-----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, QCcYveqPd04zG7mFGk+St06BBoWZ0DIXgkjBzSBsTeE1ZXDRRMvex54dCK7/yL8D n7kJnAx735rjvcnyVonsKQ== 0000950144-97-009272.txt : 19970815 0000950144-97-009272.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950144-97-009272 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22317 FILM NUMBER: 97663507 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 10-Q 1 MELITA INTERNATIONAL 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . --------------- ----------------- Commission file number 0-22317 ------- MELITA INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in its Charter) GEORGIA 58-1378534 (State or other Jurisdiction of Incorporation (I.R.S. Employer Identification or Organization) Number) 5051 PEACHTREE CORNERS CIRCLE NORCROSS, GEORGIA 30092-2500 (770) 239-4330 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, outstanding as of August 11, 1997: 15,168,395 shares. Page 1 of 13 2 PART 1 - FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1997 (Unaudited) 3 and December 31, 1996. Unaudited Consolidated Statements of Income for the three months ended June 30, 4 1997 and 1996 and for the six months ended June 30, 1997 and 1996. Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 5 1997 and 1996 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and 8 Results of Operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings 10 Item 2. Changes in Securities 10 Item 3. Defaults Upon Senior Securities 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11
Page 2 of 13 3 MELITA INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE DATA)
June 30, December 31, 1997 1996 ----------- ------------ Current assets: (Unaudited) Cash and cash equivalents $ 29,984 $ 9,849 Accounts receivable, net of allowance for doubtful 12,315 11,860 accounts of $318 at June 30, 1997 and $487 at December 31, 1996 Inventories 1,355 2,442 Deferred taxes 1,473 -- Prepaid expenses and other 398 170 ----------- ----------- Total current assets 45,525 24,321 Property and equipment, net of accumulated depreciation 3,458 2,724 Other assets 35 24 ----------- ----------- $ 49,018 $ 27,069 =========== =========== Current liabilities: Accounts payable $ 2,826 $ 2,429 Accrued liabilities 6,193 4,210 Deferred revenue 3,803 3,065 Customer deposits 2,110 3,849 Current maturities of notes payable to shareholder -- 2,625 Current maturities of capital lease obligations -- 19 ----------- ----------- Total current liabilities 14,932 16,197 Commitments and contingencies Shareholders' equity Preferred Stock: Melita International Corporation, no par value; 20,000 shares authorized, no shares issued and outstanding at December 31, 1996 and June 30, 1997 -- -- Common Stock: Melita International Corporation, no par value; 100,000 shares authorized, 8,000 shares issued and outstanding December 31, 1996 and 15,168 shares issued and outstanding June 30, 1997 69 2 Melita Europe Limited, L1 par value; 50 shares authorized, 31 shares issued and outstanding December 31, 1996 and no shares issued and outstanding at June 30, 1997 -- 46 Inventions, Inc., $5 par value; .1 shares authorized, .1 shares issued and outstanding December 31, 1996 and no shares issued and outstanding at June 30, 1997 -- 1 Additional paid-in capital 36,102 20 Cumulative foreign currency translation adjustment 8 35 Retained earnings (deficit) (2,093) 10,768 ----------- ----------- Total shareholders' equity (deficit) 34,086 10,872 ----------- ----------- $ 49,018 $ 27,069 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. Page 3 of 13 4 MELITA INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT FOR SHARE AMOUNTS) (UNAUDITED)
For the three months ended For the six months ended June 30, June 30, 1997 1996 1997 1996 -------------- ------------- ------------ ------------ Net revenues: Product $ 10,714 $ 8,108 $ 20,979 $ 15,799 Service 4,816 3,778 9,220 7,108 ------------- ------------- ----------- ------------ Total revenues 15,530 11,886 30,199 22,907 Cost of revenues: Product 3,565 2,990 7,401 5,439 Service 2,433 1,733 4,364 3,172 ------------- ------------- ----------- ------------ Total cost of revenues 5,998 4,723 11,765 8,611 Gross margin 9,532 7,163 18,434 14,296 Operating expenses: Research and development 1,644 1,151 3,025 2,096 Selling, general and administrative 5,231 3,992 10,365 8,129 ------------- ------------- ----------- ------------ Total operating expenses 6,875 5,143 13,390 10,225 ------------- ------------- ----------- ------------ Income from operations 2,657 2,020 5,044 4,071 Other income (expense), net (9) 54 (60) 43 ------------- ------------- ----------- ------------ Income before income taxes 2,648 2,074 4,984 4,114 Income tax provision (benefit): Tax provision as 'C' Corporation 393 -- 409 -- Deferred tax adjustment (1,473) -- (1,473) -- ------------- ------------- ----------- ------------ Net income after income tax $ 3,728 $ 2,074 $ 6,048 $ 4,114 ============= ============= =========== ============ Income before income taxes 2,648 2,074 4,984 4,114 Pro forma income tax provision (Note 6) 983 775 1,894 1,537 ------------- ------------- ----------- ------------ Pro forma net income $ 1,665 $ 1,299 $ 3,090 $ 2,577 ============= ============= =========== ============ Primary earnings per share $ 0.29 $ 0.17 $ 0.47 $ 0.33 ============= ============= =========== ============ Weighted average common and common equivalent shares 12,868 12,360 12,758 12,360 Pro forma earnings per share $ 0.13 $ 0.11 $ 0.24 $ 0.21 ============= ============= =========== ============
The accompanying notes are an integral part of these consolidated statements. Page 4 of 13 5 MELITA INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six months ended June 30, 1997 1996 ---------- ---------- Cash flows from operating activities: Net income $ 6,048 $ 4,114 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 655 504 Deferred taxes (1,473) -- Changes in assets and liabilities: Accounts receivable (455) (1,955) Inventories 1,087 (494) Prepaid expenses and other assets (228) 47 Accounts payable 397 (264) Accrued liabilities 1,982 67 Deferred revenue 740 1,329 Customer deposits (1,739) (237) Other, net (38) (1) ---------- ---------- Total adjustments 928 (1,004) ---------- ---------- Net cash provided by operating activities 6,976 3,110 Cash flows from investing activities: Purchases of property and equipment (1,389) (741) ---------- ---------- Net cash used in investing activities (1,389) (741) Cash flows from financing activities: Repayment of capital lease obligations (19) (28) Net proceeds from issuance of common stock 36,102 -- Repayment of note payable to shareholder (15,525) -- Distributions to shareholders (6,010) (3,181) ---------- ---------- Net cash provided by financing activities 14,548 (3,209) Net change in cash and cash equivalents 20,135 (840) Cash and cash equivalents, beginning of period 9,849 5,959 ---------- ---------- Cash and cash equivalents, end of period $ 29,984 $ 5,119 ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest during the period $ 360 $ 139 ========== ========== Income taxes paid $ 32 $ -- ========== ==========
Page 5 of 13 6 MELITA INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) 1. Basis of Presentation The unaudited consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles applicable to interim financial statements. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, these consolidated financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position as of June 30, 1997, the results of operations and changes in cash flows for the six months ended June 30, 1997 and 1996. The interim results for the three months and six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company's combined financial statements for the year ended December 31, 1996, as filed in its Prospectus dated June 4, 1997. 2. Principles of Consolidation The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. 3. Completion of Initial Public Offering and Combination On June 4, 1997, the Company completed its initial public offering ("IPO") of common stock. The Company sold 4,025 shares of common stock, including the underwriters' over-allotment of 525 shares, for $40,250 less issuance costs of $4,148. Concurrently with the IPO, the Company issued 3,143 shares in connection with the combination of Melita International, Melita Europe Limited and Inventions, Inc. 4. Inventories Inventories consist of the following at:
June 30, 1997 December 31, 1996 ------------- ----------------- Raw Materials 631 1,059 Work in process 242 337 Finished goods 482 1,046 ----- ------ Total inventories 1,355 2,442
5. Earnings Per Share Earnings per share are computed using the weighted-average number of common stock and dilutive common stock equivalents ("CSE") shares from stock options and warrants (using the treasury stock method) outstanding during each period. Also included are (1) common stock and CSE's issued at a price below the initial public offering price during the 12 month period prior to June 4, 1997, and (2) CSE's in an amount necessary to pay the shareholder distributions. Page 6 of 13 7 6. Income Taxes In connection with the IPO the Company converted from an S corporation to a C corporation and, accordingly, is subject to federal and state income taxes. Upon the conversion, the Company recognized a one-time benefit by recording the asset related to the future reduction of income tax payments due to timing differences between the recognition of income for financial statements and income tax regulations. Pro forma income tax provisions reflect the Company's anticipated effective tax rate of 38.0% for 1997 and 37.2% in 1996. 7. Accounting Pronouncements During the first quarter of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. This standard is effective for fiscal years ending after December 15, 1997 and early adoption is not permitted. The Company will adopt this statement for its year ended December 31, 1997. Pro forma calculations of basic and diluted earnings per share, in conformance with SFA's No. 128, are as follows:
For the three months For the six months ended ended June 30, June 30, 1997 1996 1997 1996 -------- --------- -------- -------- Basic EPS .31 .17 .49 .34 Basic pro forma EPS .14 .11 .25 .21 Diluted EPS .29 .17 .47 .33 Diluted pro forma EPS .13 .11 .24 .21
Page 7 of 13 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Total revenues of $15.5 million in the second quarter of 1997 increased 30.7% from $11.9 million in the second quarter of 1996. Total revenues increased to $30.2 million in the first six months of 1997 as compared to $22.9 million in the corresponding period of 1996, representing growth of 31.8%. Product revenues increased 32.1% to $10.7 million and 32.8% to $21.0 million for the quarter and six month periods ended June 30, 1997 as compared to the same periods in 1996, respectively. Service revenues increased 27.5% to $4.8 million in the second quarter and 29.7% to $9.2 million for the six months ended June 30, 1997. The growth in product revenues was due to continued increasing demand for the Company's products, increased marketing and sales efforts and the introduction of a new product feature, Magellan CS, which increased sales of the Company's systems. Service revenues increased during the quarter and six month period due to the continued expansion of the Company's installed customer base and the increased volume of installations during the period. Cost of product revenue, as a percentage of product revenue, was 33.3% and 35.3% in the second quarter and first six months of fiscal 1997, respectively, compared to 36.9% and 34.4% for the comparable 1996 periods. Product cost as a percentage of product revenue decreased during the second quarter principally due to the continuing efforts to cost reduce the product, and due to changes in the product mix. The slight increase in product costs for the first six months is due primarily to lower per unit sales prices. Research and development cost was $1.6 million in the second quarter of fiscal 1997, a $493,000 increase over the second quarter of 1996. For the first six months of 1997, research and development cost increased to $3.0 million, an increase of $929,000 over the comparable 1996 period. Research and development cost increased as a percentage of revenue to 10.6% from 9.7% and to 10.0% from 9.2% for the three month and six month comparable periods ended June 30, 1997 and 1996, respectively. The overall cost increase during the three and six month periods ended June 30, 1997 resulted primarily from the addition of developers to support the Company's new product development efforts and the subcontracting of certain feature development efforts during 1997. Selling, general and administrative expenses were $5.2 million for the second quarter of 1997 as compared to $4.0 million in the comparable 1996 period. Selling, general and administrative expense for the first six months of fiscal 1997 increased to $10.4 million, an increase of $2.2 million (27.5%) over the comparable 1996 period. This increase was the result of an increase in sales commissions corresponding to the increase in revenues and the additional staff required to support the larger sales levels in 1997. Selling, general and administrative expense increased slightly as a percentage of revenue to 33.7% from 33.6% for the second quarter of fiscal 1997, and decreased as a percentage of revenue to 34.3% from 35.5% for the first six months of fiscal 1997. Income from operations was $2.7 million in the second quarter of 1997, representing a 31.5% increase over income from operations of $2.0 million in the first quarter of 1996. Income from operations was $5.0 million in the first six months of 1997, representing a 23.9% increase over income from operations of $4.1 million in the corresponding period in 1996. These increases were the result of the foregoing factors. Page 8 of 13 9 Other income (expense), net was a net expense of $9,000 in the second quarter of 1997 compared to net income of $54,000 in the second quarter of 1996. Other income (expense), net was a net expense of $60,000 for the first six months of 1997 compared to net income of $43,000 in the first six months of 1996. Interest expense, which is included in other income (expense), net increased from 1996 levels in both periods during 1997 due to increased debt. Income tax provisions have been recorded for the period subsequent to the IPO. The Company, prior to the IPO was not subject to federal or state income taxes. As a result of its election to be treated as an S Corporation for income tax purposes prior to the IPO, pro forma net income amounts include additional provisions for income taxes determined by applying the Company's anticipated statutory tax rate to income before income taxes, adjusted for permanent tax differences. The Company's S Corporation status was terminated in conjunction with the completion of its initial public offering in June 1997. Upon the termination of its S Corporation election, the Company recorded certain deferred tax assets in the amount of $1.5 million. Pro forma net income increased to $1.7 million in the second quarter of 1997 from $1.3 million in the second quarter of 1996. Pro forma net income rose to $3.1 million in the first six months of 1997 compared to $2.6 million in the first six months of 1996. LIQUIDITY AND CAPITAL RESOURCES In June 1997, the Company completed its initial public offering, in which the Company received net proceeds of approximately $36.1 million after deducting underwriting discounts and offering expenses. The Company applied a portion of the net proceeds to (1) repay outstanding shareholder notes of $15.2 million, (2) payment of $245,000 in accrued interest on the shareholder notes, and (3) pay undistributed S Corporation earnings of $ 2.4 million. Prior to the IPO date, the company made payments of $375,000 to repay shareholder notes, and $3.6 million in distributions to shareholders. The balance of the net proceeds of the offering (approximately $18.3 million) will be utilized for general corporate purposes. Such purposes may also include possible acquisitions of, or investments in, businesses and technologies that are complementary to those of the Company. As of June 30, 1997, the Company had $30.0 million in cash and cash equivalents, compared to $9.8 million as of December 31, 1996. The Company's working capital increased to $30.6 million from $8.1 million over the same period. Operating activities provided $7.0 million during the first six months of fiscal 1997. Cash used in investing activities totaled $1.4 million during the first six months of fiscal 1997. Such investing activities consisted of purchases of property and equipment. Cash provided by financing activities totaled $14.5 million during the first six months of fiscal 1997, due to the issuance of common stock in the initial public offering offset by repayment of the Company's outstanding indebtedness noted above. The Company anticipates that existing cash and cash equivalents will be adequate to meet its cash requirements for the next twelve months. FORWARD LOOKING STATEMENTS Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to plans for future business development activities, anticipated costs of revenues, product mix and service revenues, research and development and selling, general and administrative activities, and liquidity and capital needs and resources. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. For further information about these and other factors that could affect the Company's future results, please see Exhibit 99.1 to this report. Investors are cautioned that any forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward looking statements. Page 9 of 13 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities. None Item 3 Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 11 Statement re Computation of per share earnings. Exhibit 27 Financial Data Schedule (for SEC use only). Exhibit 99.1 Certain risk factors related to the Company. (b) Reports on Form 8-K. No Report on Form 8-K was filed during the quarter ended June 30, 1997. Page 10 of 13 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MELITA INTERNATIONAL CORPORATION Date: August 14, 1997 By: /s/ J. Neil Smith ------------------------- J. Neil Smith President and Chief Operating Officer Date: August 14, 1997 By: /s/ Mark B. Adams ------------------------- Mark B. Adams Chief Financial Officer Page 11 of 13 EX-11 2 STATEMENT RE:COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 MELITA INTERNATIONAL CORPORATION COMPUTATION OF PRO FORMA EARNINGS PER SHARE (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Three Months Six Months Ended June 30 Ended June 30 1997 1996 1997 1996 ---- ---- ---- ---- PRIMARY (1) Weighted average common stock outstanding 8,000 8,000 8,000 8,000 Effect of the combination (2) 3,143 3,143 3,143 3,143 Effect of issuance of shares in IPO 1,058 -- 529 -- Dilutive effect of common stock equivalents 596 139 395 139 Cheap stock adjustment (3) 71 133 94 133 Effect of shareholder distribution (4) -- 945 597 945 ------- ------- ------- ------- Weighted average common and common equivalent shares 12,868 12,360 12,758 12,360 Net income after income tax 3,728 2,074 6,048 4,114 Earnings per share 0.29 0.17 0.47 0.33 Pro forma net income 1,665 1,299 3,090 2,577 Pro forma earnings per share 0.13 0.11 0.24 0.21
(1) Fully diluted earnings per share would change only the dilutive effect of common stock equivalents noted above. If the dilutive effect of common stock equivalents was computed on a fully dilutive basis, the weighted average common and common equivalent shares would be 13,084, 12,462, 13,162, and 12,463, for the three months ended June 30, 1997 and 1996, and the six months ended June 30, 1997 and 1996, respectively. (2) Reflects pro forma issuance of 3,143 shares of Common Stock in connection with the combination of Melita International Corporation, Melita Europe Limited and Inventions, Inc. (3) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common stock equivalents issued at prices below the assumed initial public offering price per share ("cheap stock") during the twelve months immediately preceding the initial filing date of the Company's Registration Statement for its public offering have been included as outstanding for all periods presented. (4) Pursuant to Staff Accounting Bulletin 1B.3, pro forma earnings per share gives effect to the issuance by the Company of the numbers of shares that, of the assumed public offering price, would yield proceeds in the amount necessary to pay the shareholder distribution that is not covered by the earnings during the period. Page 12 of 13 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JAN-01-1997 JUN-30-1997 29,984 0 12,633 (318) 1,355 45,525 8,569 (5,111) 49,018 14,932 0 0 0 69 34,017 49,018 30,199 30,199 11,765 11,765 13,108 0 342 4,984 1,064 6,048 0 0 0 6,048 .47 .47
EX-99.1 4 CERTAIN RISK FACTORS 1 EXHIBIT 99.1 MELITA INTERNATIONAL CORPORATION RISK FACTORS The following factors may affect the Company's future performance, and should be considered by all investors and prospective investors in the Company. 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. 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 2 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. 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. 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. CONTROL BY PRINCIPAL SHAREHOLDER Aleksander Szlam, the Company's Chairman of the Board, Chief Executive Officer and principal shareholder, beneficially owns approximately 73.5% of the outstanding shares of Common Stock. Accordingly, 2 3 Mr. Szlam is, and likely will continue to 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. 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. 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. 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, 3 4 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. 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. 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 4 5 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. 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 its initial public 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. 5 6 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. 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 6 7 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. 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. 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. SHARES ELIGIBLE FOR FUTURE SALE Approximately 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 of 1933. Upon completion of this offering, the Company will have 1,600,000 shares of Common Stock reserved for issuance under its stock plans. 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 7 8 additional capital through the sale of equity securities in the future should it desire to do so. POSSIBLE VOLATILITY OF STOCK PRICE 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. 8 -----END PRIVACY-ENHANCED MESSAGE-----