agent and registrar fees and expenses; and
the Listing Fee of the Nasdaq Stock Market. Any transfer taxes imposed on the
sale of the Shares to the several Underwriters will be paid by the Sellers pro
rata. The Company shall not, however, be required to pay for any of the
Underwriters expenses (other than those related to qualification under NASD
regulation) except that, if this Agreement shall not be consummated because the
conditions in Section 6 hereof are not satisfied, or because this Agreement is
terminated by the Representatives pursuant to Section 11 hereof, or by reason of
any failure, refusal or inability on the part of the Company or the Selling
Shareholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel consisting of one firm only,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company and the Selling Shareholders shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares
on the Closing Date and the Option Shares, if any, on the Option Closing Date
are subject to the accuracy, as of the Closing Date or the Option Closing Date,
as the case may be, of the representations and warranties of the Company and the
Selling Shareholders contained herein, and to the performance by the Company and
the Selling Shareholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall
have been made, and any request of the Commission for additional
information (to be included in the Registration Statement or otherwise)
shall have been disclosed to the Representatives and complied with to
the reasonable satisfaction of the Commission's staff. No stop order
suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company or
the Selling Shareholders, shall be contemplated by the Commission and
no injunction, restraining order,
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<PAGE> 15
or order of any nature by a Federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinions of
Akerman, Senterfitt & Eidson, P.A., counsel for the Company and the
Selling Shareholders, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of
the State of Florida, with corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; the Company is duly qualified to transact
business in all jurisdictions in which the conduct of its business
requires such qualification, or in which the failure to qualify would
have a Material Adverse Effect; the outstanding shares of capital stock
of each of the Subsidiaries are owned by the Company; and, to the best
of such counsel's knowledge, the outstanding shares of capital stock of
each of the Subsidiaries are owned free and clear of all liens,
encumbrances and equities and claims.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus as of the date set forth therein; the authorized shares of
the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock, including the Shares to be sold
by the Selling Shareholders, have been duly authorized and validly
issued and are fully paid and non-assessable; all of the Shares conform
to the description thereof contained in the Prospectus; the
certificates for the Shares, assuming they are in the form filed with
the Commission, are in due and proper form; the shares of Common Stock,
including the Option Shares, if any, to be sold by the Company pursuant
to this Agreement have been duly authorized and will be validly issued,
fully paid and non-assessable when issued and paid for as contemplated
by this Agreement; and no preemptive rights of shareholders exist with
respect to any of the Shares or the issue or sale thereof.
(iii) Except as described in the Prospectus, to the
knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights
of any character obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of such
stock; and except as described in the Prospectus, to the knowledge of
such counsel, no holder of any securities of the Company or any other
person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of,
any of the Shares or the right to have any Common Shares or other
securities of the Company
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<PAGE> 16
included in the Registration Statement or the right, as a result of the
filing of the Registration Statement, to require registration under the
Act of any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective
under the Act and, to the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and
each amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no
opinion as to the financial statements and related schedules and other
financial and statistical data therein).
(vi) The statements under the captions
"Business-Legal Proceedings," "Management-Stock Option Plans," "Certain
Transactions," "Description of Capital Stock" and "Shares Eligible for
Future Sale" in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters of law, fairly
summarize in all material respects the information called for with
respect to such documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or the Prospectus
which are not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or
any of the Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do not and
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or By-Laws of
the Company, or any agreement or instrument known to such counsel to
which the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries may be bound that was filed as an
Exhibit to the Registration Statement.
(x) This Agreement has been duly authorized, executed
and delivered by the Company.
(xi) To such counsel's knowledge, no approval,
consent, order, authorization, designation, declaration or filing by or
with any regulatory, administrative or other governmental body is
necessary in connection with the execution and delivery of this
Agreement and the consummation of the transactions herein contemplated
(other than as may
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<PAGE> 17
be required by the NASD as to which such counsel need express no
opinion) except such as have been obtained or made, or where the
failure to obtain such would not reasonably be expected to have a
Material Adverse Effect.
(xii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by this
Agreement, and application of the net proceeds therefrom as described
in the Prospectus, required to register as an investment company under
the 1940 Act.
(xiii) This Agreement has been duly authorized,
executed and delivered on behalf of the Selling Shareholders.
(xiv) To such counsel's knowledge, each Selling
Shareholder has full legal right, power and authority, and any approval
required by law, to sell, assign, transfer and deliver the portion of
the Shares to be sold by such Selling Shareholder.
(xv) The Custodian Agreement and the Power of
Attorney executed and delivered by each Selling Shareholder is valid
and binding.
(xvi) To such counsel's knowledge, the Underwriters
(assuming that they are bona fide purchasers within the meaning of the
Uniform Commercial Code) have acquired good and marketable title to the
Shares being sold by each Selling Shareholder on the Closing Date, free
and clear of all liens, encumbrances, equities and claims.
Such opinion shall also include a statement to the effect that nothing
has come to the attention of such counsel which leads them to believe that (i)
the Registration Statement, at the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to Rule
430A under the Act) and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements and schedules and financial data or
statistical information therein). With respect to such statement, Akerman,
Senterfitt & Eidson, P.A. may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(c) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of
Berryman, Lace & Mawer, counsel for Smith-Gardner & Associates, Limited
(the "U.K. Subsidiary"), dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the
effect that:
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<PAGE> 18
(i) The U.K. Subsidiary has been duly organized and
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the U.K. Subsidiary is duly
qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification, or in which the
failure to qualify would have a Materially Adverse Effect upon the
business of the U.K. Subsidiary.
(ii) The outstanding shares of capital stock of the
U.K. Subsidiary have been duly authorized and validly issued and are
fully paid and non-assessable and are owned by the Company; and, to the
best of such counsel's knowledge, the outstanding shares of capital
stock of the U.K. Subsidiary are owned free and clear of all liens,
encumbrances and equities and claims, and no options, warrants or
other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into any shares of capital
stock or of ownership interests in the U.K. Subsidiary are outstanding.
(iii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the U.K.
Subsidiary except as set forth in the Prospectus.
(iv) The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated do not
and will not conflict with or result in a breach of any of the terms
or provisions of, or constitute a default under, any agreement or
instrument known to such counsel to which the U.K. Subsidiary is a
party or by which the U.K. Subsidiary may be bound.
(d) The Representatives shall have received, on each of the
dates hereof, the Closing Date and the Option Closing Date, as the case
may be, a letter dated the date hereof, the Closing Date or the Option
Closing Date, as the case may be, in form and substance satisfactory to
you, of KPMG LLP, confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
Rules and Regulations; and containing such other statements and
information as is ordinarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration
Statement and Prospectus.
(e) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the President and Chief Executive Officer and the Chief
Financial Officer, Vice President-Finance of the Company to the effect
that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and
18
<PAGE> 19
no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as of the
Closing Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration
Statement and the Prospectus and, in his opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration
Statement and Prospectus did not omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries
taken as a whole or the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business.
(f) The Company and the Selling Shareholders shall have
furnished to the Representatives such further certificates and
documents confirming the representations and warranties, covenants and
conditions contained herein and related matters as the Representatives
may reasonably have requested.
(g) The Firm Shares and Option Shares, if any, have been
approved for designation upon notice of issuance on the Nasdaq Stock
Market.
(h) The Lockup Agreements described in Section 4(b)(i) are in
full force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Piper & Marbury
L.L.P., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters
19
<PAGE> 20
hereunder may be terminated by the Representatives by notifying the Company and
the Selling Shareholders of such termination in writing or by telegram at or
prior to the Closing Date or the Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company and the Selling Shareholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse each Underwriter
and each such controlling person upon demand for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such loss,
claim, damage or liability, action or proceeding or in responding to a
subpoena or governmental inquiry related to the offering of the Shares,
whether or not such Underwriter or controlling person is a party to any
action or proceeding; provided, however, that the Company and the
Selling Shareholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement, or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically
for use in the preparation thereof, or (ii) grossly negligent, reckless
or intentional misconduct or wrongful acts of the Underwriters. In no
event, however, shall the liability of any SellingShareholder for
indemnification under this Section 8(a) exceed the net proceeds
received by such Selling Shareholder from the Underwriters in the
offering. This indemnity agreement will be in addition to any liability
which the Company or the Selling Shareholders may otherwise have.
20
<PAGE> 21
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, the Selling
Shareholders, and each person, if any, who controls the Company or the
Selling Shareholders within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company or any such
director, officer, Selling Shareholder or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or (ii) the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such
director, officer, Selling Shareholder or controlling person in
connection with investigating or defending any such loss, claim,
damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment
or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof, or (iii) grossly
negligent, reckless or intentional misconduct or wrongful acts of the
Underwriters. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to this Section 8, such person
(the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available
to any party who shall fail to give notice as provided in this Section
8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially
prejudiced by the failure to give such notice, but the failure to give
such notice shall not relieve the indemnifying party or parties from
any liability which it or they may have to the indemnified party for
contribution or otherwise than on account of the provisions of Section
8(a) or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party and shall
pay as incurred the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of
the counsel retained by the indemnified party in the event (i) the
21
<PAGE> 22
indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate du to actual or
potential differing interests between them or (iii) the indemnifying
party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm for all
such indemnified parties. Such firm shall be designated in writing by
you in the case of parties indemnified pursuant to Section 8(a) and by
the Company and the Selling Shareholders in the case of parties
indemnified pursuant to Section 8(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify
the indemnified party from and against any loss or liability by reason
of such settlement or judgment. In addition, the indemnifying party
will not, without the prior written consent of the indemnified party,
settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified
party is an actual or potential party to such claim, action or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability
arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party
under Section 8(a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of
such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders
on the one hand and the Underwriters on the other from the offering of
the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the
Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as
any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling
Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be
22
<PAGE> 23
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company or the Seling Shareholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant
to this Section 8(d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter, (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation, and (iii) no Selling Shareholder
shall be required to contribute any amount in excess of the lesser of
(A) that proportion of the total of such losses, claims, damages or
liabilities indemnified or contributed against equal to the proportion
of the total Shares sold hereunder which is being sold by such Selling
Shareholder, or (B) the proceeds received by such Selling Shareholder
from the Underwriters in the offering. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or
amendment thereto, each party against whom contribution may be sought
under this Section 8 hereby consents to the jurisdiction of any court
having jurisdiction over any other contributing party, agrees that
process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process
and agrees that any other contributing party may join him or it as an
additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall be paid by the indemnifying
party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 8 and the representations and
warranties of the Company set forth in this Agreement shall remain
operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its
23
<PAGE> 24
directors or officers or any persons controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter, or to
the Company, its directors or officers, or any person controlling the
Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or a Selling
Shareholder), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Shareholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
24
<PAGE> 25
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention: David
Weaver; with a copy to BT Alex. Brown Incorporated, 1 South Street, Baltimore,
Maryland 21202. Attention: General Counsel; if to the Company or the Selling
Shareholders, to Smith-Gardner & Associates, Inc., 1615 South Congress Avenue,
Delray Beach, Florida 33445-6368, Attention: Gary G. Hegna, President and Chief
Executive Officer, with copies to Akerman, Senterfitt & Eidson, P.A., One S.E.
Third Avenue, 28th Floor, Miami, Florida 33131-1704, Attention: Bruce I. March,
Esquire.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company and
the Selling Shareholders as follows:
(a) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business; (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable
to market the Shares or to enforce contracts for the sale of the
Shares; (iii) trading generally shall have been suspended or materially
limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the NASD, the Chicago Board of
Options Exchange, the Chicago Mercantile Exchange or the Chicago Board
of Trade; (iv) the enactment, publication, decree or other promulgation
of any statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or
operations of the Company; (v) declaration of a banking moratorium by
United States or New York State authorities; (vi) the suspension of
trading of the Company's common stock on the Nasdaq Stock Market or
(vii) the taking of any action by any governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the
Uited States; or
(b) as provided in Sections 6 and 9 of this Agreement.
25
<PAGE> 26
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholders and the Underwriters acknowledge
and agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the Registration
Statement consists of the information set forth in the last paragraph on the
front cover page (insofar as such information relates to the Underwriters),
legends required by Item 502(d) of Regulation S-K under the Act and the
information under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
26
<PAGE> 27
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Shareholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
SMITH-GARDNER & ASSOCIATES, INC.
By:
-------------------------------------
Gary G. Hegna,
President and Chief Executive Officer
Selling Shareholders listed on Schedule II
By:
-------------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
SOUNDVIEW TECHNOLOGY GROUP, INC.
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:
------------------------------------
-----------------------
Authorized Officer
27
<PAGE> 28
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
- ----------- ----------------------
BT Alex. Brown Incorporated
SoundView Technology Group, Inc.
----------
Total 4,410,000
==========
28
<PAGE> 29
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
Number of Firm Shares
Selling Shareholder to be Sold
- ------------------- ---------------------
Allan J. Gardner 200,000
Wilburn W. Smith 200,000
Thomas Quigley 10,000
----------
Total 410,000
==========
29
<PAGE> 30
EXHIBIT A
Subsidiaries
1. Smith-Gardner & Associates, Limited (United Kingdom)
2. Smith-Gardner & Associates Pty Limited (Australia)
1
<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
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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.
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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
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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.
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<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
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<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
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<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.
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<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:
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<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
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<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.
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<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
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<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
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<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
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<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
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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
2,350,000 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 10.3
SMITH-GARDNER & ASSOCIATES, INC.
AMENDED AND RESTATED
1998 EMPLOYEE STOCK OPTION PLAN
Smith-Gardner & Associates, Inc. (the "Company") hereby adopts this
Smith-Gardner & Associates, Inc. Amended and Restated 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 1,500,000 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.
- 2 -
<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
- 3 -
<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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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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<PAGE> 7
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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<PAGE> 9
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 15th day of January,
1999.
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