-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L3awQ1SQcVq2IqSEv6g/+EW5V/m0QQ4OwaYKgI4i6U6yyb+H6I1/WqF3iVA3Uqos /ji7sjqf7Ad9Y02jzLUDsw== 0000950144-97-006580.txt : 19970605 0000950144-97-006580.hdr.sgml : 19970605 ACCESSION NUMBER: 0000950144-97-006580 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MELITA INTERNATIONAL CORP CENTRAL INDEX KEY: 0001034956 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 581378534 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22855 FILM NUMBER: 97619151 BUSINESS ADDRESS: STREET 1: 5051 PEACHTREE CORNERS CITY: NORCROSS STATE: GA ZIP: 30092-2500 BUSINESS PHONE: 7702394000 MAIL ADDRESS: STREET 1: 5051 PEACHTREE CORNERS CIRCLE CITY: NORCROSS STATE: GA ZIP: 30092-2500 S-1/A 1 MELITA INTERNATIONAL CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997 REGISTRATION NO. 333-22855 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- MELITA INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in its Charter) GEORGIA 3661 58-1378534 (State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
--------------------- 5051 PEACHTREE CORNERS CIRCLE NORCROSS, GEORGIA 30092-2500 (770) 239-4000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------------- J. NEIL SMITH PRESIDENT AND CHIEF OPERATING OFFICER MELITA INTERNATIONAL CORPORATION 5051 PEACHTREE CORNERS CIRCLE NORCROSS, GEORGIA 30092-2500 (770) 239-4000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) --------------------- COPIES TO: JOHN FRANKLIN SMITH, ESQ. MARK G. BORDEN, ESQ. LARRY W. SHACKELFORD, ESQ. BRENT B. SILER, ESQ. MORRIS, MANNING & MARTIN, L.L.P. HALE AND DORR LLP 1600 ATLANTA FINANCIAL CENTER 1455 PENNSYLVANIA AVENUE, N.W. 3343 PEACHTREE ROAD, N.E. WASHINGTON, D.C. 20004 ATLANTA, GEORGIA 30326 (202) 942-8400 (404) 233-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), 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, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ 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, DATED JUNE 4, 1997 3,500,000 SHARES MELITA(R) INTERNATIONAL LOGO COMMON STOCK All of the shares of Common Stock offered hereby are being sold by the Company. 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 of the Common Stock will be between $9.00 and $11.00 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 listing on the Nasdaq National Market under the symbol "MELI," subject to official notice of issuance. SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
======================================================================================================== Price to Underwriting Proceeds to Public Discount(1) Company(2) - -------------------------------------------------------------------------------------------------------- Per Share............... $ $ $ Total(3)................ $ $ $ ========================================================================================================
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company, estimated at $1,300,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 525,000 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ and the Proceeds to Company will total $ . See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Montgomery Securities on or about , 1997. ------------------------ MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY , 1997 3 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 [ARTWORK/DIAGRAMS DEPICTED IN PROSPECTUS] 1. Inside front page is captioned: "Melita's Command Post(TM) graphical desktop lets supervisors monitor call center activity at a glance." Graphics portray a screen generated by the Company's PhoneFrame(R) CS product. The screen is labeled "Production Monitoring." Features of the screen are highlighted by the following text: " - Call List Display Panel. Displays status of active calling lists. - The Tool Bar. Brings up different productivity views to monitor and control the activity of a call center. - Agent Status Legend. User defined legends to choose conditions or calling states. - ViewPort Display Area. Real time production monitoring of agent status using customized floor plans. - Trunk State Display Panel. Graphically depicts enabled and disabled trunk states." 2. Inside front page gate-fold portrays the following: Center: Photograph of a Call Center agent and customers speaking over the telephone illustrating the Company's concept of "People To People Communication." Arrows to the top, left, bottom and right of the photograph point to additional diagrams. Top: Arrow extending from central photograph points to the word "Applications." Above and to the left of "Applications" is a list of the CTI applications: MPACT, PowerPACT and ActionPACT. Above and to the right of "Applications," the Company's Megellan application is listed. Right: Arrow extending from central photograph points to the words "System Management" which are superimposed over a picture of four overlapping screens generated by PhoneFrame CS Command Post Desktop. Bottom: Arrow extending from central photograph points to the text: "Applications and solutions for customer communications: - Comprehensive Call Center Solutions - Build and Improve Customer Relationships - Increase Agent Productivity - Reduce Operating Costs" Left: Arrow extending from central photograph points to the word "Technology." To the immediate left of "Technology" is a diagram of the Company's call center system. 3. Graphic on page 29 of the prospectus in the "Business" section is labeled "PhoneFrame CS Architecture." The center portion of the graphic depicts a bar labeled "Local Area Network." Below the Local Area Network bar are drawings representing a customer's host computing center, the Company's call processor, the Company's Universal Switch components, the customer's PBX/ACD and a "cloud" labeled "PSTN" (public switch telephone network). Each of these components are linked to the Local Area Network. The Universal Switch, PBX/ACD and PSTN are linked together. Above the Local Area Network bar are drawings representing the Company's Universal Workstations and corresponding telephone sets, the Company's Command Post Windows NT and the Company's Universal Server running on a RISC/6000 system with Sybase. The telephone sets are connected to the PBX/ACD with a dotted line. The Command Post and the Universal Server each are connected to the Local Area Network. 4. Inside back page graphics portray a screen generated by the Company's Magellan product. The screen is labeled "Magellan Application Interpreter." The text appearing above the picture of the screen is as follows: "Provides agent with information, not just data.... Magellan(TM) navigates multiple corporate data sources and presents needed information in a Single System Image View(TM). Solutions from basic "screen pops" to sophisticated customer interaction applications can be created and modified on-the-fly without programming. Magellan(TM) allows applications to be developed and deployed quickly, making agents more efficient by presenting them with the information needed to make timely and informed decisions." The image of the "Magellan Application Interpreter" screen is enhanced by text that highlights Magellan's features as follows: - Employs script windows to bring together text and real-time data from multiple resources. - Customer data may be entered with the click of a mouse. - Customizes on-line help functions. - Displays talk time with the call gauge. - Programmable action buttons for background applications. - Buttons may be customized to display specific actions and reactions. - Imports visual elements in graphic boxes. 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Combined Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Melita International Corporation ("Melita" or the "Company") is a leading provider of customer contact and call management systems that enable businesses to automate call center activities and enhance their telephony-based customer interaction. The Company's principal product, PhoneFrame CS, is used by organizations to increase agent productivity, reduce the costs of call center operations and enhance revenue generation for a broad range of activities, including debt collection, telemarketing and customer service. PhoneFrame CS is an innovative, comprehensive call center solution based on client/server software that integrates with industry standard computing and telephony infrastructures. The Company's customers include leading organizations in industries such as banking, financial services, retail, communications and service bureaus, where businesses are engaged in frequent telephone contact with customers or prospects. In many industries, customer retention costs are significantly lower than the costs of customer acquisition. Consequently, many businesses have come to view long-term customer relationships as a key corporate asset and a source of competitive advantage. To build customer loyalty, organizations are leveraging available customer information by disseminating this information to employees responsible for customer interaction in order to enhance the quality of each customer contact. In addition, organizations recognize that telephony-based interaction has become an increasingly effective means of customer contact as telecommunications costs have decreased and enabling technologies such as computer/telephony integration ("CTI") have emerged to automate the customer interaction process. According to industry sources, the CTI, outbound call management and automatic call distribution market segments of the worldwide call center systems market aggregated $2.8 billion in 1996 and are expected to grow at a compound annual growth rate of 19.1% to $6.7 billion by 2001. The Company's primary target markets, CTI and outbound call management, were approximately $1.3 billion worldwide in 1996 and are together expected to grow at a compound annual growth rate of 27.6% to $4.4 billion by 2001. The Company provides comprehensive solutions to the call center industry based on a scaleable client/server software architecture capable of supporting installations with more than 500 simultaneous users on a single server. PhoneFrame CS provides comprehensive functionality and a user-friendly application development environment designed to provide increased agent productivity, lower telecommunication costs and low nuisance call rates. The Company's software allows call center system managers to control and monitor call center activity at a glance by providing call flow script creation and editing, call campaign configuration, resource definition and management, and system management and reporting capabilities. The Company's products also provide enhanced interaction with customers through front-end applications which utilize real-time access to information to guide call center agents through each step of the customer interaction process. The Company's call management solution leverages existing investments in call center, information and telephony systems. The Company currently has over 400 systems in operation worldwide. Selected customers include AirTouch Communications, Inc., BancOne Services Corporation, Barclays Bank PLC, Citicorp, Credicard SA Brazil, Dun & Bradstreet Corporation, Grupo Financiero Bancomer, S.A. de C.V., J.C. Penney Company, Inc., National Westminster Bank and Snyder Communications, Inc. The Company sells its products through a direct sales force in the United States, Canada and the United Kingdom. In 1996, the Company derived approximately 21.0% of its total revenues from sales outside the United States. International distribution is largely through direct sales and value-added resellers ("VARs"). --------------------- Melita International Corporation is a Georgia corporation organized in 1979. Unless the context otherwise requires, references in this Prospectus to "Melita" or the "Company" refer to Melita International Corporation and its combined affiliates, Melita Europe Limited and Inventions, Inc. The Company's principal executive offices are located at 5051 Peachtree Corners Circle, Norcross, Georgia 30092-2500, and its telephone number is (770) 239-4000. 3 6 THE OFFERING Common Stock offered by the Company.... 3,500,000 shares Common Stock to be outstanding after the offering........................... 14,643,395 shares(1) Use of proceeds........................ For (i) repayment of notes payable to the Company's principal shareholder, (ii) payment of undistributed S corporation earnings and (iii) general corporate purposes and working capital. Proposed Nasdaq National Market symbol................................. MELI - --------------- (1) Includes 3,143,395 shares of Common Stock to be issued in connection with the combination (the "Combination") of the Company, Melita Europe Limited ("Melita Europe") and Inventions, Inc. ("Inventions") which will occur concurrently with the effective date of this offering. Excludes an aggregate of 1,600,000 shares of Common Stock reserved for issuance under the 1992 Stock Option Plan, the 1997 Stock Option Plan and the Stock Purchase Plan (as defined herein), of which 1,104,097 shares were subject to options outstanding as of the date of this Prospectus at a weighted average exercise price of $3.43 per share. See "Management -- Employee Benefit Plans" and Note 6 of the Notes to Combined Financial Statements. SUMMARY COMBINED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- -------- -------- STATEMENT OF OPERATIONS DATA: Total revenues.................. $24,703 $24,668 $27,156 $35,282 $47,540 $11,021 $14,669 Gross margin.................... 16,059 16,563 17,592 21,270 29,183 7,133 8,092 Income from operations.......... 3,178 3,649 2,600 4,661 7,348 2,051 2,387 Pro forma net income (1)........ $ 2,157 $ 2,356 $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425 Pro forma net income per common and common equivalent share... $ 0.39 $ 0.11 ======= ======= Pro forma weighted average common and common equivalent shares outstanding(2)......... 12,363 12,647 ======= =======
MARCH 31, 1997 --------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) ------- ------------ -------------- BALANCE SHEET DATA: Working capital (deficit).................................. $(4,324) $(5,885) $ 25,365 Total assets............................................... 28,105 17,478 42,578 Long-term debt, net of current portion..................... -- -- -- Shareholders' equity (deficit)............................. (1,485) (3,046) 28,204
- --------------- (1) Upon the effective date of this offering, the Company will terminate its status as an S corporation. Thereafter, the Company will be subject to federal and state corporate income taxes. Pro forma net income is presented as if the Company had been subject to corporate income taxes for all periods presented. See "Termination of S Corporation Status and Related Distributions" and Notes 1 and 3 of the Notes to Combined Financial Statements. (2) See Note 1 of the Notes to Combined Financial Statements. (3) Pro forma to give effect to the following: (i) the issuance of 3,143,395 shares of Common Stock in connection with the Combination, which will occur concurrently with the effective date of this offering, (ii) the repayment at the closing of this offering of a note payable to the principal shareholder (the "1992 4 7 Note") with a principal balance of $2.4 million and notes payable (the "1997 Notes") of $12.9 million issued in February 1997 representing a portion of the undistributed S corporation earnings at December 31, 1996 (the "Note Repayment"), (iii) the interest accrual of $250,000 relating to the 1997 Notes (the "Interest Accrual"), (iv) the inclusion of current deferred tax assets of $1.1 million due to the termination of the S corporation status (the "Deferred Tax Adjustment") and (v) the payment subsequent to March 31, 1997 of a cash distribution representing estimated undistributed 1997 S corporation earnings of $2.5 million through March 31, 1997 (the "Distribution"). See "Termination of S Corporation Status and Related Distributions," "Use of Proceeds," "Capitalization," "Certain Transactions" and Notes 2, 3 and 8 of the Notes to Combined Financial Statements. (4) Pro forma as adjusted to give effect to the sale by the Company of the 3,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." FORWARD-LOOKING STATEMENTS Information contained in this Prospectus includes "forward-looking statements" that are based largely on the Company's current expectations and are subject to a number of risks and uncertainties. The Company faces many risks and uncertainties, including those described in this Prospectus under the caption "Risk Factors." Because of these many risks and uncertainties, the Company's actual results may differ materially from any results presented in or implied by the forward-looking statements included in this Prospectus. --------------------- Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) gives effect to the recapitalization of the Company's Common Stock whereby each share of the Company's outstanding Voting Common Stock and Non-Voting Common Stock (each having no par value per share) will be converted into 1/100 of a share of voting Common Stock, no par value per share ("Common Stock") and (iii) gives effect to the Combination (as defined in footnote 1 in "The Offering" above). The recapitalization and the Combination will be effected contemporaneously with the effectiveness of this offering. See "Certain Transactions," "Underwriting" and Note 9 of the Notes to Combined Financial Statements. Cancel Dial(R), Melita(R), PhoneFrame(R), Universal Access(R), Universal Server(R) and Universal Switch(R) are registered trademarks or service marks of the Company. ActionPACT(TM), Customer Care(SM), PhoneFrame Command Post(TM), Magellan(TM), MPACT(TM), People to People Communication(TM), PowerPACT(TM), QFlow(TM), Single System Image View(TM), Universal Workstation(TM) and UTP(TM) are trademarks or service marks of the Company. This Prospectus also includes trademarks, service marks and trade names of other companies. 5 8 RISK FACTORS Prospective investors should consider carefully the following factors, in addition to the other information contained in this Prospectus, in evaluating the Company and its business before purchasing shares of Common Stock offered hereby. DEPENDENCE ON SINGLE PRODUCT LINE; RISKS ASSOCIATED WITH SERVICING THE MARKET FOR CALL CENTER SOLUTIONS The Company currently derives substantially all of its revenues from sales of its PhoneFrame CS product and related services. PhoneFrame CS was introduced in early 1995, and the Company expects that this product and related services will continue to account for a substantial portion of the Company's revenues for the foreseeable future. Although the Company intends to enhance these products and develop related products, the Company expects to continue to focus on providing call center systems as its primary line of business. As a result, any factor adversely affecting the market for call center systems in general, or the PhoneFrame CS product in particular, could adversely affect the Company's business, financial condition and results of operations. The market for call center systems is intensely competitive, highly fragmented and subject to rapid change. The Company's future success will depend on continued growth in the market for call center systems, and there can be no assurance that this market will continue to grow. If this market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, financial condition and results of operations would be materially adversely affected. RELIANCE ON SIGNIFICANT CUSTOMERS The Company has derived and believes that it will continue to derive a significant portion of its revenues in any period from a limited number of large corporate clients. During 1996, the Company's five largest customers accounted for 24.5% of the Company's total revenues. In 1995, the Company's five largest customers accounted for 24.8% of its total revenues. Although the specific customers may change from period to period, the Company expects that large sales to a limited number of customers will continue to account for a significant percentage of its revenues in any particular period for the foreseeable future. Therefore, the loss, deferral or cancellation of an order could have a significant impact on the Company's operating results in a particular quarter. There can be no assurance that its current customers will place additional orders, or that the Company will obtain orders of similar magnitude from other customers. The loss of any major customer or any reduction, delay in or cancellation of orders by any such customer or the failure of the Company to market successfully to new customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Customers." POTENTIAL VARIABILITY OF QUARTERLY FINANCIAL RESULTS The Company's revenues and operating results could vary substantially from quarter to quarter. Among the factors that could cause these variations are changes in the demand for the Company's products, the level of product and price competition, the length of the Company's sales process, the size and timing of individual transactions, the mix of products and services sold, software defects and other product quality problems, any delay in or cancellation of customer installations, the Company's success in expanding its direct sales force and indirect distribution channels, the timing of new product introductions and enhancements by the Company or its competitors, customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors, commercial strategies adopted by competitors, changes in foreign currency exchange rates, customers' fiscal constraints, the Company's ability to control costs and general economic conditions. In addition, a limited number of relatively large customer orders has accounted for and is likely to continue to account for a substantial portion of the Company's total revenues in any particular quarter. Sales of the Company's software products generally involve a significant commitment of management attention and resources by prospective customers. Accordingly, the Company's sales process is often lengthy and subject to delays associated with the long approval process that accompanies significant customer initiatives or capital expenditures. The Company's sales cycle, from initial trial to complete installation, varies substantially from customer to customer. Because a high percentage of the Company's costs are for staffing and operating expenses and are fixed in the short term, based on anticipated revenue levels, variations between anticipated 6 9 order dates and actual order dates, as well as nonrecurring or unanticipated large orders, can cause significant variations in the Company's operating results from quarter to quarter. As a result of the foregoing factors, the Company's operating results for a future quarter may be below the expectations of securities analysts and investors. In such event, the market price of the Company's Common Stock likely will be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." LIMITED PREDICTABILITY OF SALES DUE TO LENGTHY SALES PROCESS The sale of the Company's products generally requires the Company to provide a significant level of education to prospective customers regarding the use and benefits of the Company's products. In addition, implementation of the Company's products involves a significant commitment of resources by prospective customers and is commonly associated with substantial integration efforts which may be performed by the Company or the customer. For these and other reasons, the length of time between the date of initial contact with the potential customer and the installation and use of the Company's products is typically six months or more, and may be subject to delays over which the Company has little or no control. The Company's implementation cycle could be lengthened in the future by increases in the size and complexity of its installations. Delay in or cancellation of sales could have a material adverse effect on the Company's business, financial condition and results of operations, and could cause the Company's operating results to vary significantly from quarter to quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." COMPETITION The market for the Company's products is intensely competitive, fragmented and subject to rapid change. Because the Company's principal products are call management systems, which include both software applications and hardware, the Company competes with a variety of companies which provide these components independently or as an integrated system. The Company's primary competitors in the field of integrated inbound/outbound call management systems are Davox Corporation ("Davox"), EIS International, Inc. ("EIS") and Mosaix International, Inc. ("Mosaix"). The Company competes primarily against Davox and Mosaix in the collections segment of the outbound call management systems market, and against EIS in the telemarketing and telesales segments of the inbound/outbound call management systems market. The Company also competes in the CTI segment of the market, where principal competitors include AnswerSoft, Inc., Genesys Telecommunications Laboratories, Inc., Nabnasset Corporation and Brock International, Inc., among others. The Company may face additional competition from PBX/ACD vendors, other telecommunications equipment providers, telecommunications service providers, computer hardware and software vendors and others. The Company generally faces competition from one or more of its principal competitors on major installations and believes that price is a major factor considered by its prospective customers. Increased competition has contributed significantly to price reductions and the Company expects these price reductions to continue. In addition, increased competition may result in reduced operating margins and loss of market share, either of which could materially adversely affect the Company's business, financial condition and results of operations. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than could the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition and results of operations. See "Business -- Competition." CONTROL BY PRINCIPAL SHAREHOLDER Upon completion of this offering, Aleksander Szlam, the Company's Chairman of the Board, Chief Executive Officer and principal shareholder, will beneficially own approximately 76.1% of the outstanding shares of Common Stock (73.5% if the Underwriters' over-allotment option is exercised in full). Accordingly, 7 10 Mr. Szlam will be in a position to control the Company through his ability to control any election of members of the Board of Directors, as well as any decision whether to merge or sell the assets of the Company, to adopt, amend or repeal the Company's Amended and Restated Articles of Incorporation and Bylaws, or to take other actions requiring the vote or consent of the Company's shareholders. This concentration of ownership could also discourage bids for the shares of Common Stock at a premium to, or create a depressive effect on, the market price of the Common Stock. See "Principal Shareholders" and "Description of Capital Stock." COMPETITIVE MARKET FOR PERSONNEL The future success of the Company's growth strategy will depend to a significant extent on its ability to attract, train, motivate and retain highly skilled professionals, particularly software developers, sales and marketing personnel and other senior technical personnel. An inability to hire such additional qualified personnel could impair the Company's ability to adequately manage and complete its existing sales and to bid for, obtain and implement new sales. Further, the Company must train and manage its growing employee base, requiring an increase in the level of responsibility for both existing and new management personnel. There can be no assurance that the management personnel and systems currently in place will be adequate or that the Company will be able to assimilate new employees successfully. Highly skilled employees with the education and training required by the Company are in high demand. Accordingly, there can be no assurance that the Company will be successful in attracting or retaining current or future employees. See "Business -- Employees." RISKS ASSOCIATED WITH TECHNOLOGICAL ADVANCES; NECESSITY OF DEVELOPING NEW PRODUCTS The market for call center systems is subject to rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, the Company's position in this market could be eroded rapidly by unforeseen changes in customer requirements for application features, functions and technologies. The Company's growth and future operating results will depend in part upon its ability to enhance existing applications and develop and introduce new applications that meet or exceed technological advances in the marketplace, that meet changing customer requirements, that respond to competitive products and that achieve market acceptance. The Company's product development and testing efforts have required, and are expected to continue to require, substantial investments by the Company. There can be no assurance the Company will possess sufficient resources to make these necessary investments. The Company has in the past experienced delays both in developing new products and customizing existing products. These delays have occurred due to the complex nature of the Company's products, difficulties in getting newly developed software code to function properly with existing code, difficulty in recruiting sufficient numbers of programmers with the proper technical skills and capabilities, loss of programmers with existing technical knowledge of the Company's products, changing standards or protocols within the computer and telephony equipment with which the Company's products integrate, inherent limitations in, and unforeseen problems with using, other company or industry products and software, changes in design specifications once technical problems are uncovered, and unforeseen problems with the implementation of a client server architecture and distributed processing. There can be no assurance that the Company will not experience difficulties that could cause such delays in the future. In addition, there can be no assurance that such products will meet the requirements of the marketplace and achieve market acceptance, or that the Company's current or future products will conform to industry standards. If the Company is unable, for technological or other reasons, to develop and introduce new and enhanced products in a timely manner, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business -- Technology, Research and Product Development." MANAGEMENT OF GROWTH The Company has recently experienced significant growth in revenue, operations and personnel. Continued growth will place significant demands on its management and other resources. In particular, the Company will have to continue to increase the number of its personnel, particularly skilled technical, 8 11 marketing and management personnel, and continue to develop and improve its operational, financial, communications and other internal systems. The Company's inability to manage its growth effectively could have a material adverse effect on the quality of the Company's services and projects, its ability to attract and retain key personnel, its business prospects and its results of operations and financial condition. The Company is currently in the process of implementing a new help-desk information system to upgrade its automated customer support capability. No assurance can be given that the implementation of this system will not result in disruptions to the Company's business. In addition, the Company is in the process of implementing a plan to decentralize its sales and support functions throughout existing and planned regional offices. There can be no assurance that the Company will be successful in implementing this decentralization plan or managing the transition without disruptions in the sales and support functions or that the new decentralized sales and support organization will be effective. Any disruptions resulting from the implementation of the help-desk information system or the decentralization plan, or the failure to implement these changes in a timely manner, could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business -- Employees" and "Management -- Executive Officers and Directors." INTERNATIONAL OPERATIONS Revenue from sales outside the United States in 1994, 1995 and 1996 accounted for 20.9%, 22.5% and 21.0%, respectively, of the Company's total revenues. International operations are subject to inherent risks, including the impact of possible recessionary environments in economies outside the United States, changes in legal and regulatory requirements including those relating to telemarketing activities, changes in tariffs, seasonality of sales, costs of localizing products for foreign markets, longer accounts receivable collection periods and greater difficulty in accounts receivable collection, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences and political and economic instability. There can be no assurance that the Company will be able to sustain or increase international revenue, or that the factors listed above will not have a material adverse impact on the Company's international operations. While the Company's expenses incurred in foreign countries typically are denominated in the local currencies, revenues generated by the Company's international sales typically are paid in U.S. dollars or British pounds. Accordingly, while exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse impact on the Company's international operations. The Company currently does not engage in currency hedging activities. A significant element of the Company's business strategy is to continue expansion of its operations in international markets. This expansion has required and will continue to require significant management attention and financial resources to develop international sales channels. Because of the difficulty in penetrating new markets, there can be no assurance that the Company will be able to maintain or increase international revenues. To the extent that the Company is unable to do so, the Company's financial condition and results of operations could be materially adversely affected. See "Business -- Strategy." RISK OF SOFTWARE DEFECTS; DEPENDENCE ON THIRD-PARTY SOFTWARE Software products as complex as those offered by the Company may contain errors that may be detected at any point in the products' life cycles. The Company has, in the past, discovered software errors in certain of its products and has experienced delays in shipment of products during the period required to correct these errors. In particular, the call center environment is characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time consuming. There can be no assurance that, despite extensive testing by the Company and by current and potential customers, errors will not be found, resulting in a loss of, or delay in, market acceptance and sales, diversion of development resources, injury to the Company's reputation or increased service and warranty cost, any of which could have a material adverse affect on the Company's business, financial condition and results of operations. Certain software used in the Company's products is licensed by the Company from third parties. There can be no assurance that the Company will continue to be able to resell this software under its licenses or, if any licensor terminates its agreement with the Company, that the 9 12 Company will be able to develop or otherwise procure replacement software from another supplier on a timely basis or on commercially reasonable terms. In addition, such third-party software may contain errors that would be difficult for the Company to detect and correct. POTENTIAL LIABILITY TO CLIENTS The Company's products may be critical to the operations of its clients' businesses and provide benefits that may be difficult to quantify. Any failure in a Company product or a client's system could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. Although the Company attempts to limit contractually its liability for damages arising from product failures or negligent acts or omissions, there can be no assurance the limitations of liability set forth in its contracts will be enforceable in all instances or would otherwise protect the Company from liability for damages. Although the Company maintains general liability insurance coverage, including coverage for product liability and 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. The successful assertion of one or more large claims against the Company that exceed available insurance coverage or changes in the Company's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect the Company's results of operations and financial condition. RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS The Company may in the future engage in selective acquisitions of businesses that are complementary to those of the Company, including other providers of call management or CTI solutions or technology. While the Company has from time to time in the past considered acquisition opportunities, it has never acquired a significant business and has no existing agreements or commitments to effect any acquisition. Accordingly, there can be no assurance that the Company will be able to identify suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition or successfully integrate any acquired business into the Company's operations. Further, acquisitions may involve a number of additional risks, including diversion of management's attention, failure to retain key acquired personnel, unanticipated events or circumstances and legal liabilities, some or all of which could have a material adverse effect on the Company's results of operations and financial condition. Problems with an acquired business could have a material adverse impact on the performance of the Company as a whole. The Company expects to finance any future acquisitions with the proceeds of this offering as well as with possible debt financing, the issuance of equity securities (common or preferred stock) or a combination of the foregoing. There can be no assurance that the Company will be able to arrange adequate financing on acceptable terms. If the Company were to proceed with one or more significant future acquisitions in which the consideration consisted of cash, a substantial portion of the Company's available cash (possibly including a portion of the proceeds of this offering) could be used to consummate the acquisitions. If the Company were to consummate one or more significant acquisitions in which the consideration consisted of stock, shareholders of the Company could suffer significant dilution of their interests in the Company. Many business acquisitions must be accounted for as a purchase. Most of the businesses that might become attractive acquisition candidates for the Company are likely to have significant intangible assets and acquisition of these businesses, if accounted for as a purchase, would typically result in substantial goodwill amortization charges to the Company, reducing future earnings. In addition, such acquisitions could involve non-recurring acquisition-related charges, such as the write-off or write-down of software development costs or other intangible items. TERMINATION OF S CORPORATION STATUS AND SUBSTANTIAL DISTRIBUTION OF OFFERING PROCEEDS TO CURRENT SHAREHOLDERS; OTHER BENEFITS TO PRINCIPAL SHAREHOLDER Since September 1, 1988, the Company has been treated for federal income tax purposes as an S corporation under the Internal Revenue Code of 1986, as amended (the "Code"). Upon the effective date of this offering (the "Termination Date"), the Company will terminate its status as an S corporation under the Code and thereafter will be subject to federal and state income taxes. 10 13 The Company will use a substantial portion of the proceeds of this offering to make the following payments to its principal shareholder: (i) repayment of the 1992 Note and the 1997 Notes, aggregating approximately $15.3 million, and (ii) a distribution of accumulated 1997 S corporation earnings. Purchasers of Common Stock in this offering will not receive any portion of the S corporation distribution. See "Termination of S Corporation Status and Related Distributions," "Use of Proceeds," "Certain Transactions" and Note 3 of the Notes to Combined Financial Statements. REGULATORY ENVIRONMENT Certain uses of outbound call processing systems are regulated by federal, state and foreign laws and regulations. While the Company's systems are generally designed to operate in compliance with these laws and regulations through the use of appropriate calling lists and calling campaign time parameters, compliance with these laws and regulations may limit the usefulness of the Company's products to its customers and potential customers, and these laws and regulations could therefore adversely affect demand for the Company's products. In addition, there can be no assurance that future legislation or regulatory activity further restricting telephone practices, if enacted, would not adversely affect the Company. See "Business -- Regulatory Environment." INTELLECTUAL PROPERTY RIGHTS The Company relies on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect its proprietary rights in its products and technology. There can be no assurance, however, that these measures will be adequate to protect its trade secrets and proprietary technology. Further, the Company may be subject to additional risks as it enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in such countries. Litigation to defend and enforce the Company's intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the final outcome of such litigation. Despite the Company's efforts to safeguard and maintain its proprietary rights both in the United States and abroad, there can be no assurance that the Company will be successful in doing so or that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using the Company's products or technology. There can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company. Any such events could have a material adverse affect on the Company's business, financial condition and results of operations. The Company has entered into agreements with certain of its distributors giving them a limited, non-exclusive right to use portions of the Company's source code to create foreign language versions of the Company's products for distribution in foreign markets. In addition, the Company has entered into agreements with a small number of its customers requiring the Company to place its source code in escrow. These escrow arrangements typically provide that these customers have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its support obligations. These arrangements may increase the likelihood of misappropriation by third parties. As the number of call management software applications in the industry increases and the functionality of these products further overlaps, software development companies like the Company may increasingly become subject to claims of infringement or misappropriation of the intellectual property rights of others. Although the Company believes that its software components and other intellectual property do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future, that assertion of such claims will not result in litigation or that the Company would prevail in such litigation or be able to obtain a license for the use of any infringed intellectual property from a third party on commercially reasonable terms. Furthermore, litigation, regardless of its outcome, could result in substantial cost to the Company, divert management's attention from the Company's operations and delay 11 14 customer purchasing decisions. Any infringement claim or litigation against the Company could, therefore, have a material adverse effect on the Company's results of operations and financial condition. See "Business -- Proprietary Rights." DEPENDENCE ON KEY PERSONNEL The Company's success will depend in large part upon the continued availability of the services of Aleksander Szlam, the Company's Chairman and Chief Executive Officer, and J. Neil Smith, the Company's President and Chief Operating Officer. Although the Company has employment agreements with Mr. Szlam and Mr. Smith, these agreements do not obligate either of them to continue his employment with the Company. There can be no assurance that the Company will be able to retain the services of Messrs. Szlam and Smith. The Company does not maintain key man life insurance on Mr. Szlam or Mr. Smith. The loss of the services of one or both of them would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management." BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS A substantial portion of the net proceeds to be received by the Company in connection with this offering is allocated to working capital and general corporate purposes. Accordingly, management will have broad discretion with respect to the expenditure of such proceeds. Purchasers of shares of Common Stock offered hereby will be entrusting their funds to the Company's management, upon whose judgment they must depend, with limited information concerning the specific working capital requirements and general corporate purposes to which the funds will ultimately be applied. See "Use of Proceeds." CERTAIN ANTI-TAKEOVER PROVISIONS The Board of Directors has authority to issue up to 20,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by the Company's shareholders. The rights of the holders of the Common Stock will be subject to, and may be adversely affected by, the rights of the holders of preferred stock that may be issued in the future. While the Company has no present intention to issue shares of preferred stock, such issuance could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, the Company's Amended and Restated Articles of Incorporation and Bylaws contain provisions that may discourage proposals or bids to acquire the Company. These provisions could have the effect of making it more difficult for a third party to acquire control of the Company and adversely affect prevailing market prices for the Common Stock. See "Description of Capital Stock -- Certain Articles of Incorporation and Bylaw Provisions" and "Certain Provisions of Georgia Law." SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of this offering, the Company will have 14,643,395 shares of Common Stock outstanding. The 3,500,000 shares of Common Stock sold in this offering will be freely tradable without restriction or limitation under the Securities Act of 1933, as amended (the "Securities Act"), except for shares purchased by "affiliates" (as defined under the Securities Act). The remaining 11,143,395 shares of Common Stock will become eligible for sale beginning in February 1998 subject to the volume and other limitations of Rule 144 under the Securities Act. All of the officers, directors and existing shareholders of the Company are subject to lock-up agreements under which they have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of Montgomery Securities. Upon completion of this offering, the Company will have 1,600,000 shares of Common Stock reserved for issuance under its stock plans, of which 1,104,097 shares are subject to outstanding options. Promptly following the completion of this offering, the Company intends to file one or more registration statements on Form S-8 to register these shares. Sales of substantial amounts of Common Stock in the public markets, pursuant to Rule 144 or otherwise, or the availability of such shares for sale could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise 12 15 additional capital through the sale of equity securities in the future should it desire to do so. See "Management -- Employee Benefit Plans" and "Shares Eligible for Future Sale." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock. Although the Company has made application for the quotation of the Common Stock on the Nasdaq National Market, there can be no assurance that an active trading market will develop or be sustained after the offering. The initial public offering price of the Common Stock offered hereby will be determined by negotiation between the Company and the Representatives of the Underwriters and may bear no relationship to the market price of the Common Stock after the offering. The market price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. In addition, the securities markets have experienced significant price and volume fluctuations from time to time that have often been unrelated or disproportionate to the operating performance of particular companies. Any announcement with respect to any adverse variance in revenue or earnings from levels generally expected by securities analysts or investors for a given period would have an immediate and significant adverse effect on the trading price of the Common Stock. In addition, factors such as announcements of technological innovations or new products by the Company, its competitors or third parties, rumors of such innovations or new products, changing conditions in the market for call center systems, changes in estimates by securities analysts, announcements of extraordinary events, such as acquisitions or litigation, or general economic conditions may have a significant adverse impact on the market price of the Common Stock. See "Underwriting." DILUTION The purchasers of the Common Stock offered hereby will experience immediate and significant dilution in the pro forma net tangible book value of the Common Stock from the initial public offering price. See "Dilution." 13 16 TERMINATION OF S CORPORATION STATUS AND RELATED DISTRIBUTIONS Since September 1, 1988, the Company has elected to operate under Subchapter S of the Code and comparable provisions of certain state income tax laws. An S corporation generally is not subject to income tax at the corporate level (with certain exceptions under state income tax laws). Instead, the S corporation's income generally passes through to shareholders and is taxed on their personal income tax returns. As a result, the Company's earnings have been taxed for federal and state income tax purposes, with certain exceptions, directly to the existing shareholders of the Company. Upon the effective date of this offering (the "Termination Date"), the Company will terminate its status as an S corporation under the Code. All undistributed S corporation earnings through the Termination Date will be distributed to the Company's principal shareholder using a portion of the net proceeds of this offering. At December 31, 1996, the undistributed S corporation earnings of the Company were estimated to be $14.4 million. Subsequent to December 31, 1996, the Company distributed these amounts to its principal shareholder, including a distribution of $1.5 million in cash and the issuance of the 1997 Notes having an aggregate principal amount of $12.9 million. The 1997 Notes bear interest at a rate equal to the applicable federal rate under the Code (currently 5.7%) and will accrue interest of approximately $250,000 through the expected Termination Date. The 1997 Notes will be repaid in full using a portion of the proceeds of this offering. As of March 31, 1997, undistributed 1997 S corporation earnings were estimated to be $2.5 million, $1.8 million of which was distributed by the Company in April 1997. The Company expects to accumulate additional earnings through the Termination Date. The Company currently estimates that such additional earnings will be between $1.0 million and $3.0 million, although the actual amount of such earnings may vary significantly. These accumulated earnings will be distributed to the principal shareholder using a portion of the net proceeds of this offering. The actual amount of this distribution will be reduced to the extent additional distributions of 1997 accumulated earnings are made by the Company to the principal shareholder prior to the Termination Date with other corporate funds. The principal shareholder has agreed to indemnify the Company should its status as an S Corporation during any portion of the period for which it claimed such status in federal or state income tax filings ever be successfully challenged. See "Risk Factors -- Termination of S Corporation Status and Substantial Distribution of Offering Proceeds to Current Shareholders; Other Benefits to Principal Shareholder," "Use of Proceeds" and "Certain Transactions." In connection with the termination of its S corporation status, the Company will report an increase in earnings which will be recognized in the quarter during which the Termination Date occurs with the addition of approximately $1.1 million in deferred tax assets. 14 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,500,000 shares of Common Stock offered hereby are estimated to be approximately $31.3 million ($36.1 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $10.00 per share and after deducting estimated underwriting discounts and estimated expenses payable by the Company in connection with the offering. From the net proceeds of the offering, the Company will make the following payments to its principal shareholder: (i) repayment of the $12.9 million principal balance of the 1997 Notes, together with accrued interest thereon which the Company estimates will then be $250,000, (ii) repayment of the 1992 Note, which the Company expects will then have a principal balance of $2.3 million, (iii) the payment of undistributed S corporation earnings through March 31, 1997, of approximately $700,000, and (iv) a distribution of all undistributed accumulated S corporation earnings for the period from April 1, 1997 through the effective date. The Company currently estimates that the undistributed accumulated earnings as of the estimated effective date will be between $1.0 million and $3.0 million, although the actual amount of such earnings may vary significantly. The actual amount of this distribution will be reduced to the extent any prior distributions of 1997 accumulated earnings are made by the Company to its principal shareholder. The 1997 Notes and the 1992 Note were issued to reflect the distribution of accumulated earnings to the principal shareholder. The 1997 Notes bear interest at the minimum rate required to avoid imputation of interest using the applicable federal rate under the Code (currently 5.7%). Payment of the 1997 Notes is due in full upon demand. The 1992 Note bears interest at a rate equal to the prime rate plus 1% per annum. Interest on the note is payable monthly, and principal is payable in 16 equal quarterly installments beginning July 1, 1996. The 1992 Note contains an acceleration provision at the option of the noteholder upon certain designated changes in ownership, which was triggered by changes in the capital structure in February 1997. See "Termination of S Corporation Status and Related Distributions" and "Certain Transactions." The remainder of the net proceeds will be used for working capital and other general corporate purposes. Such purposes may include possible acquisitions of, or investments in, businesses and technologies that are complementary to those of the Company. The Company has no specific agreements, commitments or understandings with respect to any such acquisitions or investments. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds in short-term, interest-bearing securities. See "Risk Factors -- Broad Management Discretion as to Use of Proceeds." The Company is proceeding with the offering at this time in part to establish a public trading market for shares of the Common Stock (including shares issuable pursuant to the exercise of options) in what the Company perceives as favorable market conditions. DIVIDEND POLICY The Company historically has made substantial distributions to its shareholders related to its S corporation status and the resulting tax payment obligations imposed on its shareholders, including a total since January 1, 1995 of $12.1 million in cash and $12.9 million in the form of the 1997 Notes. Other than the distribution to be made to the Company's principal shareholder described under "Termination of S Corporation Status and Related Distributions," the Company does not intend to declare or pay cash dividends in the foreseeable future. Management anticipates that all earnings and other cash resources of the Company, if any, will be retained by the Company for investment in its business. 15 18 CAPITALIZATION The following table sets forth the short-term indebtedness and capitalization of the Company at March 31, 1997 on an actual, pro forma and pro forma as adjusted basis. This table should be read in conjunction with the Company's Combined Financial Statements and Notes thereto.
MARCH 31, 1997 ----------------------------------- PRO PRO FORMA ACTUAL FORMA(1) AS ADJUSTED(2) ------- -------- -------------- (IN THOUSANDS) Current portion of long term debt........................... $15,352 $15,352 $ 15 ======= ======= ======= Long-term debt, net of current portion...................... $ -- $ -- $ -- Shareholders' equity: Preferred stock: Melita International Corporation, no par value, 20,000,000 shares authorized(3), no shares issued or outstanding.......................................... -- -- -- Common stock: Melita International Corporation, no par value; 100,000,000 shares authorized(3); 8,000,000 shares issued and outstanding, actual; 11,143,395 shares issued and outstanding, pro forma; 14,643,395 shares issued and outstanding, pro forma as adjusted(4)..... 2 69 31,319 Melita Europe Limited, L1 par value; 50,000 shares authorized; 31,128 shares issued and outstanding actual; no shares issued or outstanding pro forma or pro forma as adjusted................................ 46 -- -- Inventions, Inc., $5 par value; 100 shares authorized; 100 shares issued and outstanding actual; no shares issued or outstanding pro forma or pro forma as adjusted............................................. 1 -- -- Additional paid-in capital................................ 20 -- -- Cumulative foreign currency translation adjustment........ 13 13 13 Retained earnings......................................... (1,567) (3,128) (3,128) ------- ------- ------- Total shareholders' equity........................ (1,485) (3,046) 28,204 ------- ------- ------- Total capitalization......................... $(1,485) $(3,046) $28,204 ======= ======= =======
- --------------- (1) Pro forma to give effect to (i) the issuance of 3,143,395 shares of Common Stock in connection with the Combination, (ii) the Note Repayment, (iii) the Interest Accrual, (iv) the Deferred Tax Adjustment and (v) the Distribution. See "Termination of S Corporation Status and Related Distributions," "Use of Proceeds," "Certain Transactions" and Notes 2, 3 and 8 of the Notes to Combined Financial Statements included elsewhere in this prospectus. (2) Pro forma as adjusted to give effect to the sale by the Company of the 3,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." (3) Gives effect to an amendment to the Company's Articles of Incorporation to be filed after December 31, 1996 to increase its authorized capital stock. (4) Actual, pro forma and pro forma as adjusted shares issued and outstanding exclude an aggregate of 1,600,000 shares of Common Stock reserved for issuance under the 1992 Stock Option Plan, the 1997 Stock Option Plan and the Stock Purchase Plan, of which 1,104,097 shares were subject to options outstanding as of the date of this Prospectus at a weighted average exercise price of $3.43 per share. See "Management -- Employee Benefit Plans" and Note 6 of the Notes to Combined Financial Statements. 16 19 DILUTION The net tangible book deficit of the Common Stock as of March 31, 1997 was approximately $(1.5 million) or $(.19) per share. The pro forma net tangible book deficit of the Common Stock as of March 31, 1997 was approximately $(3.1 million) or $(.27) per share. The pro forma net tangible book deficit per share represents the excess of the Company's total liabilities over total tangible assets, divided by the total number of shares of Common Stock outstanding, after giving effect to the Combination, the Distribution and the Deferred Tax Adjustment. After giving effect to the sale by the Company of the 3,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share, and the receipt of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company (total tangible assets less total liabilities) as of March 31, 1997 would have been approximately $28.2 million, or $1.93 per share. This represents an immediate increase in pro forma net tangible book value of $2.20 per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $8.07 per share to purchasers of Common Stock in this offering, as illustrated in the following table: Assumed initial public offering price per share.................... $10.00 ------ Net tangible book value per share as of March 31, 1997.... $(.19) Decrease per share attributable to pro forma adjustments............................................ (.08) ----- Pro forma net tangible book deficit per share as of March 31, 1997............................................... (.27) Increase per share attributable to new investors.......... 2.20 ----- Pro forma net tangible book value per share as of March 31, 1997 after the offering............................................... 1.93 ------ Dilution per share to new investors................................ $ 8.07 ======
The following table sets forth, as of March 31, 1997, on a pro forma basis after giving effect to the issuance of shares of Common Stock in connection with the Combination, the number of shares of Common Stock issued by the Company and the total consideration and the average price per share paid by the existing shareholders and new investors, assuming the sale by the Company of 3,500,000 shares of Common Stock at an assumed initial public offering price of $10.00 per share, and before deducting the estimated underwriting discount and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders.... 11,143,395 76.1% $ 69,000 0.2% $ 0.01 New investors............ 3,500,000 23.9 35,000,000 99.8 $10.00 ---------- ----- ----------- ----- Total.......... 14,643,395 100.0% $35,069,000 100.0% ========== ===== =========== =====
Assuming full exercise of the Underwriters' over-allotment option, the percentage of shares held by existing shareholders would be 73.5% of the total number of shares of Common Stock to be outstanding after the offering, and the number of shares held by new investors would be increased to 4,025,000 shares, or 26.5% of the total number of shares of Common Stock to be outstanding after the offering. See "Principal Shareholders." Following the closing of this offering, the Company will have outstanding options to acquire approximately 1,104,097 shares of Common Stock at exercise prices ranging from $2.75 to $5.50 per share and a weighted average exercise price of $3.43 per share. The exercise of these options would have the effect of increasing the net tangible book value dilution to new investors in this offering. 17 20 SELECTED COMBINED FINANCIAL DATA The selected combined financial data of the Company set forth below should be read in conjunction with the Combined Financial Statements of the Company, including the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The combined statement of operations data for the years ended December 31, 1994, 1995 and 1996 and the combined balance sheet data as of December 31, 1995 and 1996 are derived from, and are qualified by reference to, the combined financial statements audited by Arthur Andersen LLP and included elsewhere in this Prospectus. The combined statement of operations data for the years ended December 31, 1992 and 1993 and the combined balance sheet data as of December 31, 1992, 1993 and 1994 are derived from unaudited combined financial statements. The combined financial data for the three months ended March 31, 1996 and 1997 has been derived from the unaudited financial statements of the Company, but includes all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the three month period ended March 31, 1997 may not be indicative of the operating results that may be expected for the Company's fiscal year ended December 31, 1997.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues: Product.............................................. $19,047 $17,709 $18,186 $24,620 $32,077 $ 7,691 $10,265 Service.............................................. 5,656 6,959 8,970 10,662 15,463 3,330 4,404 ------- ------- ------- ------- ------- ------- ------- Total revenues................................. 24,703 24,668 27,156 35,282 47,540 11,021 14,669 Cost of revenues: Product.............................................. 5,298 5,181 6,310 8,730 11,494 2,449 3,836 Service.............................................. 3,346 2,924 3,254 5,282 6,863 1,439 1,931 ------- ------- ------- ------- ------- ------- ------- Total cost of revenues......................... 8,644 8,105 9,564 14,012 18,357 3,888 5,767 ------- ------- ------- ------- ------- ------- ------- Gross margin........................................... 16,059 16,563 17,592 21,270 29,183 7,133 8,902 Operating expenses: Research and development............................. 3,952 3,386 3,660 4,050 5,070 945 1,381 Selling, general and administrative.................. 8,929 9,528 11,332 12,559 16,765 4,137 5,134 ------- ------- ------- ------- ------- ------- ------- Total operating expenses....................... 12,881 12,914 14,992 16,609 21,835 5,082 6,515 ------- ------- ------- ------- ------- ------- ------- Income from operations................................. 3,178 3,649 2,600 4,661 7,348 2,051 2,387 Other income (expense), net............................ 216 186 46 88 261 (11) (51) ------- ------- ------- ------- ------- ------- ------- Income before income taxes............................. 3,394 3,835 2,646 4,749 7,609 2,040 2,336 Income tax provision (benefit)......................... (19) 25 (26) -- -- -- 16 ------- ------- ------- ------- ------- ------- ------- Net income before pro forma income tax provision....... 3,413 3,810 2,672 4,749 7,609 2,040 2,320 Pro forma income taxes(1).............................. 1,256 1,454 1,164 1,794 2,827 762 895 ------- ------- ------- ------- ------- ------- ------- Pro forma net income(1)................................ $ 2,157 $ 2,356 $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per common and common equivalent share................................................ $ 0.39 $ 0.11 ======= ======= Pro forma weighted average common and common equivalent shares outstanding(2)................................ $12,363 $12,647 ======= =======
18 21
DECEMBER 31, MARCH 31, 1997 ----------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 ACTUAL PRO FORMA(3) ------- ------- ------- ------- ------- ------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit).................... $ 7,831 $ 8,955 $ 8,594 $ 6,904 $ 8,124 $(4,324) $(5,885) Total assets................................. 13,076 15,679 17,635 20,928 27,069 28,105 17,478 Long-term debt, net of current portion....... 3,176 3,111 3,068 2,644 -- -- -- Total shareholders' equity (deficit)......... 6,143 7,385 7,103 6,657 10,872 (1,485) (3,046)
- --------------- (1) Upon the effective date of this offering, the Company will terminate its status as an S corporation. Thereafter, the Company will be subject to federal and state income taxes. Pro forma net income is presented as if the Company had been subject to corporate income taxes for all periods presented. See "Termination of S Corporation Status and Related Distributions," and Notes 1 and 3 of the Notes to Combined Financial Statements. (2) See Note 1 of the Notes to Combined Financial Statements. (3) Presented on a pro forma basis to give effect to (i) the issuance of 3,143,395 shares of Common Stock in connection with the Combination, (ii) the Distribution, (iii) the Interest Accrual, (iv) the Deferred Tax Adjustment and (v) the Note Repayment. See "Termination of S Corporation Status and Related Distributions," "Use of Proceeds," "Capitalization," "Certain Transactions" and Notes 2, 3 and 8 of the Notes to Combined Financial Statements. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Melita is a leading provider of customer contact and call management systems that enable customers to operate efficient call centers. The Company's principal product, PhoneFrame CS, is an integrated system comprised of both hardware and software based on open, client/server architecture. Melita offers ongoing maintenance support of its products. The Company also offers fee-based installation, training and consulting services. Historically, the Company has internally generated the funds necessary for its growth through profits and cash provided by operating activities. In 1988, the Company introduced its first call management solution, based on digital voice technology and the DOS operating system, driving revenue growth from $10.8 million to $24.7 million during the period from 1989 to 1992. The Company introduced Staccato, a UNIX-based client/server version of its call center software, in 1992. Due to the slow market acceptance of client/server call center solutions, the Company's revenues were relatively flat from 1992 to 1994. In 1994, the Company introduced Interlude, a more open, scaleable and standards-based version of the product, and in 1995 the Company made significant additions to its management team, sales and marketing efforts and installation and support capabilities, which contributed to growth of 29.9% in total revenues from 1994 to 1995. The Company's revenues are derived primarily from two sources: (i) product license fees for the use of the Company's software products and revenues from sales of related computer and telephony hardware to utilize the software and (ii) service fees for ongoing system support, maintenance, installation, training and consulting services. The Company recognizes product revenue upon shipment of the product and when the Company has no significant obligations yet to be satisfied. Revenues from maintenance contracts are recognized ratably over the term of the support period. Revenues from consulting, installation and training services are recognized as the services are performed. Cost of product revenues primarily includes cost of material and assembly of components for products shipped, together with salaries and benefits of production personnel. Cost of service revenues consists primarily of salaries and benefits of customer support and field service personnel. Cost of service revenues includes related operating costs such as training, computer support and travel costs. The Company contracts with third parties to provide maintenance on hardware provided as part of the Company's systems. Research and development expenses primarily consist of salaries and benefits of engineering personnel involved with software and voice processing technology development. Also included are costs for subcontracted development projects and expendable equipment purchases. Selling, general and administrative expenses consist primarily of salaries, commissions and benefits of sales, marketing, administrative, finance and human resources personnel. Also included are marketing expenditures, travel, rent and other costs. Total revenues from sales outside the United States accounted for 20.9%, 22.5%, and 21.0% of the Company's total revenues for 1994, 1995 and 1996, respectively. The Company relies on VARs to sell, install and support its products in countries outside of the United States, Canada and the United Kingdom. The Company's international revenues are primarily denominated in U.S. dollars or British pounds. The Company's expenses incurred in foreign countries are typically denominated in local currencies. The Company has recognized foreign exchange gains (losses) of approximately $31,000, $(2,000) and $162,000 in 1994, 1995 and 1996, respectively. There can be no assurance that future fluctuations in currency exchange rates will not have a material adverse impact on the Company's future international operations. 20 23 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, --------------------- ------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net revenues: Product.......................................... 67.0% 69.8% 67.5% 69.8% 70.0% Service.......................................... 33.0 30.2 32.5 30.2 30.0 ----- ----- ----- ----- ----- Total revenues........................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of revenues: Product.......................................... 23.2 24.7 24.2 22.2 26.1 Service.......................................... 12.0 15.0 14.4 13.1 13.2 ----- ----- ----- ----- ----- Total cost of revenues................... 35.2 39.7 38.6 35.3 39.3 ----- ----- ----- ----- ----- Gross margin....................................... 64.8 60.3 61.4 64.7 60.7 ----- ----- ----- ----- ----- Operating expenses: Research and development......................... 13.5 11.5 10.7 8.6 9.4 Selling, general and administrative.............. 41.7 35.6 35.2 37.5 35.0 ----- ----- ----- ----- ----- Total operating expenses................. 55.2 47.1 45.9 46.1 44.4 ----- ----- ----- ----- ----- Income from operations............................. 9.6 13.2 15.5 18.6 16.3 Other income (expense), net........................ 0.2 0.3 0.5 (0.1) (0.4) ----- ----- ----- ----- ----- Income before income taxes......................... 9.8 13.5 16.0 18.5 15.9 Income tax benefit (provision)..................... 0.1 -- -- -- (0.1) ----- ----- ----- ----- ----- Net income before pro forma income taxes........... 9.9 13.5 16.0 18.5 15.8 ----- ----- ----- ----- ----- Pro forma income taxes............................. 4.3 5.1 6.0 6.9 6.1 ----- ----- ----- ----- ----- Pro forma net income............................... 5.6% 8.4% 10.0% 11.6% 9.7% ===== ===== ===== ===== =====
The following table sets forth, for each component of net revenues, the cost of such revenues as a percentage of such revenues for the periods indicated:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ----------------------- -------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Cost of product revenues................... 34.7% 35.5% 35.8% 31.8% 37.4% Cost of service revenues................... 36.3% 49.5% 44.4% 43.2% 43.8%
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Revenues. Total revenues increased 33.1% to $14.7 million in the first quarter of 1997 from $11.0 million in the first quarter of 1996. Revenues from product sales increased 33.5% to $10.3 million in the first quarter of 1997 from $7.7 million in the first quarter of 1996. The increase in product revenues was due to demand for the Company's products, increased marketing and sales efforts and the introduction of a new product feature, Magellan CS in the fourth quarter of 1996, which increased sales of the Company's systems. Service revenues increased 32.3% to $4.4 million in the first quarter of 1997, or 30.0% of total revenues, from $3.3 million in the first quarter of 1996, or 30.2% of total revenues. Service revenues increased primarily due to an increase in the number of contractual maintenance agreements and also from revenues generated from installation and training. Cost of Revenues. Total cost of revenues was $5.8 million in the first quarter of 1997, representing a 48.7% increase over total cost of revenues of $3.9 million in the first quarter of 1996. Total cost of revenues represented 39.3% and 35.3% of total revenues in the first quarters of 1997 and 1996, respectively. Cost of product revenues was $3.8 million in the first quarter of 1997, or 37.4% of product revenues, increasing by 21 24 56.6% from $2.4 million in the first quarter of 1996, or 31.8% of product revenues. Cost of product revenues increased as percentage of product revenues due to lower unit sales prices and a change in the size and mix of the products shipped. Cost of service revenues was $1.9 million in the first quarter of 1997, or 43.8% of service revenues, increasing by 34.2% from $1.4 million in the first quarter of 1996, or 43.2% of service revenues. Research and Development. Research and development expenses were $1.4 million in the first quarter of 1997, representing a 46.1% increase over the $945,000 expended in the first quarter of 1996. The increase resulted primarily from the addition of developers to support the Company's new product development efforts and the subcontracting of certain feature development efforts incurred during 1997. Selling, General and Administrative. Selling, general and administrative expenses were $5.1 million in the first quarter of 1997, representing a 24.1% increase over $4.1 million expended in the first quarter of 1996. This increase was the result of an increase in sales commissions corresponding to the increase in revenues and additional staff required to support the higher sales levels in 1997. Selling, general and administration expenses decreased as a percentage of total revenues from 37.5% in the first quarter of 1996 to 35.0% in the first quarter of 1997. Income from Operations. As a result of the foregoing factors, income from operations was $2.4 million in the first quarter of 1997, representing a 16.4% increase over income from operations of $2.1 million in the first quarter of 1996. Operating income decreased as a percentage of total revenues from 18.6% in the first quarter of 1996 to 16.3% in the first quarter of 1997. Other Income (Expense), Net. Other income (expense), net was a net expense of $51,000 in the first quarter of 1997 compared to a net expense of $11,000 in the first quarter of 1996. In the first quarter of 1997, interest expense increased from 1996 levels due to increased debt. Pro Forma Income Taxes. Pro forma income taxes were $895,000 in the first quarter of 1997 as compared to $762,000 in the first quarter of 1996, as a result of the Company's increased net income before income taxes in 1997. The Company's pro forma effective tax rate was 39.0% in the first quarter of 1997, compared to 37.4% in the first quarter of 1996. Pro Forma Net Income. Pro forma net income was $1.4 million in the first quarter of 1997, representing an 11.5% increase over pro forma net income of $1.3 million in the first quarter of 1996. As a percentage of total revenues, pro forma net income decreased from 11.6% in the first quarter of 1996 to 9.7% in the first quarter of 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues increased 34.7% to $47.5 million in 1996 from $35.3 million in 1995. Revenues from product sales increased 30.3% to $32.1 million in 1996, or 67.5% of total revenues, from $24.6 million in 1995, or 69.8% of total revenues. The increase in product revenues was due to strong demand for the Company's PhoneFrame CS product introduced in the first half of 1995, increased sales and marketing efforts and the introduction of Magellan CS in the fourth quarter of 1996. Service revenues increased 45.0% to $15.5 million in 1996, or 32.5% of total revenues, from $10.7 million in 1995, or 30.2% of total revenues. Service revenues increased primarily due to an increase in the number of contractual maintenance agreements and, to a lesser degree, from revenues generated by installation and training. Cost of Revenues. Total cost of revenues was $18.4 million in 1996, representing a 31.0% increase over total cost of revenues of $14.0 million in 1995. Total cost of revenues represented 38.6% and 39.7% of total revenues in 1996 and 1995, respectively. Cost of product revenues was $11.5 million in 1996, or 35.8% of product revenues, increasing by 31.7% from $8.7 million in 1995, or 35.5% of product revenues. Cost of product revenues increased slightly as a percentage of product revenues due to lower per unit sales prices and a $701,000 increase in inventory obsolescence expense, which were partially offset by product cost reductions. The increase in inventory obsolescence expense was due to the write-off of returned inventory, which was deemed to be no longer saleable due to technological advances in the Company's products, and a change in the estimated net realizable value of component parts. Cost of service revenues was $6.9 million in 1996, or 44.4% of service revenues, increasing by 29.9% from $5.3 million in 1995, or 49.5% of service revenues. The cost of 22 25 service revenues increased as the Company hired additional support and installation staff to support the increased sales volume. Cost of service revenues, as a percentage of service revenues, decreased 5.1 percentage points due to operational efficiencies, reduced third-party maintenance fees for field support of computer equipment resold by the Company and improved features within the software to facilitate the installation process. Research and Development. The Company's research and development expenses increased by 25.2% to $5.1 million in 1996, or 10.7% of total revenues, from $4.1 million in 1995, or 11.5% of total revenues. The increase resulted primarily from the addition of developers to support the Company's new product development efforts, which resulted in the release of PhoneFrame CS 2.0 and Magellan CS in 1996. Research and development expenses decreased as a percentage of total revenues in 1996 due to the growth in total revenues in 1996. Selling, General and Administrative. Selling, general and administrative expenses were $16.8 million in 1996, representing a 33.5% increase over selling, general and administrative expenses of $12.6 million in 1995. The increase was the result of an increase in sales commissions corresponding to an increase in revenues and additional staff hired to support the higher sales levels in 1996. Selling, general and administrative expenses were 35.3% and 35.6% of total revenues in 1996 and 1995, respectively. Income from Operations. As a result of the foregoing factors, income from operations was $7.3 million in 1996, representing a 57.6% increase over income from operations of $4.7 million in 1995. Operating income increased as a percentage of total revenues from 13.2% in 1995 to 15.5% in 1996. Other Income (Expense), Net. Other income (expense), net increased to $261,000 in 1996 from $88,000 in 1995. The increase was primarily attributable to foreign exchange gains, as the British pound strengthened against the U.S. dollar. Pro Forma Income Taxes. Pro forma income taxes were $2.8 million in 1996 as compared to $1.8 million in 1995, as a result of the Company's increased net income before income taxes in 1996. The Company's pro forma effective tax rate was 37.2% in 1996, compared to 37.8% in 1995. Pro Forma Net Income. Pro forma net income was $4.8 million in 1996, representing a 61.8% increase over pro forma net income of $3.0 million in 1995. As a percentage of total revenues, pro forma net income increased from 8.4% in 1995 to 10.0% in 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenues. Total revenues increased 29.9% to $35.3 million in 1995 from $27.2 million in 1994. Revenues from product sales increased 35.4% to $24.6 million in 1995, or 69.8% of total revenues, from $18.2 million in 1994, or 67.0% of total revenues. The increase in product revenues was due to increased sales volume attributable primarily to demand for the Company's first release of PhoneFrame CS introduced in 1995. Service revenues increased 18.9% to $10.7 million in 1995, or 30.2% of total revenues, from $9.0 million in 1994, or 33.0% of total revenues. Service revenues increased primarily due to an increase in the number of contractual maintenance agreements and, to a lesser degree, from revenues generated by installation of systems and upgrading, but declined as a percentage of total revenues due to the timing of product sales. Cost of Revenues. Total cost of revenues was $14.0 million in 1995, representing a 46.5% increase over total cost of revenues of $9.6 million in 1994. Total cost of revenues represented 39.7% and 35.2% of total revenues in 1995 and 1994, respectively. Cost of product revenues was $8.7 million in 1995, or 35.5% of product revenues, increasing by 38.4% from $6.3 million in 1994, or 34.7% of product revenues. Cost of service revenues was $5.3 million in 1995, or 49.5% of service revenues, increasing by 62.3% from $3.3 million in 1994, or 36.3% of service revenues. The cost of service revenues increased as the Company hired additional support and installation staff to support the increased sales volume. Cost of service revenues, as a percentage of service revenues, increased 13.2 percentage points, as the Company increased its customer service and field service support groups by over 31.0% to improve the Company's level of service and, to a lesser degree, an increase in the cost of third-party maintenance for field support of computer equipment resold by the Company. Research and Development. The Company's research and development expenses increased by 10.7% to $4.1 million in 1995, or 11.5% of total revenues, from $3.7 million in 1994, or 13.5% of total revenues. The 23 26 increase in expenditures resulted from the addition of developers to support the Company's new product development efforts. Research and development expenses decreased as a percentage of total revenues in 1995. Selling, General and Administrative. Selling, general and administrative expenses were $12.6 million in 1995, representing a 10.8% increase over selling, general and administrative expenses of $11.3 million in 1994. The increase was the result of the increase in sales commissions corresponding to an increase in revenues and additional personnel hired to support the higher sales levels in 1995. Selling, general and administrative expenses were 35.6% and 41.7% of total revenues in 1995 and 1994, respectively. Selling, general and administrative expenses decreased as a percentage of total revenues primarily as a result of cost containment initiatives in general and administrative expenses. Income from Operations. As a result of the foregoing factors, income from operations was $4.7 million in 1995, representing a 79.3% increase over income from operations of $2.6 million in 1994. Operating income increased as a percentage of total revenues from 9.6% in 1994 to 13.2% in 1995. Other Income (Expense), Net. Other income (expense), net increased to $88,000 in 1995 from $46,000 in 1994. The increase was primarily attributable to increased interest income due to the Company's higher average investment balances. Pro Forma Income Taxes. Pro forma income taxes were $1.8 million in 1995 as compared to $1.2 million in 1994, as a result of the Company's increased net income before income taxes in 1995. The Company's pro forma effective tax rate was 37.8% in 1995, compared to 43.6% in 1994, due to non-deductible foreign losses in 1994. Pro Forma Net Income. Pro forma net income was $3.0 million in 1995, representing a 96.0% increase over pro forma net income of $1.5 million in 1994. As a percentage of total revenues, pro forma net income increased from 5.6% in 1994 to 8.4% for 1995. QUARTERLY RESULTS OF OPERATIONS The following table presents certain unaudited quarterly statement of operations data for each of the last nine quarters. This information is derived from unaudited combined financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of that information. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
QUARTER ENDED ----------------------------------------------------------------------------------------- 1995 1996 1997 -------------------------------------- -------------------------------------- ------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 ------- ------- -------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS) Net revenues: Product....................... $5,698 $5,198 $6,051 $ 7,673 $ 7,691 $ 8,108 $ 7,428 $ 8,850 $10,265 Service....................... 2,191 2,467 2,729 3,275 3,330 3,778 4,161 4,194 4,404 ------ ------ ------ ------- ------- ------- ------- ------- ------- Total revenues......... 7,889 7,665 8,780 10,948 11,021 11,886 11,589 13,044 14,669 ------ ------ ------ ------- ------- ------- ------- ------- ------- Cost of revenues: Product....................... 1,867 1,905 2,471 2,487 2,449 2,990 2,660 3,395 3,836 Service....................... 1,010 1,037 1,260 1,975 1,439 1,733 1,902 1,789 1,931 ------ ------ ------ ------- ------- ------- ------- ------- ------- Total cost of revenues............. 2,877 2,942 3,731 4,462 3,888 4,723 4,562 5,184 5,767 ------ ------ ------ ------- ------- ------- ------- ------- ------- Gross margin.................... 5,012 4,723 5,049 6,486 7,133 7,163 7,027 7,860 8,902 ------ ------ ------ ------- ------- ------- ------- ------- ------- Operating expenses: Research and development...... 1,024 885 901 1,240 945 1,151 1,409 1,565 1,381 Selling, general and administrative.............. 2,842 2,998 3,072 3,647 4,137 3,992 4,212 4,424 5,134 ------ ------ ------ ------- ------- ------- ------- ------- ------- Total operating expenses............. 3,866 3,883 3,973 4,887 5,082 5,143 5,621 5,989 6,515 ------ ------ ------ ------- ------- ------- ------- ------- ------- Income from operations.......... 1,146 840 1,076 1,599 2,051 2,020 1,406 1,871 2,387 Other income (expense), net..... (1) 34 41 14 (11) 54 20 198 (51) ------ ------ ------ ------- ------- ------- ------- ------- ------- Income before pro forma income taxes......................... 1,145 874 1,117 1,613 2,040 2,074 1,426 2,069 2,336 Income tax provision............ -- -- -- -- -- -- -- -- 16 ------ ------ ------ ------- ------- ------- ------- ------- ------- Net income before income taxes......................... 1,145 874 1,117 1,613 2,040 2,074 1,426 2,069 2,320 Pro forma income taxes.......... 432 330 422 610 762 775 517 773 895 ------ ------ ------ ------- ------- ------- ------- ------- ------- Pro forma net income............ $ 713 $ 544 $ 695 $ 1,003 $ 1,278 $ 1,299 $ 909 $ 1,296 $ 1,425 ====== ====== ====== ======= ======= ======= ======= ======= =======
24 27
QUARTER ENDED ----------------------------------------------------------------------------------------- 1995 1996 1997 -------------------------------------- -------------------------------------- ------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 ------- ------- -------- ------- ------- ------- -------- ------- ------- (AS A PERCENTAGE OF TOTAL NET REVENUES) Net revenues: Product....................... 72.2% 67.8% 68.9% 70.1% 69.8% 68.2% 64.1% 67.8% 70.0% Service....................... 27.8 32.2 31.1 29.9 30.2 31.8 35.9 32.2 30.0 ------ ------ ------ ------- ------- ------- ------- ------- ------- Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ ------- ------- ------- ------- ------- ------- Cost of revenues: Product....................... 23.7 24.9 28.1 22.7 22.2 25.2 23.0 26.0 26.1 Service....................... 12.8 13.5 14.4 18.0 13.1 14.6 16.4 13.7 13.2 ------ ------ ------ ------- ------- ------- ------- ------- ------- Total cost of revenues............. 36.5 38.4 42.5 40.7 35.3 39.8 39.4 39.7 39.3 ------ ------ ------ ------- ------- ------- ------- ------- ------- Gross margin.................... 63.5 61.6 57.5 59.3 64.7 60.2 60.6 60.3 60.7 ------ ------ ------ ------- ------- ------- ------- ------- ------- Operating expenses: Research and development...... 13.0 11.5 10.3 11.3 8.6 9.7 12.2 12.0 9.4 Selling, general and administrative.............. 36.0 39.1 35.0 33.3 37.5 33.6 36.3 33.9 35.0 ------ ------ ------ ------- ------- ------- ------- ------- ------- Total operating expenses............. 49.0 50.6 45.3 44.6 46.1 43.3 48.5 45.9 44.4 ------ ------ ------ ------- ------- ------- ------- ------- ------- Income from operations.......... 14.5 11.0 12.2 14.7 18.6 16.9 12.1 14.4 16.3 Other income (expense), net..... -- 0.4 0.5 0.1 (0.1) 0.5 0.2 1.5 (0.4) ------ ------ ------ ------- ------- ------- ------- ------- ------- Income before pro forma income taxes......................... 14.5 11.4 12.7 14.8 18.5 17.4 12.3 15.9 15.9 Income tax provision............ -- -- -- -- -- -- -- -- 0.1 ------ ------ ------ ------- ------- ------- ------- ------- ------- Net income before income taxes......................... 14.5 11.4 12.7 14.8 18.5 17.4 12.3 15.9 15.8 Pro forma income taxes.......... 5.5 4.3 4.8 5.6 6.9 6.5 4.5 5.9 6.1 ------ ------ ------ ------- ------- ------- ------- ------- ------- Pro forma net income............ 9.0% 7.1% 7.9% 9.2% 11.6% 10.9% 7.8% 10.0% 9.7% ====== ====== ====== ======= ======= ======= ======= ======= =======
The Company's revenues and operating results could vary substantially from quarter to quarter. Among the factors that could cause these variations are changes in the demand for the Company's products, the level of product and price competition, the length of the Company's sales process, the size and timing of individual transactions, the mix of products and services sold, software defects and other product quality problems, any delay in or cancellation of customer installations, the Company's success in expanding its direct sales force and indirect distribution channels, the timing of new product introductions and enhancements by the Company or its competitors, customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors, commercial strategies adopted by competitors, changes in foreign currency exchange rates, customers' fiscal constraints, the Company's ability to control costs and general economic conditions. In addition, a limited number of relatively large customer orders has accounted for and is likely to continue to account for a substantial portion of the Company's total revenues in any particular quarter. Sales of the Company's software products generally involve a significant commitment of management attention and resources by prospective customers. Accordingly the Company's sales process is often lengthy and subject to delays associated with the long approval process that accompanies significant customer initiatives or capital expenditures. The Company's sales cycle, from initial trial to complete installation, varies substantially from customer to customer. Because a high percentage of the Company's costs are for staffing and operating expenses which are fixed in the short term and based on anticipated revenue levels, variations between anticipated order dates and actual order dates, as well as nonrecurring or unanticipated large orders, can cause significant variations in the Company's operating results from quarter to quarter. See "Risk Factors -- Variability of Quarterly Financial Results." LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily through internally generated cash flow. The Company's operating activities generated cash of $5.1 million in 1994, $7.5 million in 1995 and $9.3 million in 1996. In 1996, the Company's cash was generated by operating activities and an increase in customer deposits, partially offset by an increase in accounts receivable. Both customer deposits and accounts receivables increased due to the Company's increased business volume. 25 28 The Company's investing activities used cash of $800,000 in 1994, $1.7 million in 1995 and $1.5 million in 1996. The Company's use of cash was primarily for the purchase of capital equipment to support the Company's growth. The Company's financing activities used cash of $3.0 million in 1994, $5.2 million in 1995 and $3.8 million in 1996. The primary use of cash was distributions to the Company's shareholders. As of December 31, 1996, the Company had working capital of $8.1 million. Cash and cash equivalents were $9.8 million. The Company estimates that it will incur capital expenditures of approximately $2.0 million in 1997, of which $800,000 will be incurred to complete an upgrade of the internal Customer Care Center. The Company anticipates that its existing cash balances and funds anticipated to be generated from operations, combined with the net proceeds from this offering and interest thereon, will be adequate to satisfy its working capital requirements for its current and planned operations for at least the next twelve months. NEW ACCOUNTING PRONOUNCEMENTS In October of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." The Company's adoption of SFAS No. 121 in the first quarter of 1996 did not have a significant impact on the Company's combined financial statements. In October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123") which establishes a fair value based method for accounting for stock-based compensation plans. With respect to stock options granted to employees, SFAS 123 permits companies to continue using the accounting method promulgated by the Accounting Principals Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," to measure compensation or, alternatively, to adopt the fair value based method prescribed by SFAS 123. If the APB 25 method is continued, pro forma footnote disclosures are required as if SFAS 123 accounting provisions were followed. Management has determined not to adopt the SFAS 123 accounting recognition provisions. Accordingly, SFAS 123 will not have any impact on the Company's financial statements, except for the addition of the required footnote disclosures. See Note 6 of the Notes to Combined Financial Statements. The American Institute of Certified Public Accountants has issued an exposure draft to amend the provisions of Statement of Position 91-1, "Software Revenue Recognition." The adoption of the standards in the current version of the exposure draft would not be expected to have a significant impact on the Company's combined financial statements. In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128 is designed to improve the earnings per share information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of earnings per share data on an international basis. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The Company will adopt SFAS 128 on December 31, 1997. Management has not determined the effect that SFAS 128 will have on earnings per share. 26 29 BUSINESS OVERVIEW Melita International Corporation is a leading provider of customer contact and call management systems that enable businesses to automate call center activities and enhance their telephony-based customer interaction. The Company's principal product, PhoneFrame CS, is used by organizations to increase agent productivity, reduce the costs of call center operations and enhance revenue generation for a broad range of activities, including debt collection, telemarketing and customer service. PhoneFrame CS is a comprehensive call center solution based on client/server software that integrates with industry standard computing and telephony infrastructures. The Company's customers include leading organizations in industries such as banking, financial services, retail, communications and service bureaus, where businesses are engaged in frequent telephone contact with customers or prospects. The Company currently has over 400 systems in operation worldwide. Selected customers include AirTouch Communications, Inc., BancOne Services Corporation, Barclays Bank PLC, Citicorp, Credicard SA Brazil, Dun & Bradstreet Corporation, Grupo Financiero Bancomer, S.A de C.V., J.C. Penney Company, Inc., National Westminster Bank and Snyder Communications, Inc. The Company sells its products through a direct sales force in the United States, Canada and the United Kingdom. In 1996, the Company derived approximately 21.0% of its total revenues from sales outside the United States. International distribution is largely through direct sales and VARs. INDUSTRY BACKGROUND Long-term customer relationships are critical to the success of businesses operating in an increasingly competitive global marketplace. As customers become more sophisticated and demanding in the level of service they require, businesses are striving to develop and improve customer relationships as a means to distinguish their products and services. This effort requires businesses to use every opportunity to interact with customers, from marketing and sales activities to post-sales service, support and collections. Effective customer interaction can build customer loyalty, which in turn can lead to reduced customer retention costs and increased revenue potential. As organizations seek to improve the quality of their interaction with customers across the enterprise, the use of information systems to facilitate this interaction has become a core competency. In recent years, telephony-based customer interaction has become a more effective means of communication for organizations. Increased usage of telephony-based customer interaction has been facilitated by decreasing telecommunications costs, the proliferation of toll-free telephone numbers and the introduction of new enabling technologies, such as computer/telephony integration ("CTI"). CTI automates the generation and management of telephony-based customer contacts while providing real-time access to computer-based information resources. This automation is provided within call centers through the use of specialized software and hardware that integrate telephony platforms and computer systems. According to industry sources, the CTI, outbound call management and automatic call distribution market segments of the worldwide call center systems market aggregated $2.8 billion in 1996 and are expected to grow at a compound annual growth rate of 19.1% to $6.7 billion by 2001. The Company's primary target markets, CTI and outbound call management, were approximately $1.3 billion worldwide in 1996 and are together expected to grow at a compound annual growth rate of 27.6% to $4.4 billion by 2001. Call centers enable agents to process a steady flow of outbound or inbound telephone contacts relating to products and services. Call centers generally consist of supervisor and agent workstations linked to a central telephone switch and computer system. Call centers historically have focused either on conducting outbound calls, for functions such as collections and product sales, or managing inbound calls, for functions such as product support, order processing and customer service. Inbound call centers utilize an interactive voice response ("IVR") unit and an automatic call distribution ("ACD") system that together screen and route incoming calls through the call center. Outbound call centers incorporate predictive dialing software to automate outbound dialing. Increasingly, call center applications feature dynamic inbound/outbound or 27 30 "blended" functionality which permits agents to be automatically switched between inbound and outbound calls as inbound call demand varies. Common examples of outbound call center applications include debt collection for banks, finance companies and large retailers, credit card marketing and customer support activities such as customer surveys. According to industry sources, collections and telemarketing software applications accounted for 80% of all outbound call center software application revenues worldwide in 1996. A key objective of organizations operating outbound call centers is maximizing the time spent by agents on the telephone with customers or potential customers while minimizing the "nuisance call" rate. A nuisance call is a live contact which the call management system must either put on hold or disconnect because no agent is available. High nuisance call rates caused by overdialing result in high telecommunications costs and poor customer relations. Call center systems which utilize sophisticated predictive dialing software can minimize the nuisance call rate while maintaining high agent productivity. The Company believes that this capability is essential to organizations operating call centers. Call center systems were originally developed as centralized, mainframe-based information systems, which offered a platform to enable the automation of many functions, including inbound call distribution, outbound dialing, and limited database management. These systems were expensive, provided limited functionality and productivity and were generally closed and proprietary. With the advent of distributed computing environments, call center systems have been developed which utilize CTI and the flexibility and openness of client/server architectures. These developments have allowed companies to incorporate leading hardware and software products from multiple vendors, have significantly reduced the cost of implementation and have increased system functionality and flexibility. Call centers have evolved into a core competency for businesses engaged in frequent telephone contacts with customers or prospects. In order to maximize the return on their call center investment, businesses require call center solutions that: (i) provide call center agents with the tools needed to effectively manage interaction with their customers; (ii) provide agents transparent access to information across the enterprise; (iii) guide agents through a complex set of customer interaction scenarios; (iv) fully integrate existing information and telephone systems; (v) are adaptable to the changing needs of particular businesses and applications; (vi) are scaleable to support large volumes of calls; and (vii) permit the gathering of valuable information concerning customer needs, buying patterns and demographics. Customer-focused organizations are seeking call center solutions which provide state-of-the-art functionality while remaining adaptable to emerging technologies. THE MELITA SOLUTION Melita provides customer contact and call management systems that automate outbound or blended call centers, enabling its customers to enhance telephony-based customer interaction. The Company's principal product, PhoneFrame CS, is a scaleable, integrated software and hardware solution based on a distributed client/server architecture capable of supporting installations with more than 500 simultaneous users on a single server. PhoneFrame CS provides comprehensive functionality and a user-friendly application development environment enabling organizations to conduct effective telephone calling programs for a broad range of activities, including debt collection, telemarketing and customer service. The Melita solution provides: - High agent productivity, low nuisance call rates and low telecommunications costs through patented predictive dialing and inbound/outbound call blending functionality; - Enhanced agent interaction with customers through front-end software applications which utilize real-time access to information to guide agents through each step of the customer interaction; - Dynamic campaign development, deployment and modification through powerful, easy-to-use script generation and application development software. - The ability to leverage existing investment in call center systems and adapt to emerging technologies through an open, scaleable, distributed client/server architecture. The Company believes that a critical element of the comprehensive solutions it provides is its underlying philosophy of Customer Care. The Company's products represent a critical link between the business 28 31 enterprise and its customers, providing the business with a solution that allows it to provide the best customer care. The Company's Customer Care philosophy focuses on enhancing the quality of people-to-people communication and is reflected in all facets of the Company's operations. The Company has incorporated features into its existing products which reflect this philosophy, including its patented predictive dialing features, Cancel Dial and dynamic inbound/outbound call blending functionality. As part of its commitment to Customer Care, the Company intends to continue to develop and introduce new products and features to improve the ability of a business to interact with its customers. STRATEGY The Company's objective is to be a leading provider of customer contact and call management systems. The Company's strategy to achieve this objective includes the following key elements: Leverage Installed Base of Customers: The Company currently targets customers in the banking, financial services, retail, communications and service bureau industries. In 1996, 54.7% of the Company's product revenues were from sales of additional seats or capacity upgrades to product software or changes in features or product components for its existing customer base. The Company will continue to focus sales and marketing efforts on its installed base of customers. The Company also intends to continue to leverage its penetration of currently targeted vertical markets by using its existing customers as a reference base to gain new customers. Maintain Technology Leadership: The Company believes it is a technology leader in the field of call center software and CTI, having pioneered many of the industry's fundamental call center technologies. The Company owns 15 U.S. patents, with six additional U.S. patents pending, covering various processes and technologies utilized in call management systems. The Company has also been awarded 26 related foreign patents, of which 17 are still active. The Company believes that in the future advanced call management systems will consist primarily of innovative software utilizing off-the-shelf hardware. As a result, the Company intends to focus its development efforts on software, with an emphasis on customer interaction and distributed applications. Continue to Focus on Providing Comprehensive Call Center Solutions: The Company provides system design, application configuration and integration services in conjunction with the installation of its call center solutions. The Company believes its ability to provide comprehensive call center systems integration is an important factor in the purchasing decisions of customers, and it intends to continue its emphasis on providing these design and integration services. Continue to Expand Sales and Marketing: The Company intends to pursue an increased share of the market for call management systems by hiring additional sales and marketing personnel. The Company plans to open additional sales offices both domestically and internationally and is implementing a program aimed at targeted vertical markets. In addition, the Company is establishing a national account program which is intended to focus sales and marketing efforts on large, multinational corporations. Increase Penetration of International Markets: In 1996, the Company generated 21.0% of its total revenues from sales outside the United States and has 26 employees dedicated to its international operations. The Company currently has contractual relationships with VARs in Europe, Latin America and the Pacific Rim. The Company intends to commit additional resources to these relationships in selected international markets to enhance its revenue base. The Company also intends to expand its international operations through hiring additional personnel, opening new offices and forming additional relationships with VARs in Latin America and the Pacific Rim. Pursue Adjacent Markets: The Company has developed a leadership position in the collections segment of the outbound call management systems market. In 1996, approximately 80% of the Company's total revenues were attributable to systems sold for collections applications, with the remainder attributed primarily to telemarketing and telesales applications. The Company recently introduced Magellan CS which leverages the existing dynamic inbound/outbound functionality of PhoneFrame CS to target applications in telemarketing and telesales. The Company seeks to leverage its existing dynamic inbound/outbound functionality to gain market share in the overall call management systems market. The Company believes the distinction between inbound and outbound call management 29 32 systems will diminish and that it is well positioned to provide both inbound and outbound call management solutions. PRODUCTS The Company's principal product, PhoneFrame CS, is an integrated suite of client/server software applications and hardware that provides outbound and blended call management solutions. PhoneFrame CS software components are based on open standards, allowing integration with varied and complex user environments. PhoneFrame CS is sold to organizations that operate outbound and blended call centers. These call centers require solutions that integrate with existing communication and information systems including mainframe-based information systems, local area networks, agent workstations and PBX/ACDs. Utilizing customer records residing in an organization's existing databases, PhoneFrame CS automates customer contacts and guides agents through the customer interaction process. [ARCHITECTURE OVERVIEW CHART] 30 33 Customers purchase a PhoneFrame CS system from the Company. Within that system, they are able to select from the key components of the PhoneFrame CS product features: the Universal Server, Command Post, Universal Workstation and the Universal Switch. The Universal Server and Command Post are always included and the customer may select from the options listed within the Universal Workstation, Universal Switch and MPACT sections below.
PHONEFRAME CS PRODUCT COMPONENT DESCRIPTION Universal Server Server software that controls and coordinates system operation. Used to manage calling list data, call attempt and contact history, agent profiles, time zone and area code data, call processing, agent and supervisor activity. Platform: IBM RISC/6000, AIX operating system, Sybase database Command Post Suite of software applications used by system managers to configure, operate, monitor and report on system activities utilizing an interactive GUI. Platform: Pentium PC, Windows NT Universal Workstation Client-based software which runs on the agent workstation and manages the client session with the Universal Server for each call routed to the agent workstation. The Universal Workstation utilizes one of the following options: Universal Access Software that controls screen presentation and data manipulation and allows the agent to work within an enterprise information system. MTAccess Software that runs in the background and interacts with screen presentation and data manipulation applications provided by the existing enterprise information systems. Magellan CS Software that controls Windows GUI screen presentation on the agent workstation. Provides read/write access to data in customer's existing systems. Additionally, Magellan Builder, which resides on the Command Post or a dedicated PC, facilitates development of customer interaction and call flow applications featuring an interactive GUI. Platform: PC, Windows 3.1, 95 and NT Universal Switch Proprietary switching component of the system. Interfaces with existing telephony equipment or directly with PSTN using digital or analog interfaces. Call Processor PC-based Switch and Voice Processor controller and client-based software interface to Universal Server. Voice Processor Software that performs call progress analysis and call characterization for each call attempt (e.g., busy signal, ringback signal, fax machine, modem, voicemail, answering machine, live contact). Also provides voice messaging services for inbound and outbound applications. Platform: PC, Dialogic voice processing cards Switch High speed, real-time digital switching matrix. Platform: Motorola 68030 CPU, VME-Bus, OS/9 operating system MPACT Software option for the Universal Server that communicates with leading PBX/ACDs through CTI links, using one or both of the following: PowerPACT Software option that provides ability to use an existing PBX/ACD for switching and/or call progress analysis in place of the Voice Processor and Switch. ActionPACT Software option that monitors service levels on a call center's ACD via its CTI links and dynamically and automatically move agents from outbound applications to inbound applications and vice versa.
The Universal Server software is the heart of each PhoneFrame CS system, providing centralized control for the operation and management of the system. It integrates a Sybase database to provide calling list 31 34 management, and to store operational data for real-time and historical reporting. TCP/IP is used as the transport protocol for communication with all client components of the system. The Universal Server also includes software that facilitates integration with popular user platforms to perform extended functions such as real-time calling list data acquisition, dynamic call blending, Internet callback and enterprise reporting. The Command Post is a suite of software applications used for call flow script creation and editing, call campaign configuration, resource definition and management, agent and production monitoring and system reporting. Command Post runs on Windows NT and consists of software modules that automate the operation and monitoring of the system. Builder is used to automate data exchange with user databases and create calling campaigns. QFlow is used to implement user-defined strategies for calling campaigns based on real-time events such as time of day, hit rate and list penetration. Production Monitoring provides an interactive graphical representation of the call center that allows managers to access, monitor and control system resources such as agents and trunks. The Report Scheduler automates the generation of system reports. Reports can be written in any Windows SQL-based report writer. The Company's Universal Workstation is client-based software which runs on the agent workstation, and is available in three different software options: Universal Access, MTAccess and Magellan CS. Each option supports Microsoft's Dynamic Data Exchange ("DDE") and industry standard Enhanced High Level Language Application Programming Interface ("EHLLAPI") for exchanging information with external applications. Each Universal Workstation software option meets different needs for agent workstation functionality. Universal Access for Windows and Universal Access for OS/2 manage the client session with the Universal Server for each call routed to an agent workstation and provide basic information about the called party, including customer identification or account number. Universal Access facilitates automated access to other enterprise information systems and can be configured to toggle between applications. MTAccess interfaces with screen presentation and data manipulation applications software provided by the customer. Similar to the Universal Access options, MTAccess manages the client session with the Universal Server for each call routed to the agent workstation. Initial contact information about the called party is provided to the agent through the customer's application. Magellan CS is the Company's recently introduced Universal Workstation software. Magellan CS consists of two components, Magellan Interpreter and Magellan Builder. Magellan Builder allows system managers to create and dynamically modify call flow applications, complete with many features of a Windows GUI, such as buttons and checklists, without any programming. Magellan Interpreter provides agents with a composite view of enterprise-wide customer information through a Windows GUI. Agent interaction with customers is guided by Magellan CS applications, which provide agents with the customer information necessary to make timely, informed customer interaction decisions. Magellan CS supports EHLLAPI, DDE, object linking and embedding ("OLE"), open database connectivity ("ODBC"), telephony application programming interface ("TAPI") and telephony services application programming interface ("TSAPI") for accessing customers' information and telephony systems. Additionally, through the use of resource files, Magellan CS has been designed to facilitate localization for international deployment. The Universal Switch is the Company's proprietary switching platform that interfaces with existing telephone equipment or directly with the Public Switched Telephone Network ("PSTN") using digital and analog interfaces. All inbound and outbound calls can be processed through the Universal Switch, which performs two major functions: call processing and switching. The Call Processor serves as the controller and client software interface to the Universal Server. The Voice Processor performs all telephone call processing including call progress analysis, which determines the type of call result that has been achieved. Call progress analysis utilizes a digital signal processing algorithm which detects various tone and voice patterns including busy signals, ringback signals, fax machines, modems, voice mail and answering machines as well as live contacts. The Voice Processor also provides voice messaging services for inbound and outbound applications. The Switch performs high speed switching to connect live contacts to the next available, appropriate agent in real time. The Company's MPACT software option enables PhoneFrame CS to be integrated with industry leading PBX/ACDs through the use of CTI links. PowerPACT allows PhoneFrame CS to use a customer's existing 32 35 PBX/ACD in place of the Switch and Voice Processor components. The Voice Processor, in conjunction with PowerPACT software, can provide call progress analysis for PBX/ACDs that do not provide this functionality. ActionPACT provides the ability for PhoneFrame CS to monitor service levels on a call center's PBX/ACD via its CTI link and dynamically and automatically move agents from outbound applications to inbound applications and vice versa. PowerPACT and ActionPACT allow users to leverage their investment in installed PBX/ACD equipment. SERVICES A significant portion of the Company's revenues is derived from on-going system support, maintenance, installation, training, customization and consulting services. Upon purchase of a system, customers generally enter into a maintenance agreement covering on-going system support and software upgrades. These agreements can have a duration of up to five years. In addition, the Company provides installation, training, customization and consulting services during the implementation process. For additional fees, the Company will from time to time provide additional training or consulting services at the customer's request. The Customer Care Group consists of the Customer Care Center ("CCC"), the Technical Assistance Center ("TAC"), the Applications Integration Engineers and the Training and Customer Education Division. The CCC provides 24 x 7 customer support by telephone. The TAC provides high level technical support, coordinates new product development and beta tests, and provides additional expert support for the other groups within the service function. The Applications Integration Engineers provide configuration, scripting, reconfiguration, custom application development and other special customer services. The Training and Customer Education Division develops documentation for installation and support of the Company's products, provides on-site and off-site training to customers through an array of classes, and offers consulting services. Introductory training classes are provided as part of each initial system purchase and advanced classes are provided for additional fees. As of January 31, 1997, the Customer Care Group employed a total of 72 employees. The Field Implementation Services Group is responsible for systems design, sales support, implementation and project management and serves as the customer installation liaison. The Field Implementation Services Group is divided into three regional divisions covering the United States and Canada, and one international division. International support is also provided by technical support personnel located in the United Kingdom and the Company's international VARs. As of January 31, 1997, this group employed a total of 38 employees. The Company contracts with IBM to provide local hardware support in the United States and Canada, and can dispatch local personnel from IBM national service centers to address hardware issues. SALES AND MARKETING The Company sells its products primarily through a direct sales channel and through VARs. Sales in the United States, Canada and the United Kingdom are conducted primarily through direct channels. Distribution in other countries is conducted through a combination of direct sales and VARs. The Company has sales offices located in Atlanta, Boston, Dallas, Los Angeles, Philadelphia, Salt Lake City, White Plains, London and Toronto. The Company's marketing activities include product management, product marketing, direct marketing, public relations, press and analyst communications, event support and management of the Company's Web site. The Company's Business Development Group is responsible for developing joint marketing and co- development relationships with call center industry suppliers. The Company is also implementing a program aimed at specific vertical markets. In addition, the Company is establishing a national account program which is intended to focus sales and marketing efforts on large, multinational corporations. As of January 1, 1997, the Company's sales personnel, including the Sales, Marketing, Product Management and Business Development groups consisted of 54 employees worldwide. 33 36 The Company's customers independently operate domestic and international User Groups, which have approximately 300 and 35 members, respectively. The domestic User Group was formed in 1990, and is managed by an independent board of directors that coordinate User Group activity. The international User Group was formed in 1991. Activities of both the domestic and international User Groups include an annual User Group conference. Additionally, the domestic User Group conducts regional User Group meetings typically focused on common applications and call center opportunities. The 1996 annual domestic User Group conference was attended by approximately 260 people. Although the Company is not a sponsor of the User Group conferences, it generally sends Company employees who conduct seminars, product demonstrations and training sessions. CUSTOMERS The Company's call management solutions are used by organizations in a broad range of industries. Since the introduction of PhoneFrame CS in 1995, the Company has licensed its software for use on over 5,000 agent workstations and has shipped over 100 systems. The Company's top five customers accounted for 24.5% of the Company's total revenues in 1996. The Company's top five customers accounted for 24.8% of the Company's total revenues in 1995. Although specific customers may change from period to period, the Company expects that large sales to a limited number of customers will continue to account for a significant percentage of its revenues in any particular period for the foreseeable future. The following table sets forth certain of the Company's current customers who have purchased $200,000 or more in products and services from the Company during the two year period ended December 31, 1996:
CUSTOMERS APPLICATIONS BANKING BancOne Services Corporation Citicorp Collections Banco Popular de Puerto Rico Credicard SA Brazil Telemarketing Grupo Financiero Bancomer, S.A. de C.V. First USA Bank Customer Service Barclays Bank PLC (UK) Marine Midland Bank Fraud Detection Chemical Bank National Westminster Bank Chevy Chase, FSB FINANCIAL SERVICES Americredit Financial Services, Inc. Guardian National Acceptance Collections AmSouth Consumer Collections Corporation Telemarketing Countrywide Funding Intuition, Inc. Customer Service Dun & Bradstreet Corporation Strong Capital Management, Inc. Prospect Outreach Green Tree Financial Corporation Marketing Business Information Surveys RETAIL Circuit City Stores, Inc. J.C. Penney Company, Inc. Collections Eagle Managed Care Mercantile Stores Company, Inc. Telemarketing Financial Management Control The Foschini Group (PTY), Hudson's Bay Company Limited COMMUNICATIONS AirTouch Communications, Inc. Telemarketing Comcast Cellular Communications Collections Continental Cablevision of Customer Service Broward County, FL Customer Welcome IDT Corporation Campaigns SERVICE BUREAU The Call Centre Ltd. (UK) Collections Decisions Group Ltd. (UK) Telemarketing National Action Financial Services, Inc. Customer Service Snyder Communications, Inc. Fundraising Sales Loan Servicing Appointment Scheduling
TECHNOLOGY, RESEARCH AND PRODUCT DEVELOPMENT The Company intends to continue investment in research and development to maintain its position as a leader in call center technology. The Company has developed a client/server software architecture that 34 37 facilitates the deployment, configuration and interoperability of its call center solutions. The design of the system provides three core sets of services: (i) user interface presentation and navigation, (ii) server-based system management services, and (iii) telephone call processing services, including the Company's patented predictive dialing and dynamic call blending features. The Company's products are based on an open architecture and industry standards and provide seamless integration with third-party systems or customers' existing technology infrastructure. The Company will seek to develop future products that adhere to existing and emerging standards. The presentation and navigation components of the software have been implemented using Windows GUI guidelines. Usability labs and focus groups are used to define interface requirements and verify ease of use. TCP/IP is used as the transport layer for all client/server communication. Adherence to Winsock and other standards facilitates integration with third-party desktop applications and protocol stacks. The Company is working to broaden the incorporation of Simple Network Management Protocol ("SNMP") into its product architecture to facilitate enterprise-wide network management for both computer and telephony components. The Company's telephony hardware and software have been designed using industry standards and the Company intends to continue this approach. The Company's systems use standard analog and digital connectivity to telecommunications equipment and services. The Company's newest generation of agent workstation software, Magellan CS, supports the evolving telephony application program interfaces TAPI and TSAPI, and future products are expected to support those interfaces as well. CTI links to various PBX/ACDs are often proprietary and the Company therefore uses various interfaces such as CallPath, CallBridge, ASAI, Meridian Link and the Application Bridge to facilitate integration with various switching platforms. Magellan CS, released in 1996, and Magellan SA, which the Company currently plans to release in 1997, have been developed using object oriented methods and technology. Magellan SA is a version of the Company's Magellan CS product that will provide the functionality of Magellan CS to call center systems not employing PhoneFrame CS. The Company expects Magellan SA will be used for a variety of call center applications, including inbound applications, in which an outbound call management system is not necessary or is already installed. Magellan SA is intended to allow system managers to develop applications which present a uniform Windows GUI independent of the application. Each application can be developed by the system manager with scripting, data processing and presentation and telephony services specific to the application while providing agents with a consistent presentation. Like Magellan CS, Magellan SA will support EHLLAPI, DDE, OLE, ODBC, TAPI and TSAPI for access to customers' information and telephony systems. There can be no assurance that Magellan CS or Magellan SA will generate significant amounts of revenue or incremental revenue growth in the future. The Company is currently developing the Universal Telephony Platform ("UTP"), a new subsystem which incorporates the functionality of a telephony switch and voice processor. The UTP has been designed using the Common Object Request Broker Architecture ("CORBA") to support distributed objects in an open systems environment. UTP runs on Windows NT and uses off-the-shelf voice processing components. Asynchronous Transfer Mode ("ATM") technology is used to link multiple UTP components across standard ATM networks, providing seamless, multi-site resource allocation, management and utilization. SNMP is used to provide standards based network management. As of January 31, 1997, the Company's research and development and quality assurance staffs consisted of 42 employees. The Company's total expenses for research and development for 1994, 1995 and 1996 were $3.7 million, $4.1 million, and $5.1 million, respectively. The Company anticipates that it will continue to commit substantial resources to research and development in the future. See "Risk Factors -- Risks Associated with Technological Advances; Necessity of Developing New Products." COMPETITION The market for the Company's products is intensely competitive, fragmented and subject to rapid change. Because the Company's principal products are call center systems, which include both software applications and hardware, the Company competes with a variety of companies which provide these components independently or as an integrated system. The Company's principal competitors in the field of integrated inbound/outbound call management systems are Davox, EIS and Mosaix. According to a recent industry 35 38 study, the Company is one of four leading suppliers of outbound call processing products out of a total of 64 suppliers identified in the market. The Company competes primarily against Davox and Mosaix in the collections segment of the call management systems market, and against EIS in the telemarketing and telesales segments of the call management systems market. The Company also competes in the CTI segment of the market, where principal competitors include AnswerSoft, Inc., Genesys Telecommunications Laboratories, Inc., Nabnasset Corporation and Brock International, Inc., among others. The Company may face additional competition from PBX/ACD vendors, other telecommunications equipment providers, telecommunications service providers, computer hardware and software vendors and others. The Company generally faces competition from one or more of its principal competitors on major installations and believes that price is a major factor considered by its prospective customers. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote more resources to the development, promotion and sales of products than the Company. Competition from these or other sources could result in price reductions and loss of market share which could materially adversely affect the Company's business, financial condition and results of operations. The Company believes that the primary competitive factors affecting its markets include product features such as flexibility, scalability, interoperability, functionality and ease of use, as well as reputation, quality, performance, price and customer service and support. See "Risk Factors -- Competition." REGULATORY ENVIRONMENT Certain uses of outbound call management systems are regulated by federal, state and foreign law. The Federal Telephone Consumer Protection Act (the "TCPA") prohibits the use of automatic dialing equipment to call emergency telephone lines, health care and similar facility patient telephone lines, and telephone lines where the called party is charged for incoming calls, such as those used by pager and cellular phone services. The TCPA prohibits use of such equipment to engage two or more lines of a multi-line business simultaneously, and restricts the use of artificial or prerecorded voice messages in calls to residential lines. Among other things, the TCPA required the Federal Communications Commission ("FCC") to create regulations protecting residential telephone subscribers from unwanted telephone solicitations. In addition, the Telemarketing and Consumer Fraud and Abuse Prevention Act authorized the Federal Trade Commission ("FTC") to prohibit a variety of deceptive and/or abusive telemarketing practices, including, among other things, repetitive or harassing calls and requests by telemarketers for payments before certain types of services are provided. The Rules adopted by the FCC and FTC prohibit calls to persons who have indicated that they do not wish to be contacted, and the FCC specifically requires telemarketers to maintain a company-specific "do-not-call list" which contains the names and numbers of residential subscribers who do not want to receive calls. An entity which has an "established business relationship" with a party it calls and tax-exempt nonprofit organizations are exempt from do-not-call lists. The rules also require that telemarketers may call consumers only after 8 a.m. and before 9 p.m., local time. Certain states have enacted similar laws limiting access to telephone subscribers who object to receiving solicitations. Fair Debt Collection Practices Act ("FDCPA") limits communication by certain debt collectors with consumers only after 8:00 a.m. and before 9:00 p.m., local time, and not at the consumer's place of business. Many of the Company's customers are exempt from the FDCPA. Although compliance with these laws may limit the potential use of the Company's products in some respects, the Company's systems can be programmed to operate automatically in full compliance with these laws through the use of appropriate calling lists and calling campaign time parameters. There can be no assurance, however, that future legislation further restricting telephone solicitation practices, if enacted, would not adversely affect the Company. See "Risk Factors -- Regulatory Environment." PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect its proprietary rights in its products and technology. The Company holds 15 U.S. patents, with six additional U.S. patents pending, covering various processes and technologies utilized in call management systems. The Company has also been awarded 26 related foreign 36 39 patents, of which 17 are still active. The patents cover the Company's proprietary implementations of features such as inbound/outbound call blending, call progress analysis, screen pops of the called person's account information and Cancel Dial. The Company also has a number of pending patent applications on call technology innovations for which patents have not issued. In many cases, the Company has also received or applied for patents in other countries covering the innovations covered by existing patents or patent applications. With certain exceptions, the Company historically has not actively pursued infringements of these patents. There can be no assurance that any future attempt by the Company to enforce its patents would be successful or would result in royalties which exceed the cost of such enforcement efforts, or that the Company will be able to detect all instances of infringement. The Company generally enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to, and distribution of, its proprietary information. The Company maintains trademarks and service marks to identify its products, development tools and service offerings and relies upon trademark and trade dress laws to protect its proprietary rights in these marks. The Company has entered into agreements with certain of its distributors giving them a limited, non-exclusive right to use portions of the Company's source code to create foreign language versions of the Company's products for distribution in foreign markets. In addition, the Company has entered into agreements with a small number of its customers requiring the Company to place its source code in escrow. These escrow arrangements typically provide that these customers have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its support obligations. These arrangements may increase the likelihood of misappropriation by third parties. The Company may be subject to additional risks as it enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in such countries. Litigation to defend and enforce the Company's intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the final outcome of such litigation. Despite the Company's efforts to safeguard and maintain its proprietary rights both in the United States and abroad, there can be no assurance that the Company will be successful in doing so, or that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using the Company's products or technology. Any such events could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of call center software applications in the industry increases and the functionality of these products further overlaps, software development companies similar to the Company may increasingly become subject to claims of infringement or misappropriation of the intellectual property rights of others. Although the Company believes that its software components and other intellectual property do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future, that assertion of such claims will not result in litigation or that the Company would prevail in such litigation or be able to obtain a license for the use of any infringed intellectual property from a third party on commercially reasonable terms. Furthermore, litigation, regardless of its outcome, could result in substantial cost to the Company and divert management's attention from the Company's operations. Any infringement claim or litigation against the Company could, therefore, have a materially adverse affect on the Company's results of operations and financial condition. EMPLOYEES As of January 31, 1997, the Company had 236 full-time employees, of which 215 were based in the United States and 21 were based in other countries. None of the employees of the Company is covered by a collective bargaining agreement. The Company considers its relations with its employees to be good. The Company believes its future success will depend in large part on its ability to recruit and retain qualified employees, especially experienced software engineering personnel. The competition for such 37 40 personnel is intense, and there can be no assurance that the Company will be successful in retaining or recruiting key personnel. See "Risk Factors -- Competitive Market for Personnel." PROPERTIES The Company's principal administrative, sales, marketing, support, and research and development facility is located in 100,000 square feet of modern office space in Norcross, Georgia. This facility is leased to the Company through 2005, and approximately 75% of the space is presently actively utilized. The facility is owned by a partnership controlled by the Company's Chairman of the Board, Chief Executive Officer and principal shareholder. See "Certain Transactions." The Company also leases space for seven sales and support centers located throughout the United States and in London and Toronto. Management believes its current facilities are adequate to meet its needs through the next twelve months and that, if required, suitable additional or alternative space will be available to accommodate expansion of the Company's operations on commercially reasonable terms. LEGAL PROCEEDINGS The Company is not currently a party to any material legal proceedings. 38 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Aleksander Szlam............... 45 Chairman of the Board and Chief Executive Officer J. Neil Smith.................. 56 President, Chief Operating Officer and Director Mark B. Adams.................. 45 Vice President, Finance and Chief Financial Officer William K. Dumont.............. 48 Vice President, Sales Lee H. Davies.................. 53 Vice President, Operations Dean A. Trumbull............... 37 Vice President, Advanced Technology John A. Lamb................... 44 Vice President, New Business Development A. Scott Anderson.............. 41 Vice President, International John M. Goodeve-Docker......... 50 Managing Director of Melita Europe Dan K. Lowring................. 37 Treasurer and Secretary Donald L. House................ 55 Proposed Director Don W. Hubble.................. 58 Proposed Director
Aleksander Szlam founded the Company in 1979 and has served as Chairman of the Board and Chief Executive Officer of the Company since its inception. Mr. Szlam also has served as Chairman of the Board, President and Chief Executive Officer of Inventions since 1987, and Chairman of the Board of Melita Europe since 1991. Prior to founding Melita, Mr. Szlam worked as a design engineer and scientist at Lockheed Corporation, NCR and Solid State Systems. J. Neil Smith has served as President, Chief Operating Officer and a director of the Company since January 1995. Prior to joining the Company, Mr. Smith served as Chairman of the Board, President and Chief Executive Officer of American Technical Services Group, Inc., a systems integration company, from 1987 to 1994. Mark B. Adams has served as Vice President, Finance and Chief Financial Officer of the Company since September 1996. During 1996 prior to joining the Company, Mr. Adams served as President of INITIAL Contract Services, a building services company. From 1993 to 1995, Mr. Adams served as Executive Vice President, Finance and Chief Financial Officer of INITIAL Contract Services. From 1989 to 1993, Mr. Adams served as Vice President, Finance for Suntory Water Group, a consumer products company. Mr. Adams is a member of the American Institute of Certified Public Accountants and is a Certified Public Accountant in the State of Georgia. William K. Dumont has served as Vice President, Sales of the Company since December 1996. From 1994 to 1996, Mr. Dumont served as Regional Manager for Octel Communications Corporation, and from 1990 to 1994 he served as Regional Vice President of VMX, Inc., both of which are voice processing companies. Lee H. Davies has served as Vice President, Operations of the Company since September 1995. Prior to joining the Company, Mr. Davies served as Vice President of Sales, Marketing and Customer Support for Aristacom International, Inc., an inbound call center software company, from 1994 to 1995. From 1991 to 1994, Mr. Davies served as a marketing director for Digital Equipment Corporation. Dean A. Trumbull has served as Vice President, Advanced Technology of the Company since October 1994. Prior to joining the Company, Mr. Trumbull served as a software engineering project leader and call processing group manager for Intecom, Inc., a telecommunications corporation, from 1983 to 1994, and, during 1994, as Software Development Manager for its multimedia software subsidiary, Incitz Incorporated. John A. Lamb has served as Vice President, New Business Development of the Company since September 1996, and was Director of Special Projects of the Company from February 1996 to September 1996. From January 1995 to November 1995, he was Vice President, Research and Development of 39 42 Microhelp, Inc., a software development company. From 1990 to 1995, he held various positions in the sales and engineering departments of the Company. A. Scott Anderson has served as Vice President, International of the Company since February 1997. From 1995 to 1997, Mr. Anderson served as Senior Vice President -- International Sales of S2 Systems, Inc., a software subsidiary of Stratus Computer, Inc., a data communications software and development services company. He served as Director of International Sales of S2 Systems during 1995. Prior to that time, he was Director of International Operations of BellSouth Systems Integration, a division of BellSouth Enterprises, from 1992 until its acquisition by S2 Systems in 1994. John M. Goodeve-Docker has served as Managing Director of Melita Europe since June 1995. He served as Deputy Managing Director for Melita Europe from January 1994 to June 1995 and as Business Development Director from November 1992 to December 1993. Prior to joining the Company, Mr. Goodeve-Docker served as General Manager of Trend Communications Ltd., an information technology data communications manufacturer and distributor in the U.K., from 1991 to 1992. Dan K. Lowring has served as Treasurer of the Company since January 1997 and as Secretary since March 1997. From July 1993 to December 1996 he served as Director, Finance of the Company. From March 1993 to July 1993, he served as Controller of the Company, and from October 1990 to March 1993 he served as Manager, Finance of the Company. The Company intends to add Donald L. House and Don W. Hubble as members of its Board of Directors within 90 days after the date of this Prospectus. It will be necessary for the Company to appoint these or two other independent directors within the 90 day time period in order to maintain its Nasdaq National Market listing. Failure to appoint two such directors could result in a delisting of the Common Stock from the Nasdaq National Market. Donald L. House has served as Chairman of the Board of Directors of SQL Financials International, Inc., a client/server software company, since January 1993. From September 1991 until December 1992, Mr. House served as President of Prentice Hall Professional Software, Inc., a subsidiary of Simon and Schuster, Inc. Since 1988, he has been a business advisor, director and investor in a number of emerging growth high technology companies. From 1968 through 1987, Mr. House served in a number of positions with Management Science America, Inc., a provider of application software. Mr. House presently serves as a director of XcelleNet, Inc., a remote access software company, and as Chairman of its Audit and Nominating Committees. Don W. Hubble served with National Service Industries, Inc. ("NSI") from 1980 until October 1996, most recently serving as President and Chief Operating Officer. During this period, Mr. Hubble also served in various capacities with a number of divisions of NSI, including National Linen Service, Block Industries, and Certified Leasing Company. There are no family relationships between any of the directors or executive officers of the Company. COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors intends to establish an Executive Committee, an Audit Committee and a Compensation Committee. The Executive Committee will be empowered to exercise all authority of the Board of Directors of the Company, except as limited by the Georgia Business Corporation Code ("GBCC"). Under Georgia law, the Executive Committee may not, among other things, approve or propose to shareholders actions required to be approved by shareholders, fill vacancies on the Board of Directors, amend the articles of incorporation or bylaws or approve a plan of merger. The Company expects that the Executive Committee will include Messrs. Szlam and Smith. The Audit Committee will be responsible for recommending independent auditors, reviewing with the independent auditors the scope and results of the audit engagement, monitoring the Company's financial policies and control procedures, and reviewing and monitoring the provisions of nonaudit services by the Company's auditors. The Compensation Committee will be responsible for reviewing and recommending salaries, bonuses and other compensation for the Company's executive officers. The Compensation Committee also will be responsible for administering the Company's stock option and stock purchase plans and for establishing the terms and conditions of all stock options and 40 43 purchase rights granted under these plans. At least two of the new independent directors will be appointed to each of the Audit and Compensation Committees at the time they are elected to the Board of the Directors of the Company. DIRECTOR COMPENSATION Prior to this offering, no member of the Board of Directors of the Company received compensation for service on the Board. Following the consummation of the offering, the Company expects to pay the non-employee directors fees for each board meeting attended and each committee meeting attended which is held independently of a board meeting. In addition, the Company expects to grant to each nonemployee director options covering 2,000 shares of the Common Stock each year, with one-fourth of such options vesting for each quarterly board meeting attended. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by the Company in 1996 for its Chief Executive Officer and the four other most highly compensated executive officers of the Company in 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION NUMBER OF ---------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION --------------------------- -------- -------- ------------ ------------ ------------ Aleksander Szlam...................... $300,001 $154,502 $86,040(2) -- -- Chairman of the Board and Chief Executive Officer J. Neil Smith......................... 220,399 82,500 --(3) -- -- President and Chief Operating Officer Lee H. Davies......................... 127,211 13,320 --(3) -- -- Vice President -- Operations Dean A. Trumbull...................... 110,816 20,000 --(3) 40,000 -- Vice President -- Advanced Technology John M. Goodeve-Docker................ 85,333 32,000 18,576(4) -- $ 3,040(5) Managing Director of Melita Europe
- --------------- (1) Bonuses awarded and paid in 1996 were based upon 1995 performance. (2) Includes the value of the non-business use of two automobiles provided by the Company and reimbursement of the associated income taxes in the aggregate amount of $64,068, health and life insurance premiums and reimbursement of the associated income taxes in the aggregate amount of $13,623, auto insurance premiums and reimbursement of the associated income taxes in the aggregate amount of $6,308, and ad valorem tax payments and reimbursement of the associated income taxes in the aggregate amount of $2,041. (3) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), other compensation in the form of perquisites and other personal benefits has been omitted because such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officer for such year. (4) Consists of the value of the non-business use of an automobile provided by the Company. (5) Consists of a retirement savings contribution of $3,040 paid by the Company. 41 44 The following table sets forth all individual grants of stock options during the year ended December 31, 1996, to each of the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------------- VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(2) OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% - ---- ---------- ---------------- ----------- ---------- --------- ---------- Aleksander Szlam.............. -- -- -- -- -- -- J. Neil Smith................. -- -- -- -- -- -- Lee H. Davies................. -- -- -- -- -- -- Dean A. Trumbull.............. 40,000(1) 29.9% $4.07 1/1/03 $66,276 $154,451 John M. Goodeve-Docker........ -- -- -- -- -- --
- --------------- (1) This option was granted with an exercise price equal to the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. The option is a nonqualified stock option, vests over five years and has a seven-year term. (2) The potential realizable value is calculated based on the seven-year term of the option at the time of its grant. It is calculated by assuming that the stock price on the date of grant ($4.07) appreciates at the indicated annual rate, compounded annually for the entire term of the option. The actual realizable value of the options based on the price to the public in the offering will substantially exceed the potential realizable value shown in the table. The following table summarizes the value of the outstanding options held by the Named Executive Officers at December 31, 1996. No options were exercised by the Named Executive Officers during the year ended December 31, 1996. YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT FISCAL AT FISCAL YEAR-END YEAR-END(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Aleksander Szlam........................... -- -- -- -- J. Neil Smith.............................. -- 450,000 -- $1,165,500 Lee H. Davies.............................. -- -- -- -- Dean A. Trumbull........................... -- 40,000 -- 57,200 John M. Goodeve-Docker..................... -- -- -- --
- --------------- (1) Based on the estimated fair market value of the Company's Common Stock as of December 31, 1996, of $5.50 per share, less the exercise price payable upon exercise of such options. Such estimated fair market value as of December 31, 1996, is substantially lower than the initial public offering price per share in this offering. EMPLOYEE BENEFIT PLANS 1997 Stock Option Plan The Company's 1997 Stock Option Plan (the "1997 Stock Option Plan") became effective on February 6, 1997. The aggregate number of shares reserved for issuance under the 1997 Stock Option Plan is 1,350,000 shares, less the number of shares issued pursuant to the Company's 1992 Discounted Stock Option Plan. The purpose of the 1997 Stock Option Plan is to provide incentives for key employees, officers, consultants and directors to promote the success of the Company, and to enhance the Company's ability to attract and retain the services of such persons. Options granted under the 1997 Stock Option Plan may be 42 45 either options intended to qualify as "incentive stock options" under Section 422 of the Code or nonqualified stock options. As of February 28, 1997, options to purchase 125,000 shares of Common Stock were outstanding under the 1997 Stock Option Plan at a weighted average exercise price of $5.50 per share and no shares of Common Stock have been issued upon exercise of options granted under the 1997 Stock Option Plan. 1992 Discounted Stock Option Plan The Company's 1992 Discounted Stock Option Plan (the "1992 Stock Option Plan") became effective on June 4, 1992. The aggregate number of shares reserved for issuance under the 1992 Stock Option Plan is 1,000,000 shares. The purpose of the 1992 Stock Option Plan is to provide incentives for key employees to promote the success of the Company, and to enhance the Company's ability to attract and retain the services of such persons. Options granted under the 1992 Stock Option Plan are not intended to qualify as "incentive stock options" under Section 422 of the Code. Options granted under the 1992 Stock Option Plan vest over a period of time specified in the relevant option agreement, and will first become exercisable as to the vested portion 14 months after the closing of this offering. As of February 28, 1997, options to purchase 979,097 shares of Common Stock were outstanding under the 1992 Stock Option Plan at a weighted average exercise price of $3.16 per share and no shares of Common Stock have been issued upon exercise of options granted under the 1992 Stock Option Plan. Employee Stock Purchase Plan The Company adopted an Employee Stock Purchase Plan (the "Stock Purchase Plan") on March 1, 1997, to become effective on the closing of this offering. A total of 250,000 shares of the Company's Common Stock have been reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan is intended to qualify under sec. 423 of the Code. An employee electing to participate in the Stock Purchase Plan must authorize on a semi-annual basis a stated dollar amount or percentage of the employee's regular pay (not to exceed 10%) to be deducted by the Company from the employee's pay. The price at which employees may purchase Common Stock is 85% of the closing price of the Common Stock on the Nasdaq National Market on the first day of the semi-annual period or the last day of the semi-annual period, whichever is lower. An employee may not sell shares of Common Stock purchased under the Stock Purchase Plan until the later of: (i) 180 days after the closing of this offering; or (ii) the first day of the second semi-annual period following the semi-annual period in which the right to purchase such shares was granted. Employees of the Company who have completed six full months of service with the Company and whose customary employment is more than 20 hours per week for more than nine months per calendar year are eligible to participate in the Stock Purchase Plan. An employee may not be granted an option under the Stock Purchase Plan if after the granting of the option such employee would be deemed to own 5% or more of the combined voting power or value of all classes of stock of the Company. As of March 1, 1997, approximately 240 employees are eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan will be administered by the Compensation Committee of the Board of Directors. 401(k) Profit Sharing Plan The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") which is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Code. In general, all U.S. employees of the Company who have completed six months of service are eligible to participate. The 401(k) Plan includes a salary deferral arrangement pursuant to which participants may contribute, subject to certain Code limitations, a maximum of 15% of their salary on a pre-tax basis, with a maximum deferral of $9,500. Subject to certain Code limitations, the Company may make a matching contribution at the discretion of the Board of Directors. In 1996, the Company's matching contribution was 40% of each participant's contribution up to 6% of the participant's salary, for an aggregate contribution of $119,000. A separate account is maintained for each participant in the 401(k) Plan. The portion of a participant's account attributable to his or her own contributions is 100% vested. The portion of the account attributable to Company contributions (including matching contributions) vests ratably over the next six years of service with the Company. Distributions from 43 46 the 401(k) Plan may be made in the form of a lump-sum payment in cash or property or in the form of an annuity. AGREEMENTS WITH EMPLOYEES Principal employees of the Company, including executive officers, are required to sign an agreement with the Company restricting the ability of the employee to compete with the Company during his or her employment and for a period of one year thereafter, restricting solicitation of customers and employees following employment with the Company, and providing for ownership and assignment of intellectual property rights to the Company. Mr. Szlam has entered into a two-year employment agreement with the Company which commences on the effective date of this offering. Pursuant to the agreement, Mr. Szlam is entitled to receive an annual base salary of $300,000, and is entitled to annual bonuses of $160,000. Mr. Szlam's employment under the agreement automatically renews for additional two-year terms unless the Company or Mr. Szlam cancels such renewal by giving three months' prior written notice. Under the terms of the agreement, Mr. Szlam has agreed to assign to the Company all patents, copyrights and other intellectual property developed by him during the course of his employment by the Company. In addition, Mr. Szlam has agreed not to solicit the customers or employees of the Company or to compete with the Company for two years following any termination of his employment. Mr. Smith has entered into an employment agreement with the Company which commences on the effective date of this offering and terminates on July 31, 1999. Pursuant to the agreement, Mr. Smith is entitled to receive an annual base salary of $225,000, and is entitled to annual bonuses of up to $100,000 at the discretion of the Board. Mr. Smith's employment under the agreement automatically renews for additional two-year terms unless the Company or Mr. Smith cancels such renewal by giving three months' prior written notice. If Mr. Smith's employment is terminated by the Company other than for cause, death or disability, he will be entitled to severance pay equal to one year's salary. Following a material diminishment of Mr. Smith's duties or authority ("good reason"), he will be entitled to terminate his employment and receive severance pay equal to one year of salary. All options currently held by Mr. Smith will vest upon completion of this offering, but will not be exercisable until beginning 14 months after completion of this offering. Notwithstanding the foregoing, (i) if Mr. Smith voluntarily resigns his positions with the Company without good reason, his right to exercise his current options will be forfeited with respect to one-fourth of his options for each full year which the resignation occurs prior to July 1, 2000, and (ii) if Mr. Smith is terminated by the Company other than for cause or if he voluntarily resigns for good reason, his current options shall be immediately vested and exercisable. Under the terms of the agreement, Mr. Smith has agreed to assign to the Company all patents, copyrights and other intellectual property developed by him during the course of his employment by the Company. In addition, Mr. Smith has agreed not to solicit the customers or employees of the Company or to compete with the Company for two years following any termination of his employment. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, compensation of executive officers of the Company was determined by Mr. Szlam, Chairman of the Board and Chief Executive Officer of the Company. See "Certain Transactions" for information concerning certain transactions and relationships between the Company and Mr. Szlam. Simultaneously with the expansion of the Board of Directors following the completion of this offering, the Company will establish a Compensation Committee to review the performance of executive officers, establish overall employee compensation policies and recommend to the Board of Directors major compensation programs. No voting member of the Compensation Committee will be an executive officer of the Company. Messrs. Szlam and Smith will be ex officio members of the Compensation Committee. LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Upon the closing of this offering, the Company's Amended and Restated Articles of Incorporation will provide that the liability of the directors for monetary damages shall be limited to the fullest extent permissible under Georgia law. Under Georgia law, liability of a director cannot be limited for (i) any appropriation, in violation of his duties, of any business opportunity of the Company, (ii) acts or omissions 44 47 which involve intentional misconduct or a knowing violation of law, (iii) any liability under Section 14-2-832 of the GBCC, which relates to unlawful payments of dividends and unlawful stock repurchases and redemptions, or (iv) any transaction from which he derived an improper personal benefit. This limitation of liability will not affect the availability of injunctive relief or other equitable remedies. Upon the closing of this offering, the Company's Amended and Restated Bylaws will provide that the Company shall indemnify each of its directors and officers to the extent that he is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director or officer of the Company, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with such action, suit or proceeding; provided, however, that no indemnification shall be made for (i) any appropriation, in violation of his duties, of any business opportunity of the Company, (ii) acts or omissions which involve intentional misconduct or a knowing violation of law, (iii) any liability under Section 14-2-832 of the GBCC, which relates to unlawful payments of dividends and unlawful stock repurchases and redemptions, or (iv) any transaction from which he derived an improper personal benefit. The Company intends to maintain directors and officers liability insurance coverage following this offering. 45 48 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of February 28, 1997, and as adjusted to reflect the sale by the Company of the shares offered hereby, by (i) each director of the Company; (ii) each of the Named Executive Officers; (iii) each shareholder known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock; and (iv) all executive officers and directors as a group. Except as otherwise noted, the persons or entities named in the table have sole voting and investment power with respect to all the shares of Common Stock beneficially owned by them, subject to community property laws where applicable.
PERCENTAGE OF COMMON STOCK OUTSTANDING NUMBER OF SHARES -------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING - --------------------------------------- ---------------- -------- -------- Aleksander Szlam (2)...................................... 11,143,395 100.0% 76.1% J. Neil Smith (3)......................................... -- -- -- Lee H. Davies (4)......................................... 5,000 * * Dean A. Trumbull (5)...................................... -- -- -- John M. Goodeve-Docker (6)................................ 5,000 * * All executive officers and directors as a group (10 persons)(7)............................................. 11,163,395 100.0% 76.1%
- --------------- * Less than 1%. (1) Except as set forth herein, the street address of the named beneficial owner is c/o Melita International Corporation, 5051 Peachtree Corners Circle, Norcross, Georgia 30092-2500. (2) Consists of 11,143,395 shares held by a limited partnership controlled by Mr. Szlam. (3) Excludes 450,000 shares issuable pursuant to currently vested options exercisable beginning 14 months after the closing of this offering, subject to certain acceleration and defeasance provisions. See "Agreements with Employees." (4) Includes 5,000 shares issuable pursuant to currently exercisable options. (5) Excludes 10,000 shares issuable pursuant to currently vested options exercisable beginning 14 months after the closing of this offering. (6) Includes 5,000 shares issuable pursuant to currently exercisable options. (7) Includes 11,143,395 shares held by a limited partnership controlled by Mr. Szlam and 20,000 shares issuable pursuant to currently exercisable options. Excludes 460,000 shares issuable pursuant to currently vested options exercisable beginning 14 months after the closing of this offering. 46 49 CERTAIN TRANSACTIONS RELATED PARTY TRANSACTIONS In August 1994, the Company entered into a lease agreement with an unrelated party to lease its headquarters facility commencing April 1995. The agreement provides for annual lease payments ranging from $542,000 to $636,000 per year over a ten-year term. In November 1995, Mr. Szlam, the Company's Chairman of the Board, Chief Executive Officer and principal shareholder, purchased the facility through a limited liability company controlled by Mr. Szlam and his wife. The limited liability company now rents the facility to the Company under the terms of the original lease. Rent expense paid to the limited liability company was $60,000 and $543,000 in 1995 and 1996, respectively. During 1994, the Company paid $325,000 in research and development fees to an entity owned by Mr. Szlam's brother-in-law. The Board of Directors of the Company has adopted a resolution whereby all future transactions, including any loans from the Company to its officers, directors, principal shareholders or affiliates, will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested members of the Board of Directors, if required by law, or a majority of the disinterested shareholders, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. COMBINATION OF MELITA EUROPE AND INVENTIONS Upon the effective date of this offering, the Company will acquire Melita Europe and Inventions by share exchanges with their existing shareholders, which are Mr. Szlam, a limited partnership controlled by Mr. Szlam and a trust controlled by his spouse. The Company will issue a total of 3,143,395 shares of its Common Stock to the shareholders of Melita Europe and Inventions in such share exchanges. The exchange ratios and number of shares issued in the share exchanges were based on relative valuations of the Company, Melita Europe and Inventions determined by an independent appraisal firm. S CORPORATION DISTRIBUTION AND TERMINATION OF S CORPORATION STATUS Upon the Termination Date, the Company will terminate its status as an S corporation under the Code. All undistributed S corporation earnings through the Termination Date will be distributed to the Company's principal shareholder using a portion of the net proceeds of this offering. See "Termination of S Corporation Status and Related Distributions," "-- Repayment of Shareholder Notes" below and Notes 1 and 3 of the Notes to Combined Financial Statements. REPAYMENT OF SHAREHOLDER NOTES In connection with a June 19, 1992 distribution of S corporation accumulated earnings, Melita issued a note payable (the "1992 Note") to Mr. Szlam in the principal amount of $3.0 million. The note bears interest at a rate equal to the prime rate plus 1% per annum, and the outstanding principal balance of this note as of March 1, 1997, was $2.4 million. Interest on the note is payable monthly, and principal is payable in 16 equal quarterly installments beginning July 1, 1996. The note contains an acceleration provision at the option of the noteholder upon certain designated changes in ownership, which was triggered by changes in the capital structure in February 1997. The largest amount outstanding under this note during 1996 was $3.0 million. In connection with a February 7, 1997 distribution of S corporation earnings accumulated through December 31, 1996, Melita and Inventions issued notes payable (the "1997 Notes") to Mr. Szlam. These two notes have an aggregate principal amount of $12.9 million. Each of the notes bears interest at the minimum rate required to avoid imputation of interest using the applicable federal rate under the Code (currently 5.7%). The outstanding principal balance on these notes as of March 31, 1997, was $12.9 million, and the largest aggregate amount outstanding under these notes during the period from issuance to March 31, 1997 was $13.2 million. Payment of these notes is due in full upon demand. The 1992 Note and 1997 Notes will be repaid in full with a portion of the net proceeds of this offering. 47 50 TAX INDEMNIFICATION AGREEMENT Melita and Inventions have entered into Tax Indemnification Agreements with their existing shareholders prior to this offering providing for, among other things, the indemnification of the Company by such shareholders for any federal and state income taxes (including interest) incurred by the Company if for any reason the Company is deemed to be treated as a C corporation during any period for which it reported its earnings to the taxing authorities as an S corporation. The Tax Indemnification Agreements further provide for the cross-indemnification of the Company and of each existing shareholder for certain additional taxes (including interest and, in the case of existing shareholders, penalties) resulting from the Company's operations during the period in which it was an S corporation. 48 51 DESCRIPTION OF CAPITAL STOCK Upon the effectiveness of this offering, the Company's authorized capital stock will consist of 100,000,000 shares of Common Stock, no par value per share, and 20,000,000 shares of preferred stock, no par value per share. As of March 1, 1997, after giving effect to the issuance of 3,143,395 shares of Common Stock in connection with the Combination, the Company had issued and outstanding 11,143,395 shares of Common Stock held by three stockholders of record. The following description of the capital stock of the Company is a summary and is qualified in its entirety by the provisions of the Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK Holders of shares of Common Stock are entitled to one vote per share for the election of directors and on all matters to be submitted to a vote of the Company's shareholders. The Common Stock does not have cumulative voting rights, and, as a result, the holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election and the holders of the remaining shares will not be able to elect any directors. Subject to the rights of any holders of preferred stock which may be issued in the future, the holders of shares of Common Stock are entitled to share ratably in such dividends as may be declared by the Board of Directors and paid by the Company out of funds legally available therefor. In the event of dissolution, liquidation or winding up of the Company, holders of shares of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities and liquidation preferences, if any. Holders of shares of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued by the Company in connection with this offering will be, duly authorized, validly issued, fully paid and nonassessable. The rights of holders of Common Stock will be subject to, and may be adversely affected by, the rights, privileges and preferences of the holders of any shares of preferred stock that the Company may designate and issue in the future. PREFERRED STOCK The Board of Directors is authorized, subject to certain limitations prescribed by law, without further shareholder approval, to issue from time to time up to an aggregate of 20,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions on the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company. There are no outstanding shares of preferred stock, and no series have been designated. The Company does not currently have any intention to designate or issue any preferred stock. CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS The Amended and Restated Bylaws provide that special meetings of shareholders may be called only by (i) the Board of Directors, (ii) the Chairman of the Board of Directors (if one is so appointed), (iii) the Chief Executive Officer, (iv) the President of the Company or (v) holders of not less than 50% of all votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. The Company's Amended and Restated Bylaws establish an advance notice procedure for the nomination of candidates for election as directors and other shareholder proposals to be considered at shareholders meetings, other than by or at the direction of the Board of Directors or other designated parties. Notice of shareholder proposals and director nominations must be given timely in writing to the Secretary of the Company before the meeting at which such matters are to be acted upon or directors are to be elected. Such notice, to be timely, must be received at the principal executive offices of the Company not less than 60 days before the date of the meeting at which the director(s) are to be elected or the proposal is to be considered; 49 52 however, if less than 70 days notice or prior public disclosure of the date of the scheduled meeting is given or made, notice by the shareholder, to be timely, must be delivered or received not later than the close of business on the tenth day following the earlier of the day on which notice of the date of the meeting is mailed to shareholders or public disclosure of the date of such meeting is made. Notice to the Company from a shareholder who intends to present a proposal or to nominate a person for election as a director at a shareholders' meeting must contain certain information about the shareholder giving such notice and, in the case of director nominations, all information that would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee (including such person's written consent to serve as a director if so elected). If the chairman of the meeting determines that a shareholder's proposal or nomination is not made in accordance with the procedures set forth in the Amended and Restated Bylaws, such proposal or nomination, at the direction of such presiding officer, may be disregarded. The notice requirement for shareholder proposals contained in the Amended and Restated Bylaws does not restrict a shareholder's right to include proposals in the Company's annual proxy materials pursuant to rules promulgated under the Securities Exchange Act of 1934, as amended. The Board of Directors shall have the power to increase or decrease the authorized number of directors, with or without shareholder approval. Newly created directorships resulting from any increase in the number of directors or any vacancy on the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors then in office or, if not filled by the directors, by the shareholders. In discharging the duties of their respective positions and in determining what is believed to be in the best interest of the Company, the Board of Directors, and individual directors, in addition to considering the effects of any action on the Company or is shareholders, may, to the extent permitted by applicable Georgia law, consider the interests of the employees, customers, suppliers and creditors of the Company and its subsidiaries, the communities in which offices or other establishments of the Company and its subsidiaries are located, and all other factors such directors may consider pertinent; provided, however, that this provision of the Company's Amended and Restated Articles of Incorporation solely grants discretionary authority to the directors and no constituency shall be deemed to have been given any right to consideration thereby. The preceding provisions of the Amended and Restated Articles of Incorporation and Bylaws may be changed only upon the affirmative vote of holders of at least a majority of the outstanding shares of Common Stock. The provisions of the Amended and Restated Articles of Incorporation and Bylaws summarized in the preceding paragraphs and the provisions of the GBCC described under "Certain Provisions of Georgia Law," contain provisions that may have the effect of delaying, deferring or preventing a non-negotiated merger or other business combination involving the Company. These provisions are intended to encourage any person interested in acquiring the Company to negotiate with and obtain the approval of the Board of Directors in connection with the transaction. Certain of these provisions may, however, discourage a future acquisition of the Company not approved by the Board of Directors in which shareholders might receive an attractive value for their shares or that a substantial number or even a majority of the Company's shareholders might believe to be in their best interest. As a result, shareholders who desire to participate in such a transaction may not have the opportunity to do so. Such provisions could also discourage bids for the Common Stock at a premium to the prevailing market price, as well as create a depressive effect on the market price of the Common Stock. CERTAIN PROVISIONS OF GEORGIA LAW Georgia Business Combination Statute. The Company has elected in its Bylaws to be subject to provisions of the GBCC prohibiting various "business combinations" involving "interested shareholders" for a period of five years after the shareholder becomes an interested shareholder of the Company. Such provisions prohibit any business combination with an interested shareholder unless either (i) prior to such time, the Board of Directors approves either the business combination or the transaction by which such shareholder became an interested shareholder, (ii) in the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder became the beneficial owner of at least 90% of the outstanding voting stock of the Company which was not held by directors, officers, affiliates thereof, 50 53 subsidiaries or certain employee stock option plans of the Company, or (iii) subsequent to becoming an interested shareholder, such shareholder acquired additional shares resulting in such shareholder owning at least 90% of the outstanding voting stock of the Company and the business combination is approved by a majority of the disinterested shareholders' shares not held by directors, officers, affiliates thereof, subsidiaries or certain employee stock option plans of the Company. Under the relevant provisions of the GBCC, a "business combination" is defined to include, among other things, (i) any merger, consolidation, share exchange or any sale, transfer or other disposition (or series of related sales or transfers) of assets of the Company having an aggregate book value of 10% or more of the Company's net assets (measured as of the end of the most recent fiscal quarter), with an interested shareholder of the Company or any other corporation which is or, after giving effect to such business combination, becomes an affiliate of any such interested shareholder, (ii) the liquidation or dissolution of the Company, (iii) the receipt by an interested shareholder of any benefit from any loan, advance, guarantee, pledge, tax credit or other financial benefit from the Company, other than in the ordinary course of business and (iv) certain other transactions involving the issuance or reclassification of securities of the Company which produce the result that 5% or more of the total equity shares of the Company, or of any class or series thereof, is owned by an interested shareholder. An "interested shareholder" is defined by the GBCC to include any person or entity that, together with its affiliates, beneficially owns or has the right to own 10% or more of the outstanding voting shares of the Company, or any person that is an affiliate of the Company and has, at any time within the preceding two-year period, been the beneficial owner of 10% or more of the outstanding voting shares of the Company. The restrictions on business combinations shall not apply to any person who was an interested shareholder before the adoption of the Bylaw which made the provisions applicable to the Company nor to any persons who subsequently become interested shareholders inadvertently, subsequently divest sufficient shares so that the shareholder ceases to be an interested shareholder and would not, at any time within the five-year period immediately before a business combination involving the shareholder, have been an interested shareholder but for the inadvertent acquisition. Georgia Fair Price Statute. The Company has elected in its Bylaws to be subject to the "Fair Price" provisions of the GBCC. These provisions require that a "business combination" with an "interested shareholder" be (a) unanimously approved by "continuing directors" who must constitute at least three members of the board of directors at the time of such approval, or (b) recommended by at least two-thirds of the "continuing directors" and approved by a majority of the shareholders excluding the "interested shareholder," unless certain standards regarding the consideration paid to shareholders in the transaction are met. Subject to certain exceptions, a "business combination" includes (i) any merger or consolidation of the corporation or a subsidiary of the Company; (ii) any share exchange; (iii) any sale, lease, transfer, or other disposition of assets of the Company or its subsidiary occurring within a 12 month period and having an aggregate book value equal to 10% or more of the net assets of the Company; (iv) any transaction that results in the issuance or transfer by the Company of any stock of the Company or the subsidiary representing 5% or more of the total market value of the outstanding stock of the Company to any interested shareholder within a 12 month period, except pursuant to a transaction that effects a pro rata distribution to all shareholders of the Company; (v) the adoption of any plan or proposal for the liquidation or dissolution of the corporation in which anything other than cash will be received by an interested shareholder; and (vi) any transaction occurring within a 12 month period involving the Company or a subsidiary of the Company that has the effect of increasing by 5% or more the proportionate share of the stock of any class or series of the Company or the subsidiary that is directly or beneficially owned by the interested shareholder. An "interested shareholder" is defined the same as it is defined in the Georgia Business Combination Statute. A "continuing director" includes any director who is not an affiliate or associate of an interested shareholder or any board approved successor of such a director who is not an affiliate or associate of an interested shareholder. The Fair Price provisions do not restrict a business combination if: (a) the aggregate amount of the cash, and fair market value of any non-cash property, measured five days before the consummation date, to be received per share by the shareholders is at least equal to the highest of: (i) the highest per share price, including brokerage commissions, transfer taxes, and soliciting dealers' fees, paid by the interested shareholder for any shares of the same class or series acquired by it within two years preceding the announcement date or in the transaction in which it became an interested shareholder; (ii) the higher of the fair market value per 51 54 share as determined on the announcement date or the determination date; or (iii) in the case of shares other than common shares, the highest amount per share to which preferred shareholders are entitled in the event of liquidation, dissolution, or winding up of the corporation, provided that subparagraph (iii) shall only be applicable if the interested shareholder acquired the shares within the two year period immediately preceding the announcement date; and (b) shareholders receive cash or the form of consideration used in the past by the interested shareholder to purchase the largest number of shares of such class or series. Further, subject to exceptions, prior to the time the business combination with the interested shareholder takes place, without the approval of the board of directors, there must have been: (i) no failure to declare and pay full dividends on the Company's outstanding preferred shares; (ii) no reduction in the annual rate of dividends paid on common shares except as to reflect any subdivision of the shares; (iii) an increase in the annual rate of dividends to reflect any reclassification of shares; and (iv) not more than a 1% increase in the interested shareholder's ownership of any of the Company's stock in any 12 month period. An interested shareholder may not receive a direct or indirect benefit, except proportionately as a shareholder, of any loans, advances, guarantees, pledges, or other financial assistance or any tax credits or other tax advantages provided by the corporation or its subsidiaries, either in anticipation of or in connection with such business combination or otherwise. LISTING Application has been made to include the Company's Common Stock on the Nasdaq National Market under the trading symbol "MELI." TRANSFER AGENT AND REGISTRAR The transfer agent for the Company's Common Stock is First Union National Bank of North Carolina. 52 55 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 14,643,395 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 3,500,000 shares sold in this offering will be freely tradable without restriction or further registration under 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 11,143,395 shares of Common Stock may be sold in the public market beginning in February 1998, subject to the volume and other limitations of Rule 144 promulgated under the Securities Act. The holders of all of these remaining shares have executed 180-day lock-up agreements with Montgomery Securities. See "Underwriting." 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 146,500 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. 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 one or more Registration Statements on Form S-8 under the Securities Act to register an aggregate of 1,600,000 shares of Common Stock reserved for issuance under the 1992 Stock Option Plan, the 1997 Stock Option Plan and the Stock Purchase Plan. After the date of such filing, if not otherwise subject to a lock-up agreement, shares purchased pursuant to these plans generally would be available for resale in the public market. The Company has granted options under such plans to purchase an aggregate of 1,104,097 shares of which options to purchase an aggregate of 20,000 shares are currently exercisable. See "Management -- Employee Benefit Plans." 53 56 UNDERWRITING The underwriters named below, represented by Montgomery Securities and Robertson, Stephens & Company LLC (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares, if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- --------- Montgomery Securities....................................... Robertson, Stephens & Company LLC........................... --------- Total............................................. 3,500,000 =========
The Representatives have advised the Company that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 525,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this offering. The holders of all of the Company's Common Stock, who immediately following the offering (assuming no exercise of the over-allotment option) collectively will beneficially own 11,143,395 shares of Common Stock, and each of the Company's officers and directors, have agreed that for a period of 180 days after the date of this Prospectus they will not, without the prior written consent of Montgomery Securities, directly or indirectly, sell, offer, contract or grant an option to sell, pledge, transfer, except with respect to certain transfers to family members or trusts for the benefit of family members, establish an open put equivalent position or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities convertible into or exchangeable or exercisable for shares of Common Stock, or publicly announce the intention to do any of the foregoing. In addition, the Company has agreed that for a period of 180 days after the date of this Prospectus it will not, without the consent of Montgomery Securities, directly or indirectly, sell, offer, contract or grant an option to sell, pledge, transfer or otherwise dispose of, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities convertible into or exchangeable or exercisable for shares of Common Stock, or publicly announce the intention to do any of the foregoing, except for shares of Common Stock offered hereby and shares issued pursuant to the 1992 Stock 54 57 Option Plan, the 1997 Stock Option Plan or the Stock Purchase Plan. See "Management -- Employee Benefit Plans" and "Shares Eligible for Future Sale." The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. Certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may involve the purchase of Common Stock of the Company on the Nasdaq National Market or otherwise. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have advised the Company that the Underwriters do not expect to make sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority in excess of 5% of this offering. Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial offering price will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations will be the history of and prospects for the Company and the industry in which the Company competes, an assessment of the Company's management, the Company's past and present operations and financial performance, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering and the market prices of publicly traded common stocks of comparable companies in recent periods. LEGAL MATTERS The validity of the issuance of the shares of the Common Stock offered hereby will be passed upon for the Company by Morris, Manning & Martin, L.L.P., Atlanta, Georgia. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Hale and Dorr LLP, Washington, D.C. EXPERTS The combined financial statements included in this prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their reports. In those reports, that firm states that with respect to Melita Europe its opinion is based on the reports of other independent public accountants, namely BDO Stoy Hayward. The financial statements referred to above have been included herein in reliance upon the authority of those firms as experts in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts 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 offered hereby, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New 55 58 York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. In addition, the Company is required to file electronic versions of these documents with the Commission through the Commissions Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a World Wide Web Site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company intends to furnish to its shareholders annual reports containing consolidated financial statements audited by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 56 59 MELITA INTERNATIONAL CORPORATION MELITA EUROPE LIMITED AND INVENTIONS, INC. INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE ---- COMBINED FINANCIAL STATEMENTS: Report of Independent Public Accountants -- Arthur Andersen LLP....................................................... F-2 Report of the Auditors -- BDO Stoy Hayward.................. F-3 Combined Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997............................................ F-4 Combined Statements of Operations for the three years in the period ended December 31, 1996 and for the three months ended March 31, 1996 and 1997............................. F-5 Combined Statements of Shareholders' Equity for the three years in the period ended December 31, 1996 and for the three months ended March 31, 1997......................... F-6 Combined Statements of Cash Flows for the three years in the period ended December 31, 1996 and for the three months ended March 31, 1996 and 1997............................. F-7 Notes to Combined Financial Statements...................... F-8
F-1 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Melita International Corporation, Melita Europe Limited and Inventions, Inc.: We have audited the accompanying combined balance sheets of MELITA INTERNATIONAL CORPORATION (a Georgia corporation), MELITA EUROPE LIMITED (a private limited company incorporated in the United Kingdom) and INVENTIONS, INC. (a Georgia corporation) (collectively the "Company") as of December 31, 1995 and 1996 and the related combined statements of operations, shareholders' equity, and cash flows for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Melita Europe Limited, which statements reflect total assets of 8% and 12% at December 31, 1995 and 1996, respectively, and total revenues of 5%, 9%, and 9% of the combined totals for the three years in the period ended December 31, 1996, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the entity, is based solely on the report of the other auditors. 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. Our audits also included examining, on a test basis, evidence supporting the translation of Melita Europe Limited's financial statements from British pounds to US dollars and from the Companies Act of 1985 to generally accepted accounting principles. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of Melita International Corporation, Melita Europe Limited and Inventions, Inc. as of December 31, 1995 and 1996 and the combined results of their operations and their cash flows for the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia February 28, 1997 (except with respect to the matter discussed in Note 9, as to which the date is June 4, 1997) F-2 61 MELITA EUROPE LIMITED REPORT OF THE AUDITORS To the shareholders of Melita Europe Limited: We have audited the financial statements of Melita Europe Limited for the three years ended 31 December 1996. Respective responsibilities of directors and auditors The Company's directors are responsible for the preparation of the financial statements. It is our responsibility to form an independent opinion, based on our audits, on those statements and to report our opinion to you. Basis of opinion We conducted our audits in accordance with Auditing Standards issued by the Auditing Practices Board. The results of the audits would not have been materially different had the audits been conducted in accordance with Generally Accepted Auditing Standards in the United States. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audits so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements and including those for the years ended 31 December 1994 and 1995 as previously audited by us, give a true and fair view of the state of the Company's affairs as at 31 December 1996 and of its profit for the three years ended 31 December 1996 and have been properly prepared in accordance with the Companies Act 1985. BDO Stoy Hayward Chartered Accountants and Registered Auditors Ewell, Epsom, Surrey 25 April 1997 F-3 62 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. COMBINED BALANCE SHEETS
DECEMBER 31, PRO FORMA ----------------- MARCH 31, MARCH 31, 1995 1996 1997 1997 (NOTE 8) ------- ------- ------------ -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 5,959 $ 9,849 $11,687 $ 0 Accounts receivable, net of allowance for doubtful accounts of $331 and $487 at December 31, 1995 and 1996, respectively, and $495 at March 31, 1997.............................. 9,203 11,860 11,187 11,187 Inventories............................................... 3,027 2,442 1,919 1,919 Deferred taxes............................................ 0 0 0 1,060 Prepaid expenses and other................................ 342 170 473 473 ------- ------- ------- ------- Total current assets................................ 18,531 24,321 25,266 14,639 ------- ------- ------- ------- Property and equipment, at cost: Furniture and fixtures.................................... 1,341 1,361 1,366 1,366 Equipment................................................. 4,255 5,476 5,957 5,957 Leasehold improvements.................................... 166 343 343 343 ------- ------- ------- ------- Total property and equipment........................ 5,762 7,180 7,666 7,666 Less accumulated depreciation and amortization............ 3,423 4,456 (4,848) (4,848) ------- ------- ------- ------- Net property and equipment.......................... 2,339 2,724 2,818 2,818 ------- ------- ------- ------- Other assets................................................ 58 24 21 21 ------- ------- ------- ------- $20,928 $27,069 $28,105 $17,478 ======= ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft............................................ $ 0 $ 0 $ 0 $ 6,150 Accounts payable.......................................... 2,763 2,429 2,999 2,999 Accrued liabilities....................................... 3,416 4,210 4,178 4,299 Deferred revenue.......................................... 2,593 3,065 3,850 3,850 Customer deposits......................................... 2,432 3,849 3,211 3,211 Current maturities of notes payable to shareholder (Note 2)...................................................... 375 2,625 15,337 0 Current maturities of capital lease obligations (Note 5)...................................................... 48 19 15 15 ------- ------- ------- ------- Total current liabilities........................... 11,627 16,197 29,590 20,524 ------- ------- ------- ------- Notes payable to shareholder, net of current maturities (Note 2).................................................. 2,625 0 0 0 ------- ------- ------- ------- Capital lease obligations, net of current maturities (Note 5)........................................................ 19 0 0 0 ------- ------- ------- ------- Commitments and contingencies (Note 5) Shareholders' equity: Preferred stock: Melita International Corporation, no par value; 20,000,000 shares authorized, no shares issued and outstanding at December 31, 1995 and 1996 and March 31, 1997 and March 31, 1997 pro forma................. 0 0 0 0 Common stock: Melita International Corporation, no par value; 100,000,000 shares authorized, 8,000,000 shares issued and outstanding December 31, 1995 and 1996, and 11,143,395 shares issued and outstanding March 31, 1997 and March 31, 1997 pro forma..................... 2 2 2 69 Melita Europe Limited, L1 par value; 50,000 shares authorized, 31,328 shares issued and outstanding December 31, 1995 and 1996, and March 31, 1997, no shares issued and outstanding pro forma............... 46 46 46 0 Inventions, Inc., $5 par value; 100 shares authorized, 100 shares issued and outstanding December 31, 1995 and 1996, and March 31, 1997, no shares issued and outstanding pro forma................................. 1 1 1 0 Additional paid-in capital................................ 20 20 20 0 Cumulative foreign currency translation adjustment........ 5 35 13 13 Retained earnings (deficit)............................... 6,583 10,768 (1,567) (3,128) ------- ------- ------- ------- Total shareholders' equity (deficit)................ 6,657 10,872 (1,485) (3,046) ------- ------- ------- ------- $20,928 $27,069 $28,105 $17,478 ======= ======= ======= =======
The accompanying notes are an integral part of these combined balance sheets. F-4 63 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- ------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: Product.................................... $18,186 $24,620 $32,077 $ 7,691 $10,265 Service.................................... 8,970 10,662 15,463 3,330 4,404 ------- ------- ------- ------- ------- Total revenues..................... 27,156 35,282 47,540 11,021 14,669 ------- ------- ------- ------- ------- Cost of revenues: Product.................................... 6,310 8,730 11,494 2,449 3,836 Service.................................... 3,254 5,282 6,863 1,439 1,931 ------- ------- ------- ------- ------- Total cost of revenues............. 9,564 14,012 18,357 3,888 5,767 ------- ------- ------- ------- ------- Gross margin................................. 17,592 21,270 29,183 7,133 8,902 ------- ------- ------- ------- ------- Operating expenses: Research and development................... 3,660 4,050 5,070 945 1,381 Selling, general, and administrative....... 11,332 12,559 16,765 4,137 5,134 ------- ------- ------- ------- ------- Total operating expenses........... 14,992 16,609 21,835 5,082 6,515 ------- ------- ------- ------- ------- Income from operations....................... 2,600 4,661 7,348 2,051 2,387 Other income (expense), net.................. 46 88 261 (11) (51) ------- ------- ------- ------- ------- Income before income taxes................... 2,646 4,749 7,609 2,040 2,336 Income tax (benefit) provision............... (26) 0 0 0 16 ------- ------- ------- ------- ------- Net income before pro forma income taxes..... 2,672 4,749 7,609 2,040 2,320 Pro forma income taxes....................... 1,164 1,794 2,827 762 895 ------- ------- ------- ------- ------- Pro forma net income......................... $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425 ======= ======= ======= ======= ======= Pro forma net income per common and common equivalent share........................... $ 0.39 $ 0.11 ======= ======= Pro forma weighted average common and common equivalent shares outstanding.............. 12,363 12,647 ======= =======
The accompanying notes are an integral part of these combined statements. F-5 64 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK -------------------------------------------------------- MELITA CUMULATIVE INTERNATIONAL MELITA EUROPE FOREIGN PREFERRED STOCK CORPORATION LIMITED INVENTIONS, INC. ADDITIONAL CURRENCY --------------- ------------------ --------------- ----------------- PAID-IN TRANSLATION SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT ------ ------ --------- ------ ------ ------ ------- ------- ---------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance, December 31, 1993............... 0 $0 8,000,000 $2 31,328 $46 100 $1 $20 $ 8 Net income before pro forma income taxes............ 0 0 0 0 0 0 0 0 0 0 Distributions to shareholders..... 0 0 0 0 0 0 0 0 0 0 Foreign currency translation adjustment....... 0 0 0 0 0 0 0 0 0 (3) -- -- --------- -- ------ --- --- -- --- --- Balance, December 31, 1994............... 0 0 8,000,000 2 31,328 46 100 1 20 5 Net income before pro forma income taxes............ 0 0 0 0 0 0 0 0 0 0 Distributions to shareholders..... 0 0 0 0 0 0 0 0 0 0 Foreign currency translation adjustment....... 0 0 0 0 0 0 0 0 0 0 -- -- --------- -- ------ --- --- -- --- --- Balance, December 31, 1995............... 0 0 8,000,000 2 31,328 46 100 1 20 5 Net income before pro forma income taxes............ 0 0 0 0 0 0 0 0 0 0 Distributions to shareholders..... 0 0 0 0 0 0 0 0 0 0 Foreign currency translation adjustment....... 0 0 0 0 0 0 0 0 0 30 -- -- --------- -- ------ --- --- -- --- --- Balance, December 31, 1996............... 0 0 8,000,000 2 31,328 46 100 1 20 35 Net income before pro forma income taxes (unaudited)........ 0 0 0 0 0 0 0 0 0 0 Note and cash distributions to shareholders (unaudited)........ 0 0 0 0 0 0 0 0 0 0 Foreign currency translation adjustment (unaudited)........ 0 0 0 0 0 0 0 0 0 (22) -- -- --------- -- ------ --- --- -- --- --- Balance, March 31, 1997 (unaudited)... 0 $0 8,000,000 $2 31,328 $46 100 $1 $20 $13 == == ========= == ====== === === == === === RETAINED EARNINGS TOTAL --------- -------- Balance, December 31, 1993............... $ 7,282 $ 7,359 Net income before pro forma income taxes............ 2,672 2,672 Distributions to shareholders..... (2,924) (2,924) Foreign currency translation adjustment....... 0 (3) -------- -------- Balance, December 31, 1994............... 7,030 7,104 Net income before pro forma income taxes............ 4,749 4,749 Distributions to shareholders..... (5,196) (5,196) Foreign currency translation adjustment....... 0 0 -------- -------- Balance, December 31, 1995............... 6,583 6,657 Net income before pro forma income taxes............ 7,609 7,609 Distributions to shareholders..... (3,424) (3,424) Foreign currency translation adjustment....... 0 30 -------- -------- Balance, December 31, 1996............... 10,768 10,872 Net income before pro forma income taxes (unaudited)........ 2,320 2,320 Note and cash distributions to shareholders (unaudited)........ (14,655) (14,655) Foreign currency translation adjustment (unaudited)........ 0 (22) -------- -------- Balance, March 31, 1997 (unaudited)... $ (1,567) $ (1,485) ======== ========
The accompanying notes are an integral part of these combined statements. F-6 65 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Pro forma net income................... $ 1,508 $ 2,955 $ 4,782 $ 1,278 $ 1,425 ------- ------- ------- ------- ------- Adjustments to reconcile pro forma net income to net cash provided by operating activities: Pro forma income taxes.............. 1,164 1,794 2,827 762 895 Depreciation and amortization....... 768 997 1,141 242 392 (Gain) loss on sale of property and equipment......................... 0 (51) 6 0 0 Changes in assets and liabilities: Accounts receivable............... 130 (1,095) (2,657) (2,455) 673 Inventories....................... (355) (990) 585 (221) 524 Prepaid expenses and other assets......................... (405) 165 172 56 (303) Accounts payable.................. 154 1,595 (334) (256) 570 Accrued liabilities............... 178 161 794 75 (180) Deferred revenue.................. 996 607 472 1,119 785 Customer deposits................. 975 1,416 1,417 (176) (638) Other, net........................ (51) (18) 63 15 (19) ------- ------- ------- ------- ------- Total adjustments.............. 3,554 4,581 4,486 (839) 2,699 ------- ------- ------- ------- ------- Net cash provided by operating activities................... 5,062 7,536 9,268 439 4,124 ------- ------- ------- ------- ------- Cash flows from investing activities: Purchases of property and equipment.... (783) (1,879) (1,531) (267) (486) Proceeds from sale of property and equipment........................... 0 132 0 0 0 ------- ------- ------- ------- ------- Net cash used in investing activities................... (783) (1,747) (1,531) (267) (486) ------- ------- ------- ------- ------- Cash flows from financing activities: Repayment of capital lease obligations......................... (65) (40) (48) (16) (4) Repayment of note payable to shareholder......................... 0 0 (375) 0 (188) Distributions to shareholders.......... (2,924) (5,196) (3,424) (1,386) (1,608) ------- ------- ------- ------- ------- Net cash used in financing activities................... (2,989) (5,236) (3,847) (1,402) (1,800) ------- ------- ------- ------- ------- Net change in cash and cash equivalents............................ 1,290 553 3,890 (1,230) 1,838 Cash and cash equivalents, beginning of year................................... 4,116 5,406 5,959 5,959 9,849 ------- ------- ------- ------- ------- Cash and cash equivalents, end of year... $ 5,406 $ 5,959 $ 9,849 $ 4,729 $11,687 ======= ======= ======= ======= ======= Cash paid for interest during the year... $ 265 $ 302 $ 279 $ 71 $ 56 ======= ======= ======= ======= ======= Income taxes paid........................ $ 0 $ 29 $ 0 $ 0 $ 16 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these combined statements. F-7 66 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Melita International Corporation ("Melita"), Melita Europe Limited ("Melita Europe"), and Inventions, Inc. ("Inventions") (collectively, the "Company") are effectively owned and controlled by related individuals. The Company is a provider of customer contact and call management systems that enable customers to operate efficient call centers. The Company's principal product, PhoneFrame CS, is an integrated system comprised of both hardware and software. Melita offers periodic ongoing maintenance support of its products. The Company also offers fee-based installation, training and consulting services. The Company markets its products worldwide through direct sales forces and through distributors in Europe, Latin America and Asia (Note 7). The Company is planning an initial public offering (the "Offering") of its common stock. In connection with the planned Offering, the Company will convert from an S corporation to a C corporation and Melita Europe and Inventions will be combined into Melita (Note 8). BASIS OF COMBINATION The policy of the Company is to present combined financial statements including the accounts of Melita, Melita Europe and Inventions, since all are under common control. All significant intercompany accounts and transactions have been eliminated in combination. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash or cash equivalents. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes raw materials, labor and overhead. Market is defined as replacement cost for work in progress and purchased parts and net realizable value for finished goods. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated primarily using an accelerated depreciation method over the following estimated useful lives: Furniture and fixtures Five to seven years Equipment Three to five years Leasehold improvements Remaining life of lease
INCOME TAXES Melita and Inventions are organized as S corporations under the Internal Revenue Code and, therefore, are not subject to federal income taxes. The income or loss of Melita and Inventions is included in the shareholders' individual federal and state tax returns, and as such, no provision for income taxes is recorded in the accompanying combined statements of operations. The Company has historically made distributions to cover the shareholders' anticipated tax liability. F-8 67 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The accompanying combined financial statements reflect a provision for income taxes on a pro forma basis as if the Company were liable for federal and state income taxes as a taxable corporate entity throughout the years presented. The pro forma income tax provision has been computed by applying the Company's anticipated statutory tax rate to pretax income, adjusted for permanent tax differences (Note 3). FOREIGN CURRENCY TRANSLATION The financial statements of Melita Europe are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Net assets of Melita Europe are translated at the current rates of exchange. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded in shareholders' equity. The Company has recognized foreign exchange gains (losses) of approximately $31,000, $(2,000) and $162,000 in fiscal 1994, 1995 and 1996, respectively, and $0 and $(83,000) for the three months ended March 31, 1996 and 1997, respectively. REVENUE RECOGNITION The Company generates product revenues primarily from its principal product, PhoneFrame CS, an integrated system comprised of both hardware and software. The Company's service revenues are generated from maintenance contracts which include support, parts and labor and software update rights. Service revenues also include fee-based installation, training and consulting services. The Company recognizes product revenues upon shipment of the product and when the Company has no significant obligations yet to be satisfied. The Company's sales contracts provide for certain payment terms normally based upon signing the contract, customer receipt of the product, and commencement of operation of the customer's system. Revenues from maintenance contracts are recognized ratably over the term of the contractual support period which ranges up to 5 years. If maintenance is included in the original integrated product contract, such amounts are unbundled from the license fee based on the value established by independent sale of such maintenance to customers. Consulting revenues are primarily related to implementation services performed under separate service arrangements related to the installation of the Company's hardware and software products. Revenues from consulting, installation and training services are recognized as the services are performed. Deferred revenues primarily relate to products that have not yet been delivered and maintenance services which have been paid by the customers prior to the performance of those services. Deferred revenue amounted to $2,593,000 and $3,065,000 at December 31, 1995 and 1996, respectively, and $3,851,000 at March 31, 1997. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Research and development expenditures are charged to expense as incurred. The system software delivers the functionality and controls the hardware components. Computer software development costs of the system software products are charged to research and development expense until technological feasibility is established, after which remaining software production costs are capitalized in accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." The Company has defined technological feasibility of its products as the point in time at which the Company has a working model of the related product, which is when the product has achieved "beta" status. Historically, the development costs incurred during the period between the achievement of beta status by a product and the point at which the product is available for general release to customers have not been material. Accordingly, F-9 68 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the Company has concluded that the amount of development costs capitalizable under the provisions of SFAS No. 86 was not material to the financial statements for the years ended December 31, 1994, 1995 and 1996 or for the three months ended March 31, 1997. Therefore, the Company has charged all software development costs to expense as incurred for the years ended December 31, 1994, 1995 and 1996 and the three months ended March 31, 1997. WARRANTY COSTS The Company generally warranties its products for 90 days and provides for estimated warranty costs upon shipment of such products. Warranty costs have not been and are not anticipated to be significant. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to accounts receivable are limited due to the wide variety of customers and markets for which the Company's services are provided as well as their dispersion across many different geographic areas. As a result, as of December 31, 1995 and 1996, the Company did not consider itself to have any significant concentrations of credit risk. During 1996, the Company's five largest customers accounted for approximately 24.5% of the Company's total revenues. In 1995, the Company's five largest customers accounted for approximately 24.8% of its total revenues. Although the particular customers may change from period to period, the Company expects that large sales to a limited number of customers will continue to account for a significant percentage of its revenues in any particular period for the foreseeable future. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Pro forma net income per common and common equivalent share is computed using the weighted average number of shares of common stock and dilutive common stock equivalent shares ("CSEs") from stock options using the treasury stock method. Additionally, the weighted average common and common equivalent shares outstanding reflect the shares issued as a result of the combination of Melita, Melita Europe and Inventions and the effects of the stock recapitalization discussed in Note 8 as if the events occurred at the beginning of the period. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common stock and CSEs issued at prices below the expected public offering price during the 12-month period prior to filing of the registration statement in connection with the Company's planned Offering have been included in the calculation as if they were outstanding for all periods presented prior to the Offering, regardless of whether they are dilutive. Pursuant to Staff Accounting Bulletin 1B.3, pro forma earnings per share gives effect to the issuance by the Company of the number of shares that, at the assumed public offering price, would yield proceeds in the amount necessary to pay the shareholder distribution discussed in Note 8 that is not covered by the earnings for the year. Historical net income per share has not been presented in view of the S corporation status in prior periods and the anticipated change in capital structure upon closing of the planned Offering. F-10 69 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of accounts receivable, accounts payable and other financial instruments approximate their fair values principally because of the short-term maturities of these instruments. The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company's fair value of long-term debt was not significantly different than the stated value at December 31, 1995 and 1996. ACCRUED LIABILITIES Accrued liabilities include the following (in thousands):
DECEMBER 31, ---------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Accrued salaries and wages.............................. $1,666 $2,437 $2,367 Other current liabilities............................... 1,193 807 1,506 Accrued royalties....................................... 293 689 24 Accrued rent............................................ 264 277 281 ------ ------ ------ Total accrued liabilities..................... $3,416 $4,210 $4,178 ====== ====== ======
NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company's adoption of SFAS No. 121 in the first quarter of 1996 did not have a significant impact on the Company's combined financial statements. The American Institute of Certified Public Accountants has issued an exposure draft to amend the provisions of Statement of Position 91-1, "Software Revenue Recognition." The adoption of the standards in the current version of the exposure draft would not be expected to have a significant impact on the Company's combined financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 2. NOTES PAYABLE TO SHAREHOLDER Notes payable to shareholder are as follows (in thousands):
DECEMBER 31, ---------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Note payable to shareholder; due in equal quarterly installments of $187,500 beginning July 1, 1996, interest payable monthly at the prime rate plus 1% (9.25% at December 31, 1996).......................... $3,000 $2,625 $ 2,437 Notes payable to shareholder; due upon demand, interest accrues monthly at the applicable federal rate (approximately 5.7% at February 7, 1997) (Note 8)..... 0 0 12,900 Less current maturities................................. 375 2,625 15,337 ------ ------ ------- Note payable to shareholder, net of current maturities............................................ $2,625 $ 0 $ 0 ====== ====== =======
F-11 70 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Interest paid to shareholder was $251,000, $294,000 and $271,000 for the years ended December 31, 1994, 1995 and 1996, respectively, and $69,000 and $56,000 for the three months ended March 31, 1996 and 1997, respectively. The installment note payable to shareholder contains an acceleration provision at the option of the shareholder upon certain changes in capital structure, as defined. As a result of the stock recapitalization discussed in Note 9, that right became exercisable. The note has therefore been classified as current at December 31, 1996 as a result of the acceleration option. 3. INCOME TAXES In connection with the planned Offering, the Company will convert from an S corporation to a C corporation and, accordingly, will be subject to future federal and state income taxes. Upon conversion to C corporation status, the Company will record deferred taxes for which it will be responsible following termination of S corporation status. The assets below will be reflected on the balance sheet of the Company with a corresponding non-recurring income amount in the statement of operations at the completion of the Offering. The components of the pro forma total deferred tax assets as of December 31, 1996 are as follows (in thousands): Deferred tax assets: Deferred revenue.......................................... $ 321 Other accrued liabilities................................. 198 Allowance for doubtful accounts........................... 171 Accrued commissions....................................... 115 Accrued rent.............................................. 105 Depreciation.............................................. 95 Inventory................................................. 56 ------ Total deferred tax assets......................... $1,061 ======
The following summarizes the components of the pro forma income tax provision for the years ended December 31, 1994, 1995 and 1996 (in thousands):
1994 1995 1996 ------ ------ ------ Current domestic taxes: Federal................................................ $ 664 $1,572 $2,775 State.................................................. 78 185 326 Foreign taxes............................................ (9) 2 (75) Deferred taxes........................................... 431 35 (199) ------ ------ ------ $1,164 $1,794 $2,827 ====== ====== ======
F-12 71 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation from the federal statutory rate to the pro forma tax provision for the years ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 ---- ---- ---- Statutory federal tax rate................................. 34.0% 34.0% 34.0% State income taxes, net of federal tax benefit............. 4.0 4.0 4.0 Foreign operations......................................... 4.0 (0.9) (1.3) Other...................................................... 1.6 0.7 0.5 ---- ---- ---- 43.6% 37.8% 37.2% ==== ==== ====
The Company's effective tax rate is affected by the income or loss at Melita Europe. Melita Europe incurred a loss in fiscal 1994 and had income in 1995 and 1996. This effect is included above as foreign operations. The Company's net operating loss carryforwards are immaterial at December 31, 1996. 4. BENEFIT PLAN Melita has a profit-sharing plan (the "Plan") for substantially all Melita employees meeting the eligibility requirements as defined in the plan agreement. The Plan provides for annual contributions by Melita at the discretion of the board of directors. The Plan also contains a 401(k) feature which allows participants to contribute up to 15% of their eligible compensation, as defined, and provides for discretionary employer matching contributions. Total contributions by Melita to the Plan were $92,000, $90,000 and $119,000 for fiscal 1994, 1995 and 1996, respectively. The Company expensed $31,000 and $63,000 for the three months ended March 31, 1996 and 1997, respectively, related to this Plan. 5. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS At December 31, 1996, the present value of future minimum capital lease payments and future minimum operating lease payments (including leases with related parties) under noncancelable operating leases were as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 1997........................................................ $19 $ 659 1998........................................................ 0 628 1999........................................................ 0 624 2000........................................................ 0 581 2001........................................................ 0 589 Thereafter.................................................. 0 2,369 --- ------ Total future minimum lease payments............... 19 $5,450 ====== Less amounts representing interest.......................... 0 --- Present value of future minimum lease payments.............. $19 ===
The Company's capital and operating leases are primarily for equipment and rental of facilities. Total rental expense for operating leases was $840,000, $728,000 and $751,000 in fiscal 1994, 1995 and 1996, respectively, and $226,000 and $162,000 for the three months ended March 31, 1996 and 1997, respectively. In August 1994, the Company entered into a lease agreement with an unrelated party to lease land and buildings commencing April 1995. The agreement provides for annual rentals of approximately $542,000 to $636,000 per year over a ten-year term. In November 1995, the Company's majority shareholder purchased F-13 72 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the land and buildings and now rents them to the Company under the terms of the original lease. Rent expense paid to the shareholder was $60,000 and $543,000 in fiscal 1995 and 1996, respectively, and $181,000 and $136,000 for the three months ended March 31, 1996 and 1997, respectively. LEGAL PROCEEDINGS Many of the Company's installations involve products that are critical to the operations of its clients' businesses. Any failure in a Company product could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. Although the Company attempts to limit contractually its liability for damages arising from product failures or negligent acts or omissions, there can be no assurance the limitations of liability set forth in its contracts will be enforceable in all instances. The Company is subject to legal proceedings and claims which have arisen in the ordinary course of business. In the opinion of management, the amount of potential liability with respect to these actions will not materially affect the financial position or results of operations of the Company. RELATED-PARTY TRANSACTIONS During 1994, the Company incurred and paid $325,000 in research and development fees to a related party (through family relationship). The Company did not incur these fees in 1995 or 1996. 6. STOCK OPTION PLANS During 1992, the Company approved a stock option plan (the "1992 Plan") for key employees for which 640,000 shares of common stock were authorized for use in the plan. During 1995, the number of authorized shares was increased to 1,000,000 shares of common stock. Options under the plan are granted at estimated fair market value as determined by the board of directors and are exercisable 14 months after an initial public offering or ratably over a three-year period beginning seven years from the plan initiation date, but in no case can the exercise period continue beyond 10 years. Options granted vest ratably over a four- or five-year employment period. The Company reserves the right to purchase vested options at the then-estimated fair market value, less the applicable exercise price prior to the date of an initial public offering. During 1994, 1995 and 1996, the Company purchased 22,311, 44,294 and 30,250, respectively, vested but unexercisable options held by terminated employees for $3,570, $2,658 and $39,774, respectively. Cash paid to repurchase options is expensed as incurred. On February 6, 1997, the Company approved the 1997 Stock Option Plan (the "1997 Plan") for which 1,350,000 shares of common stock were authorized for issuance less any options issued under the 1992 stock option plan. Options under the 1997 Plan are granted at the estimated fair market value and are exercisable based on the specific terms of the stock option grant, but in no case can extend beyond ten years past the date of grant. The options vest primarily over a four-year period subject to acceleration upon the achievement of certain performance measures. On February 6, 1997, the Company issued options to purchase an aggregate of 125,000 shares of common stock at $5.50 per share under the 1997 Plan. As of March 31, 1997, 20,000 options were exercisable under the 1997 Plan. F-14 73 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Activity for the 1992 Plan and the 1997 Plan is as follows:
OPTION OPTIONS PRICE -------- ----------- Options outstanding at December 31, 1993.................... 303,848 $2.75-$2.96 Granted................................................... 36,375 2.91 Exercised................................................. 0 Forfeited/repurchased..................................... (58,098) 2.75- 2.96 --------- Outstanding at December 31, 1994............................ 282,125 2.75- 2.96 Granted................................................... 740,525 2.81- 3.00 Exercised................................................. 0 Forfeited/repurchased..................................... (161,200) 2.81 --------- Outstanding at December 31, 1995............................ 861,450 2.75- 3.00 Granted................................................... 133,785 4.07 Exercised................................................. 0 Forfeited/repurchased..................................... (57,463) 2.75- 4.07 --------- Outstanding at December 31, 1996............................ 937,772 2.75- 4.07 Granted................................................... 168,325 5.50 Exercised................................................. 0 Forfeited/repurchased..................................... (2,000) 2.81- 4.07 --------- Outstanding at March 31, 1997............................... 1,104,097 =========
At December 31, 1996, options to purchase 62,228 shares were available for future grant and no shares were exercisable due to the stock option plan provision for the exercise date noted above. At March 31, 1997, options to purchase 20,000 shares were excercisable and 245,903 shares were available for grant. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" which defines a fair value-based method of accounting for an employee stock option plan or similar equity instrument. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB No. 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value-based method of accounting defined in the statement had been applied. The Company has elected to account for its stock-based compensation plan under APB No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1995 and 1996 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions used for grants in 1995 and 1996: Risk-free interest rate..................................... 5.4%-7.8% Expected dividend yield..................................... 0 Expected lives.............................................. 4-5 years Expected volatility......................................... 65%
The total value of the options granted during the years ended December 31, 1995 and 1996 were computed as approximately $996,000 and $264,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS No. 123, the F-15 74 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Company's reported pro forma net income and pro forma net income per share for the years ended December 31, 1995 and 1996 would have decreased to the following pro forma amounts (in thousands):
1995 1996 ------ ------ Pro forma net income: As reported in the financial statements................... $2,955 $4,782 Pro forma in accordance with SFAS No. 123................. 2,867 4,581 Pro forma net income per common and common equivalent share As reported in the financial statements................... -- .39 Pro forma in accordance with SFAS No. 123................. -- .37
7. SEGMENT AND GEOGRAPHIC INFORMATION The Company is a multinational corporation with operations in the United States and the United Kingdom. The following represents total revenues, net income and total assets of the following countries representing over 10% of the combined totals for the periods presented (in thousands):
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- United States: Total revenues......................... $21,483 $27,356 $37,568 $ 9,361 $13,777 Net income............................. 3,093 4,624 7,157 2,303 3,069 Total assets........................... 16,704 19,305 23,799 20,695 26,790 United Kingdom: Total revenues......................... $ 1,309 $ 3,252 $ 4,292 $ 415 $ 326 Net (loss) income...................... (421) 125 452 (263) (749) Total assets........................... 931 1,623 3,270 1,638 1,315 Other: Total revenues......................... $ 4,364 $ 4,674 $ 5,680 $ 1,245 $ 566
8. SUBSEQUENT EVENTS INITIAL PUBLIC OFFERING In the second quarter of 1997, the Company is planning an initial public offering of its common stock. There can be no assurance that the Offering will be completed. Prior to the Offering, the Company will pay a cash distribution to shareholders equal to the amount of undistributed S corporation earnings for both Melita and Inventions from September 1, 1988 through the date of the Offering. COMBINATION Concurrent with the Offering, the shareholders of Melita Europe and Inventions will contribute their respective shares in exchange for 3,143,395 shares of Melita. The combination will be treated similar to a pooling of interest and no step-up in basis will be recorded as the entities involved are under common control. UNAUDITED PRO FORMA INFORMATION The accompanying unaudited pro forma combined balance sheet as of March 31, 1997 is based on the Company's historical balance sheet as of March 31, 1997, as adjusted to reflect (i) the combination of Melita, F-16 75 MELITA INTERNATIONAL CORPORATION, MELITA EUROPE LIMITED AND INVENTIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Melita Europe and Inventions through the issuance of 3,143,395 shares of Melita's no par value common stock (post recapitalization and reverse stock split), (ii) the payment of the notes payable to shareholder of $15,337,000 and the accrued interest thereon as discussed below, (iii) the recording of current deferred tax assets of approximately $1,060,000 as a result of the change in corporate filing status upon the consummation of the offering discussed in Note 3, and (iv) the effects on historical retained earnings of the payment of the distribution to shareholders of the undistributed S corporation earnings at March 31, 1997. The pro forma information does not give effect to the proceeds to the Company of the Offering. Using a portion of the proceeds of the Offering and other funds, the Company intends to distribute to the pre-offering shareholders all undistributed S corporation earnings from September 1, 1988 to the effective date of the Offering. At December 31, 1996, the undistributed S corporation earnings of the Company were approximately $14,400,000. Subsequent to December 31, 1996, the Company distributed these amounts to the principal shareholders in the form of approximately $1,500,000 in cash and two notes having an aggregate principal amount of approximately $12,900,000. The notes carry an interest rate equal to the applicable federal rate under the Internal Revenue Code, (approximately 5.7% at February 7, 1997). The principal amount of the notes, together with the accrued interest on the notes through the effective date of the Offering (estimated to be approximately $250,000), will be repaid using a portion of the proceeds of the Offering. At March 31, 1997, the additional undistributed S corporation earnings of the Company were estimated to be approximately $2,500,000. The Company expects to accumulate additional earnings from April 1, 1997 to the effective date of the Offering which will also be distributed to the pre-offering shareholders. 9. STOCK RECAPITALIZATION On February 7, 1997, the Company and Inventions recapitalized their authorized, issued, and outstanding common stock by declaring a stock dividend of 99 shares of nonvoting common stock with respect to each outstanding share of voting common stock. In connection with the stock dividend, the Company amended its articles of incorporation to increase its authorized capital stock to 2,000,000,000 shares, consisting of 20,000,000 shares of voting common stock and 1,980,000,000 shares of nonvoting common stock and Inventions amended its articles of incorporation to increase its authorized capital stock to 10,000 shares, consisting of 100 shares of voting common stock and 9,900 shares of nonvoting common stock. Concurrently with the effective date of the Offering, the Company will effect a 100 to 1 reverse stock split to return the number of authorized, issued, and outstanding shares to the original number of shares. Accordingly, the financial statements reflect the capitalization of the Company as if the stock dividend and the reverse stock split occurred at the beginning of each period presented. Additionally, upon completion of this Offering, the Company's authorized capital stock will consist of 100,000,000 shares of common stock, no par value per share, and 20,000,000 shares of preferred stock, no par value per share. F-17 76 3. Inside (second to) back page graphics portray a screen generated by the Company's Magellan product. The screen is labeled "Magellan Application Interpreter." The text appearing above the picture of the screen is as follows: "Provides agent with information, not just data.... Megellan(TM) navigates multiple corporate data sources and presents needed information in a Single System Image View(TM). Solutions from basic "screen pops" to sophisticated customer interaction applications can be created and modified on-the-fly without programming. Magellan(TM) allows applications to be developed and deployed quickly, making agents more efficient by presenting them with the information needed to make timely and informed decisions." The image of the "Magellan Application Interpreter" screen is enhanced by text that highlights Magellan's features as follows: - Employs script windows to bring together text and real-time data from multiple resources. - Customer data may be entered with the click of a mouse. - Customizes on-line help functions. - Displays talk time with the call gauge. - Programmable action buttons for background applications. - Buttons may be customized to display specific actions and reactions. - Imports visual elements in graphic boxes. -2- 77 4. Inside back page is captioned: "Melita's Command Post(TM) graphical desktop lets supervisors monitor call center activity at a glance." Graphics portray a screen generated by the Company's PhoneFrame(R) CS product. The screen is labeled "Production Monitoring." Features of the screen are highlighted by the following text: " - Call List Display Panel. Displays status of active calling lists. - The Tool Bar. Brings up different productivity views to monitor and control the activity of a call center. - Agent Status Legend. User defined legends to choose conditions or calling states. - ViewPort Display Area. Real time production monitoring of agent status using customized floor plans. - Trunk State Display Panel. Graphically depicts enabled and disabled trunk states." -3- 78 ====================================================== No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction in which such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company or that the information contained herein is correct as of any time subsequent to the date hereof. ---------------------------- TABLE OF CONTENTS ----------------------------
Page ---- Prospectus Summary.................... 3 Risk Factors.......................... 6 Termination of S Corporation Status and Related Distributions........... 14 Use of Proceeds....................... 15 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Combined Financial Data...... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 27 Management............................ 39 Principal Shareholders................ 46 Certain Transactions.................. 47 Description of Capital Stock.......... 49 Shares Eligible for Future Sale....... 53 Underwriting.......................... 54 Legal Matters......................... 55 Experts............................... 55 Additional Information................ 55 Index to Combined Financial Statements.......................... F-1
---------------------------- Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, 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. ====================================================== ====================================================== 3,500,000 SHARES MELITA(R) INTERNATIONAL LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY , 1997 ====================================================== 79 PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission registration fee......... $ 10,606 National Association of Securities Dealers, Inc. fee........ 4,000 Nasdaq National Market listing fee.......................... 54,109 Accountants' fees and expenses.............................. 250,000 Legal fees and expenses..................................... 350,000 Blue Sky fees and expenses.................................. 10,000 Transfer Agent's fees and expenses.......................... 10,000 Printing and engraving expenses............................. 200,000 Miscellaneous............................................... 411,285 ---------- Total Expenses.................................... $1,300,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Bylaws provide that the Company shall indemnify each of its directors and officers to the extent that he or she is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director, officer, employee or agent of the Company, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with such action, suit or proceeding; provided, however, that no indemnification shall be made for (i) any appropriation, in violation of his duties, of any business opportunity of the Company, (ii) acts or omissions which involve intentional misconduct or a knowing violation of law, (iii) any liability under Section 14-2-832 of the GBCC, which relates to unlawful payments of dividends and unlawful stock repurchases and redemptions, or (iv) any transaction from which he or she derived an improper personal benefit. Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto also contains certain provisions pursuant to which certain officers, directors and controlling persons of the Company may be entitled to be indemnified by the Underwriters named therein. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Registrant has issued the securities set forth below which were not registered under the Securities Act. In connection with the Company's acquisition of all of the outstanding shares of Melita Europe and Inventions by share exchange, upon the effective date of this offering the Company will issue a total of 3,143,395 shares of its Common Stock to the former shareholders of Melita Europe and Inventions. The consideration to be issued by the Company was determined based on a share exchange ratio analysis of the Company, Melita Europe and Inventions by an independent appraiser which established their relative values to be $60,753,982, $4,225,000 and $16,200,000, respectively. The Registrant has issued stock options for an aggregate of 1,659,485 shares of its Common Stock under the 1992 Stock Option Plan and the 1997 Stock Option Plan. Options for an aggregate of 1,104,097 shares are currently outstanding at a weighted average exercise price of $3.43 per share. No underwriters were engaged in connection with any of the foregoing issuances of securities. The sale and issuance of shares listed above were exempt from registration under the Securities Act by virtue of Sections 3(a), 3(b) and 4(a) of the Securities Act and in reliance on Rule 701 and Regulation D promulgated thereunder. II-1 80 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. The following is a list of exhibits filed as part of the Registration Statement.
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 -- Form of Underwriting Agreement. 2.1+ -- Share Exchange Agreement by and between the Registrant and the shareholders of Melita Europe Limited. 2.2+ -- Share Exchange Agreement by and between the Registrant and the shareholders of Inventions, Inc. 3.1+ -- Restated Articles of Incorporation of the Registrant dated June 4, 1992, as amended February 7, 1997. 3.2+ -- Bylaws of the Registrant. 3.3+ -- Form of Amended and Restated Articles of Incorporation of the Registrant, to be effective upon the effectiveness of this offering. 3.4+ -- Form of Amended and Restated Bylaws of the Registrant, to be effective upon the effectiveness of this offering. 4.1+ -- See Exhibits 3.3 and 3.4 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Registrant defining rights of the holders of Common Stock of the Registrant. 4.2+ -- Specimen Stock Certificate. 5.1 -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the Registrant, as to the legality of the shares being registered. 10.1+ -- Lease Agreement between the Registrant and 5051 Peachtree Corners Circle, L.L.C. 10.2+ -- 1992 Stock Option Plan effective June 4, 1992, as amended March 1, 1997. 10.3+ -- 1997 Stock Option Plan effective February 6, 1997. 10.4+ -- Employee Stock Purchase Plan adopted March 1, 1997. 10.5+ -- 401(k) Profit Sharing Plan as amended effective January 1, 1993. 10.6+ -- Employment Agreement between the Registrant and Aleksander Szlam dated March 5, 1997. 10.7+ -- Employment Agreement between the Registrant and J. Neil Smith dated March 5, 1997. 10.8+ -- Form of Tax Indemnification Agreement between the Registrant and certain shareholders of the Registrant. 10.9+ -- Form of Tax Indemnification Agreement between Inventions, Inc. and certain shareholders of Inventions, Inc. 10.10+ -- $3,000,000 Note of the Registrant in favor of Aleksander Szlam dated June 19, 1992. 11.1+ -- Statement re: Computation of Per Share Earnings. 21.1+ -- List of Subsidiaries. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of BDO Stoy Hayward. 23.3 -- Consent of Morris, Manning & Martin, L.L.P. (included in Exhibit 5.1). 24.1+ -- Powers of Attorney (included on signature page). 27.1+ -- Financial Data Schedule. (For SEC use only) 99.1+ -- Report of Independent Public Accountants on Financial Statement Schedule.
- --------------- + Previously filed. (b) Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-2 81 (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The Registrant hereby undertakes that: (i) 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 the Registration Statement as of the time it was declared effective. (ii) For purposes 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-3 82 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia on the 4th day of June, 1997. Melita International Corporation By: /s/ J. NEIL SMITH ------------------------------------ J. Neil Smith President and Chief Operating Officer Pursuant to the requirements of the Securities Act, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ALEKSANDER SZLAM Chairman of the Board and Chief June 4, 1997 - ----------------------------------------------------- Executive Officer (Principal Aleksander Szlam Executive Officer) /s/ J. NEIL SMITH Director June 4, 1997 - ----------------------------------------------------- J. Neil Smith /s/ MARK B. ADAMS Vice President, Finance and June 4, 1997 - ----------------------------------------------------- Chief Financial Officer Mark B. Adams (Principal Financial and Accounting Officer)
II-4 83 SCHEDULE II MELITA INTERNATIONAL CORPORATION MELITA EUROPE LIMITED AND INVENTIONS, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
CHARGED BALANCE AT TO COSTS BALANCE BEGINNING AND AT END CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR -------------- ---------- -------- ------------- -------- 1994 Allowance for doubtful accounts............. $200,000 $146,000 116,000 $230,000 Allowance for inventory obsolescence........ 40,000 40,000 64,000 16,000 1995 Allowance for doubtful accounts............. 230,000 117,000 16,000 331,000 Allowance for inventory obsolescence........ 16,000 130,000 -- 146,000 1996 Allowance for doubtful accounts............. 331,000 260,000 104,000 487,000 Allowance for inventory obsolescence........ 146,000 831,000 492,000 485,000
- --------------- (1) Represents amounts written off EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 3,500,000 Shares Melita International Corporation Common Stock UNDERWRITING AGREEMENT DATED June 4, 1997 2 UNDERWRITING AGREEMENT June 4, 1997 MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY LLC As Representatives of the several Underwriters c/o MONTGOMERY SECURITIES Two International Place - 25th Floor Boston, Massachusetts 02110 Ladies and Gentlemen: INTRODUCTORY. Melita International Corporation, a Georgia corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of 3,500,000 shares (the "Firm Common Shares") of its Common Stock, no par value (the "Common Stock"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional 525,000 shares (the "Optional Common Shares") of Common Stock, as provided in Section 2 hereof. The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the "Common Shares." Montgomery Securities and Robertson, Stephens & Company LLC have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-22855), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement." Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement," and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of Montgomery Securities, 1 3 elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated May 9, 1997 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company and Aleksander Szlam and Szlam Partners, L.P. (together the "Principal Shareholders") hereby confirm their agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES. A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS. Each of the Company and the Principal Shareholders hereby represent, warrant and covenant to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and -2- 4 at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representative expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives two complete manually signed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement and the other materials permitted by the Securities Act. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. -3- 5 (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. Arthur Andersen LLP and BDO Stoy Hayward, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The combined financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates of such financial statements and the results of their operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved as certified by the independent accountants named in paragraph 1(A)(h) above, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions -4- 6 "Prospectus Summary--Summary Combined Financial Information," "Selected Combined Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own and lease its properties and to conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21.1 to the Registration Statement. (k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus -5- 7 accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (l) Stock Exchange Listing. The Common Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its articles of incorporation or other charter documents or bylaws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other material instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the articles of incorporation or other charter documents or bylaws of the Company or any subsidiary, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or require the consent of any other part to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the National Association of Securities Dealers, Inc. (the "NASD"). (n) No Material Actions or Proceedings. There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any officer or director -6- 8 of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is threatened or imminent. (o) Intellectual Property Rights. Except as disclosed in the Prospectus, the Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. (p) All Necessary Permits, etc. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (q) Title to Properties. The Company and each of its subsidiaries has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A)(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the -7- 9 use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (r) Tax Law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A)(i) above as required by generally accepted accounting principles in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined. (s) Company Not an "Investment Company." The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (t) Insurance. Each of the Company and its subsidiaries is insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and other risks customarily insured against by other comparable companies. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (u) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. -8- 10 (v) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. (w) No Unlawful Contributions or Other Payments. To the best of the Company's knowledge after due inquiry, neither the Company nor any of its subsidiaries nor, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (x) Company's Accounting System. The Company maintains a system of 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 as applied in the United States 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. (y) Compliance with Environmental Laws. Except as would not, individually or in the aggregate, result in a Material Adverse Change (i) to the best of the Company's knowledge, neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company or its subsidiaries under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company or any of its subsidiaries received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company or any of its subsidiaries is in violation of any Environmental Law; (ii) to the best of the -9- 11 Company's knowledge there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company or any of its subsidiaries, now or in the past (collectively, "Environmental Claims"), pending or, threatened against the Company or any of its subsidiaries or any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or any of its subsidiaries or against any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law. (z) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit -10- 12 plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. (aa) S Corporation Status. For all periods from its election under Subchapter S of the Code until the date of this Agreement, the Company was qualified as an S corporation pursuant to an election validly made under Subchapter S of the Code (which election has not been revoked or terminated for any such period) and the Company has not been subject to federal corporate taxes for such periods. The Company's Subchapter S election was duly terminated on the close of business on the date of this Agreement, and the Company will be subject to federal corporate income taxes from and after the date of this Agreement. B. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SHAREHOLDERS. In addition to the representations, warranties and covenants set forth in Section 1(A), the Principal Shareholders represent, warrant and covenant to each Underwriter as follows: (a) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by or on behalf of the Principal Shareholders and is a valid and binding agreement of the Principal Shareholders, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) Non-Contravention; No Further Authorizations or Approvals Required. The execution and delivery by the Principal Shareholders of, and the performance by such Principal Shareholders of their obligations under, this Agreement, will not contravene or conflict with, result in a breach of, or constitute a Default under, or require the consent of any other party to, any agreement or instrument to which such Principal Shareholders are a party or by which either is bound or under which either is entitled to any right or benefit, any provision of applicable law or any judgment, order, decree or regulation applicable to such Principal Shareholders of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Principal Shareholders. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the consummation by such Principal Shareholders of the transactions contemplated in this Agreement. -11- 13 (c) No Registration or Other Similar Rights. Such Principal Shareholders do not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as are described in the Prospectus under "Shares Eligible for Future Sale." (d) No Price Stabilization or Manipulation. Such Principal Shareholders have not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. Any certificate signed by an officer of the Company, executed by him in his official capacity, and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES. The Firm Common Shares. The Company agrees to issue and sell to the several Underwriters the Firm Common Shares on the basis of the representations, warranties and agreements and upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Common Shares set forth opposite their names on Schedule A. The purchase price per Firm Common Share to be paid by the several Underwriters to the Company shall be $[___] per share. The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed to by the Company and the Representatives) at 6:00 a.m. San Francisco time, on [___], or such other time and date not later than 10:30 a.m. San Francisco time, on [___] as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10. -12- 14 The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 525,000 Optional Common Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Common Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. Public Offering of the Common Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. Payment for the Common Shares. Payment for the Common Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. It is understood that the Representatives have been authorized, for their own accounts and the accounts of the several Underwriters, to accept delivery of and give a receipt for, and make payment of the purchase price for, the Firm Common Shares -13- 15 and any Optional Common Shares the Underwriters have agreed to purchase. Montgomery Securities, individually and not as one of the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Delivery of the Common Shares. The Company shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters certificates for the Firm Common Shares at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds to an account designated by the Company for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds to an account designated by the Company for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall reasonably request. SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) Representatives' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the -14- 16 Securities Act) or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object. (b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to promptly prepare (subject to Section 3(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the -15- 17 Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky or state securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in all material respects in the manner described under the caption "Use of Proceeds" in the Prospectus. (g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period beginning after the effective date of the Registration Statement that will satisfy the last paragraph of Section 11(a) of the Securities Act. (i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall file with the Commission all reports on Form SR as may be required under Rule 463 under the Securities Act. (j) Agreement Not To Offer or Sell Additional Securities. During the period of 180 days following the date of the Prospectus, the Company will not, without the prior written consent of Montgomery Securities (which consent -16- 18 may be withheld at the sole discretion of Montgomery Securities), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in the Prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 180 day period without the prior written consent of Montgomery Securities (which consent may be withheld at the sole discretion of Montgomery Securities). (k) Future Reports to the Representative. During the period of five years hereafter the Company will furnish to the Representative at Two International Place, Boston, MA 02110 Attention: M. Benjamin Howe: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, shareholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. Montgomery Securities, on behalf of the several Underwriters, may, in its sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's -17- 19 counsel, independent public or certified pubic accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the Blue Sky laws, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Stock on the Nasdaq National Market, and (ix) all other fees, costs and expenses referred to in Item 14 of Part II of the Registration Statement. Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Principal Shareholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Principal Shareholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: (a) Accountants' Comfort Letter. On the date hereof, the Representatives shall have received from Arthur Andersen LLP and BDO Stoy Hayward, independent public or certified public accountants for the Company, letters dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus (and the Representatives shall have received additional conformed copies for each of the Underwriters of such accountants' letter. -18- 20 (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Representatives' consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (c) No Material Adverse Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, in the judgment of the Representatives there shall not have occurred any Material Adverse Change. (d) Opinions of Counsel for the Company and the Principal Shareholders. On each of the First Closing Date and the Second Closing Date the Representatives shall have received (i) the favorable opinion of Morris, Manning & Martin L.L.P., counsel for the Company and the Principal Shareholders, dated as of such Closing Date, the form of which is attached as Exhibit A and (ii) the favorable opinion of Jones & Askew, LLP, patent counsel for the Company, the form of which is attached as Exhibit B (and the Representatives shall have received additional conformed copies of such counsels' legal opinions for each of the several Underwriters). (e) Opinion of Counsel for the Underwriters. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the -19- 21 favorable opinion of Hale and Dorr LLP, counsel for the Underwriters, dated as of such Closing Date, with respect to the matters set forth in paragraphs (i), (vii), (viii), (ix), (xi), (xii), and the next-to-last paragraph of Exhibit A (and the Representatives shall have received additional conformed copies of such counsel's legal opinion for each of the several Underwriters). (f) Officers' Certificate. On each of the First Closing Date and the Second Closing Date the Representatives shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer or President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) and (c) of this Section 5, and further to the effect that: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1(A) of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (g) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Representatives shall have received from Arthur Andersen LLP and BDO Stoy Hayward, independent public or certified public accountants for the Company, letters dated such date, in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letters furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters). (h) Lock-Up Agreement from Certain Shareholders of the Company. On the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit C hereto from each director, officer and each beneficial owner of Common Stock (as defined and determined according to Rule 13d-3 under the Exchange Act, except that a one hundred eighty day period shall be used rather than the sixty day period set forth therein), and -20- 22 such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. (i) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 5, Section 7, Section 10 or Section 11, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Representatives of the effectiveness of the Registration Statement under the Securities Act. Prior to such effectiveness, this Agreement may be terminated by any party by notice to each of the other parties hereto, and any such termination shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. -21- 23 SECTION 8. INDEMNIFICATION. (a) Indemnification of the Underwriters. Each of the Company and the Principal Shareholders, jointly and severally, agree to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company or the Principal Shareholders, as the case may be), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company or the Principal Shareholders contained herein; or (iv) in whole or in part upon any failure of the Company or the Principal Shareholders to perform their respective obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above; provided that neither the Company nor the Principal Shareholders shall be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by Montgomery Securities) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, -22- 24 liability, expense or action; provided that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense; and provided, further, that the Principal Shareholders shall not be liable under this Section 8(a) for an aggregate amount in excess of the sum of (i) $15,525,000 plus (ii) the aggregate value of any dividends or distributions (other than the distribution of the 1997 Notes described in the Prospectus and excluding any payments of principal or interest under the 1992 Note or the 1997 Notes) made to, or declared or committed to be made to, the shareholders of the Company or any of its subsidiaries between January 1, 1997 and the First Closing Date; and provided, further, that the Principal Shareholders shall not be required to provide indemnification hereunder until the Underwriter or controlling person seeking indemnification shall have first made a demand for payment on the Company with respect to any loss, claim, damage, liability or expense and the Company shall have either rejected such demand or failed to make such requested payment within 60 days after receipt thereof. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company and the Principal Shareholders may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Principal Shareholders, the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person, or the Principal Shareholders may become subject, under the Securities -23- 25 Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon 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, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, the Principal Shareholders, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, the Principal Shareholders, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the last paragraph on the inside front cover page of the Prospectus concerning stabilization by the Underwriters and (B) in the table in the first paragraph and as the second and second to last paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the -24- 26 extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (Montgomery Securities in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) Settlements. The indemnifying party under this Section 8 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 against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party -25- 27 shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Principal Shareholders, on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Principal Shareholders, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Principal Shareholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company and the Principal Shareholders, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company or the Principal Shareholders, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. -26- 28 The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification. The Company, the Principal Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined solely 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 in this Section 9. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the -27- 29 Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party (other than the defaulting Underwriter(s)) to any other party except that the expenses to be paid by the Company under the provisions of Section 4, Section 8 and Section 9 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any of federal, New York or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been -28- 30 insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company or the Principal Shareholders to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Principal Shareholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, or the Principal Shareholders, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 13. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Facsimile: 415-249-5558 Attention: Richard A. Smith with copies to: Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5553 Attention: David A. Baylor, Esq. -29- 31 Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 Facsimile: (617) 526-5000 Attention: Mark G. Borden, Esq. If to the Company: Melita International Corporation 5051 Peachtree Corners Circle Norcross, Georgia 30092-2500 Facsimile: (770) 409-4445 Attention: J. Neil Smith, President with a copy to: Morris, Manning & Martin L.L.P. 3343 Peachtree Road, NE Suite 1600 Atlanta, Georgia 30326 Facsimile: (404) 365-9532 Attention: John F. Smith, Esq. Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. -30- 32 SECTION 16. GOVERNING LAW PROVISIONS. (a) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. (c) Waiver of Immunity. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement -31- 33 may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. -32- 34 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, MELITA INTERNATIONAL CORPORATION By: -------------------------- J. Neil Smith, President PRINCIPAL SHAREHOLDERS Aleksander Szlam SZLAM PARTNERS, L.P. By: -------------------------- Szlam Management Company, LLC By: -------------------------- Aleksander Szlam, Member By: -------------------------- Halina Szlam, Member The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in San Francisco, California as of the date first above written. -33- 35 MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY LLC Acting as Representatives of the several Underwriters named in the attached Schedule A. By: MONTGOMERY SECURITIES By: ---------------------------------- Authorized Signatory -34- 36 SCHEDULE A
NUMBER OF FIRM COMMON SHARES UNDERWRITERS TO BE PURCHASED - ------------ --------------- Montgomery Securities....................................[___] Robertson, Stephens & Company LLC........................[___] [___] ...................................................[___] [___] ...................................................[___] [___] ...................................................[___] --------- Total 3,500,000
--------- 37 EXHIBIT A The final opinion in draft form will be attached as Exhibit A at the time this Agreement is executed. Opinion of counsel for the Company and the Principal Shareholders to be delivered pursuant to Section 5(d) of the Underwriting Agreement. References to the Prospectus in this Exhibit A include any supplements thereto at the Closing Date. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Georgia. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (iv) Each significant subsidiary (as defined in Rule 405 under the Securities Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, to the best knowledge of such counsel, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (v) All of the issued and outstanding capital stock of each such significant subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or, to the best knowledge of such counsel, any pending or threatened claim. 38 (vi) The authorized, issued and outstanding capital stock of the Company (including the Common Stock) conform to the descriptions thereof set forth in the Prospectus. All of the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and, to the best of such counsel's knowledge, have been issued in compliance with the registration and qualification requirements of federal and state securities laws. The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the articles of incorporation and bylaws of the Company and the Georgia Business Corporations Code. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (vii) No shareholder of the Company or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of the Company arising (i) by operation of the articles of incorporation or bylaws of the Company or the Georgia Business Corporations Code or (ii) to the best knowledge of such counsel, otherwise. (viii) To the best knowledge of such counsel the Underwriting Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ix) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable. (x) The Registration Statement and the Rule 462(b) Registration Statement, if any, has been declared effective by the Commission under the Securities Act. To the best knowledge of such counsel, no stop order suspending the effectiveness of either of the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued under the Securities Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to 39 Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Prospectus, and each amendment or supplement to the Registration Statement and the Prospectus, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered) comply as to form in all material respects with the applicable requirements of the Securities Act. (xii) The Common Shares have been approved for listing on the Nasdaq National Market. (xiii) The statements (i) in the Prospectus under the captions "Risk Factors--Certain Anti-Takeover Provisions," "Risk Factors--Shares Eligible For Future Sale," "Business--Regulatory Environment," "Business--Proprietary Rights," "Management -- Employee Benefit Plans," "Management-Agreements with Employees," "Management--Limitation of Liability and Indemnification of Officers and Directors," "Certain Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale," and "Underwriting" and (ii) in Item 14 and Item 15 of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company's articles of incorporation or bylaw provisions, documents or legal proceedings, or legal conclusions, has been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein. (xiv) To the best knowledge of such counsel, there are no legal or governmental actions, suits or proceedings pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein. (xv) To the best knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; and the descriptions thereof and references thereto are correct in all material respects. (xvi) To the best knowledge of such counsel no consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state 40 securities or blue sky laws and under the rules of the NASD. (xvii) The execution and delivery of the Underwriting Agreement by the Company and the performance by the Company of its obligations thereunder (other than performance by the Company of its obligations under the indemnification section of the Underwriting Agreement, as to which no opinion need be rendered) (i) have been duly authorized by all necessary corporate action on the part of the Company; (ii) will not result in any violation of the provisions of the articles of incorporation or other charter documents or bylaws of the Company or any subsidiary; (iii) to the best knowledge of such counsel, will not constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to any material Existing Instrument; or (iv) to the best knowledge of such counsel, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. (xviii) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act. (xix) To the best knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement, except for such rights as have been duly waived. (xx) To the best knowledge of such counsel, neither the Company nor any subsidiary is in violation of its articles of incorporation or other charter documents or bylaws or any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary or is in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument, except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. (xxi) To the best knowledge of such counsel, the Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of, and is a valid and binding agreement of, the Principal Shareholders, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. 41 (xxii) The execution and delivery by the Principal Shareholders of, and the performance by the Principal Shareholders of their obligations under, the Underwriting Agreement will not contravene or conflict with, result in a breach of, constitute a default under, violate or contravene any provision of applicable law or regulation, or violate, result in a breach of or constitute a default under the terms of any agreement or instrument to which the Principal Shareholders are a party or by which they are bound, or any judgment, order or decree applicable to the Principal Shareholders of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over the Principal Shareholders. (xxiii) To the best of such counsel's knowledge, no consent, approval, authorization or other order of, or registration or filing with, any court or governmental authority or agency, is required for the consummation by the Principal Shareholders of the transactions contemplated in the Underwriting Agreement. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public or certified public accountants for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as specified above), and any supplements or amendments thereto, on the basis of the foregoing, nothing has come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, 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 or that the Prospectus, as of its date or at the First Closing Date or the Second 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 therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or schedules or other financial or statistical data derived therefrom, included in the Registration Statement or the Prospectus or any amendments or supplements thereto). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the Georgia Business Corporations Code or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be 42 satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company, the Principal Shareholders and public officials. 43 EXHIBIT B The final opinion in draft form should be attached as Exhibit B at the time this Agreement is executed. Opinion of patent counsel for the Company to be delivered pursuant to Section 5(d) of the Underwriting Agreement. References to the Prospectus in this Exhibit B include any supplements thereto at the Closing Date. (i) to the knowledge of such counsel, the Company owns or has obtained licenses for all applications relating to the patents and patent applications, trademarks, service marks and trademark and service mark applications (the "Patent and Trademark Rights") described in the Prospectus as being owned or used by or licensed to the Company; (ii) to the knowledge of such counsel (A) except as described in the Prospectus, there are no rights of third parties to any Patent and Trademark Rights described in the Prospectus as being owned by or licensed to the Company or that is necessary for the conduct of its business; (B) there is no pending or threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to such Patent and Trademark Rights, and such counsel is unaware of any facts which would form a reasonable basis for any such claim; (C) there is no pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of such Patent or Trademark Rights, and such counsel is unaware of any facts which would form a reasonable basis for any such claim; (D) there is no pending or threatened action, suit, proceeding or claim by others that the Company infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary right of others, and such counsel is unaware of any facts which would form a reasonable basis for any such claim; (E) there is no patent or patent application not owned by the Company which contains claims that dominate or may dominate any Patent or Trademark Rights described in the Prospectus as being owned or used by or licensed to the Company or that is necessary for the conduct of its business or that interferes with the issued or pending claims of any such Patent or Trademark Right; and (F) there is no prior art that may render any patent held by the Company invalid or any patent application held by the Company unpatentable which has not been disclosed to the U.S. Patent and Trademark Office; and (iii) the statements in the Prospectus under the captions "Risk Factors-Intellectual Property Rights," "Business--Strategy," and in the first paragraph of text under the caption "Business--Proprietary Rights," insofar as such statements constitute a summary of legal matters, documents or proceedings relating to Patent 44 or Trademark Rights, are accurate in all material respects and fairly present in all material respects the information purported to be shown. 45 EXHIBIT C [Date] Montgomery Securities As Representatives of the Several Underwriters c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 RE: Melita International Corporation (the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 180 days after the date of the Prospectus. Notwithstanding the foregoing, the undersigned may make bona fide gifts or transfers effected through private transactions to family members of the undersigned or to trusts, all of the beneficiaries of which are family members of the undersigned, provided such donee agrees in writing for the benefit of Montgomery Securities to be bound by restrictions the same as those set forth in this letter. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common 46 Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. - ----------------------------------- Printed Name of Holder By: -------------------------------- Signature - ----------------------------------- Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) EX-5.1 3 LEGALITY OPINION OF MORRIS, MANNING & MARTIN 1 EXHIBIT 5.1 [MORRIS, MANNING & MARTIN LETTERHEAD] June 4, 1997 Melita International Corporation 5051 Peachtree Corners Circle Norcross, Georgia 30092-2500 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have served as counsel for Melita International Corporation, a Georgia corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, pursuant to the Company's Registration Statement on Form S-1 (No. 333-22855)(the "Registration Statement"), of a proposed public offering by the Company of 3,500,000 shares (the "Shares") of the Company's authorized common stock, no par value (the "Common Stock"), all of which are to be sold by the Company. In addition, the Company has granted to the underwriters an option to purchase 525,000 shares of Common Stock to cover over-allotments, if any (the "Over-Allotment Shares"). We have examined and are familiar with originals or copies (certified or otherwise identified to our satisfaction) of such documents, corporate records and other instruments relating to the incorporation of the Company and to the authorization and issuance of the outstanding shares of Common Stock, the Shares and the Over-Allotment Shares to be sold by the Company, as appropriate, as we have deemed necessary and advisable. Based upon the foregoing and having regard for such legal considerations that we have deemed relevant, it is our opinion that: 1. The 3,500,000 Shares to be issued and sold by the Company will be, upon issuance, sale and delivery as contemplated in the Registration Statement, legally and validly issued, fully paid and nonassessable. 2. The Over-Allotment Shares to be sold by the Company, upon the exercise of the over-allotment option by the Underwriters, will be 2 MORRIS, MANNING & MARTIN a limited liability partnership March 3, 1997 Page 2 legally and validly issued, fully paid and nonassessable. We do hereby consent to the reference to our firm under the heading "Legal Matters" in the Prospectus contained in the Registration Statement and to the filing of this Opinion as Exhibit 5.1 thereto. Respectfully, MORRIS, MANNING & MARTIN, L.L.P. EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 [LETTERHEAD OF ARTHUR ANDERSEN LLP APPEARS HERE] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our firm) included in or made part of this Registration Statement. ARTHUR ANDERSEN LLP Atlanta, Georgia June 4, 1997 EX-23.2 5 CONSENT OF BDO STAY HAYWARD 1 EXHIBIT 23.2 [LETTERHEAD OF BDO STOY HAYWARD APPEARS HERE] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the use in the Prospectus constituting a part of this Registration Statement on Form S-1 of our report dated April 25, 1997 on the financial statements of Melita Europe Limited as of December 31, 1995 and December 31, 1996 and for the three years in the period ended December 31, 1996. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO STOY HAYWARD Ewell, Epsom Surrey June 4, 1997 -----END PRIVACY-ENHANCED MESSAGE-----