-----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, MyuMrPFFM0TZewPa++2xmxRTDeVbNuCftucpYnlkIe9HrPOpmC1y00ZCvJz8qqEz Rc6/DAYjYDnOAqWfcgOhUw== 0000950144-98-003774.txt : 19980401 0000950144-98-003774.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003774 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K405 SEC ACT: SEC FILE NUMBER: 000-22317 FILM NUMBER: 98580610 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-K405 1 MELITA INTERNATIONAL CORP. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR ( ) 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 Specified in Its Charter) GEORGIA 58-1378534 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5051 PEACHTREE CORNERS CIRCLE 30092 NORCROSS, GEORGIA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (770) 239-4000 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ None. None
Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS ------------------- Common Stock, no par value per share 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 [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the average of the closing bid and ask quotations for the Common Stock on March 11, 1998 as reported by The Nasdaq Stock Market, was approximately $61,274,500. The shares of Common Stock held by each officer and director and by each person known to the company who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 11, 1998, Registrant had outstanding 15,168,395 shares of Common Stock. ================================================================================ 2 PART I ITEM 1. BUSINESS OVERVIEW Melita International Corporation is a leading provider of integrated customer interaction and intelligent call management solutions that enable businesses to automate call center activities and enhance their telephony-based customer commerce. The Company's principal products, PhoneFrame(R)CS and PhoneFrame Explorer, are 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. Melita's PhoneFrame product line is a set of comprehensive call center solutions based on a client/server architecture that integrate with industry standard computing and telephony infrastructures. The Company's customers include leading worldwide organizations in industries such as banking, financial services, telemarketing, retail, communications and service bureaus, where businesses are engaged in frequent telephone contact with customers or prospects. The Company is a Georgia corporation which began operations in 1983. Prior to June 4, 1997, the "Company" refers to the Company and its combined affiliates, Melita Europe Limited and Inventions, Inc. Since June 4, 1997, the "Company" refers to the Company and its consolidated wholly-owned subsidiaries. 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 themselves, 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") and Internet-based services. 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, computer systems and applications. 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. Common examples of outbound call center applications include collection, telemarketing, teleservice and customer support. Increasingly, call center applications feature dynamic inbound/outbound or "blended" functionality, which permits agents to be switched automatically between inbound and outbound calls as inbound call demand varies. A key objective of an organization's outbound call center 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 3 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 were expensive, provided limited functionality and productivity and were generally closed and proprietary. Distributed, standards-based computing environments have allowed call center systems to be developed which utilize CTI, other standard Application Programming Interfaces ("APIs") and the flexibility and openness of client/server architectures. The result is that call center systems now can 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 seek call center solutions that are adaptable to emerging technologies, flexible, scalable, intuitive to use, allow transparent data access, and integrate existing IT and telephony systems. THE MELITA SOLUTION Melita provides integrated customer interaction and intelligent call management solutions that automate outbound or blended call centers, enabling its customers to enhance telephony-based customer commerce. The Company's principal products, PhoneFrame CS and PhoneFrame Explorer are scaleable, integrated software and hardware solutions based on a distributed client/server architecture capable of supporting installations with more than 250 simultaneous users on a single server. The PhoneFrame product line provides comprehensive functionality and a user-friendly application development environment enabling organizations to conduct effective telephone 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 operating costs through patented predictive dialing and inbound/outbound call management 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-follow script generation and application development software. - The ability to leverage existing investments in call center systems and adapt to emerging technologies through standards-based open, scaleable, distributed client/server architecture. A critical element of the comprehensive solutions Melita provides is its underlying philosophy of Customer Care(R). Melita's products represent a critical link between the business enterprise and its customers, providing the business with a solution that allows it to provide the best customer care. Melita's Customer Care philosophy focuses on enhancing the quality of People to People Communication(TM) and is reflected in all facets of the Company's operations and products. The Company has incorporated applications into its existing products which reflect this philosophy, including its patented predictive dialing algorithms, Cancel Dial(R), dynamic inbound/outbound call blending and Single System Image View(TM). STRATEGY The Company's primary objective is to be the leading provider of outbound and blended customer contact and intelligent call management solutions. The Company's strategy to achieve this objective includes the following key elements: Leverage Installed Base of Customers. 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 2 4 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 global technology leader in the field of call center automation software and CTI, having pioneered many of the industry's fundamental call center technologies. The Company holds a comprehensive US and foreign based patent portfolio covering various processes and technologies utilized in call management systems. The Company intends to focus its development efforts on software, with an emphasis on customer interaction and distributed applications spanning an enterprise. Continue to Focus on Providing Comprehensive Call Center Solutions. The Company provides call center optimization, system design, application configuration and integration services in conjunction with the installation of its call center solutions. The Company will continue its emphasis on providing these design and integration services both directly and through strategic alliances. 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. In addition, the Company is expanding its global and national accounts program which focuses on sales and marketing efforts on large, multinational corporations. Increase Penetration of International Markets. The Company currently has relationships with Value Added Resellers ("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 Europe, 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 1997, approximately 71% 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 seeks to leverage its existing application functionality to gain market share in the overall call management systems market. PRODUCTS The Company's newest product, PhoneFrame Explorer, is an integrated suite of client/server software applications and hardware that provides outbound and blended call management solutions. PhoneFrame Explorer software components are based on open standards, allowing integration with varied and complex user environments. PhoneFrame Explorer utilizes industry standard components and eliminates the need for proprietary hardware. PhoneFrame Explorer 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, PBX/ACDs, IVRs and the Internet. Utilizing customer records residing in an organization's existing databases, PhoneFrame automates customer contacts and guides agents through the customer interaction process. Components of the PhoneFrame Explorer include the Universal Telephony Platform(TM) ("UTP(TM)"), the Universal Server(R), the Software Applications Suite and Magellan(TM). The Universal Telephony Platform ("UTP") provides state-of-the-art telephony, call analysis functionality and media management. It is based on Melita's MPower(TM) Architecture and employs industry standard telephony components and the Windows NT operating system. The UTP offers an international set of digital interfaces including T1 and E1. This open NT server-based communications platform incorporates numerous 3 5 standards, including SCSA, CORBA and ISDN. UTP's enhanced CTI capabilities enable call blending and "single-switch" software only solutions. The Universal Server controls and coordinates system operations. It is an IBM RISC/AIX based platform which is used to manage calling list data, call attempts, contact history, agent profiles, call processing and agent supervision activity. The PhoneFrame Explorer Software Application Suite includes Melita's software applications, which leverages the functionality in industry standard software and protocols such as Windows NT, Unix AIX, Sybase Database, Crystal Report Writers and industry standard protocols including TCP/IP and System Network Management Protocol (SNMP) for remote system management. Magellan, Melita's desktop application software, provides user-defined, graphical user interfaces to guide telephone agents through conversations. Magellan supports real-time access to enterprise-wide customer and product information residing anywhere within the computing and telephony infrastructures. Magellan is based on standards and supports EHLLAPI, DDE and ODBC. SERVICES The Company provides multiple forms of service and support for its customers. Services are primarily contracted along with the purchase of a system, but when requested by a customer, the Company will also provide additional training and consulting. Service personnel are located throughout the United States and also in the United Kingdom, Mexico, and Canada. Additional international services are provided by the company's international VARs. The primary forms of services are: maintenance, installation, training, custom applications and consulting. Customers who receive maintenance services are entitled to customer and technical support 24 hours a day, seven days a week. Maintenance customers also receive ongoing system support and baseline software upgrades. The Company contracts with IBM, TSS and other parties to provide local hardware support. Installation and integration services consist of custom application configuration design and documentation along with the physical installation and integration of the system. Introductory training classes are provided as part of each initial system purchase and advanced classes are provided for additional fees. Consulting and other special customer services such as custom application development, scripting and call center consulting are also offered to customers by service personnel. SALES AND MARKETING The Company sells its products primarily through a direct sales channel and through VARs. Sales in the United States, Mexico, 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's marketing activities include product management, product marketing, direct marketing, public relations, press and analyst communications, event support and management of the Company's website. The Company's Business Development Group is responsible for developing alliances, joint marketing and co-development relationships with call center industry suppliers. The Company's customers independently operate domestic and international User Groups. Each group conducts annual as well as regional User Group meetings typically focused on common applications and call center opportunities. The Company participates as invited in the User Group conferences generally by conducting seminars, product demonstrations and training sessions. CUSTOMERS The Company's call management solutions are used by organizations in a broad range of industries. In 1997, the top five industry groups by revenue were: banking, financial services, telemarketing, communications, and service bureaus. Revenues from the top five customers were 25.0% of total revenues in 1995, 24.5% of total revenues in 1996, and 27.9% of total revenues in 1997. In 1995 and 1996, no single customer accounted 4 6 for more than 10% of revenues. In 1997, BancOne Services Corporation accounted for 11.8% of revenues. 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. ENGINEERING, 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 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) telephony-based contact services, including the Company's patented predictive dialing and dynamic call blending applications. 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 Graphical User Interface ("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'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 off-the-shelf analog and digital connectivity to telecommunications equipment and services. The Company's newest generation of agent workstation software, Magellan supports a variety of standard data access methodologies including EHLLAPI, DDE, ODBC and CTI links which are often proprietary and therefore require CTI middleware such as IBM's CallPath or Dialogic's CTConnect to facilitate integration with various PBX/ACD switching platforms. 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 solution. 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 study, the Company is one of four leading suppliers of outbound call processing products in a market with greater than fifty suppliers identified. The Company also competes in the CTI segment of the market, where principal competitors include Genesys Telecommunications Laboratories, Inc., Nabnasset Corporation and IMA, among others. The Company may face additional competition from PBX/ACD vendors, other communications solution and 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 one of the major factors considered by 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. 5 7 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. 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 numerous U.S. and foreign patents covering various processes and technologies utilized in call management systems. These patents cover the Company's proprietary implementations of applications such as inbound/outbound call blending, call progress analysis, screen pops of the called person's account information, Cancel Dial and Single System Image View. The Company also has a number of pending patent applications on customer interaction management 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 U.S. patents or patent applications. EMPLOYEES As of January 31, 1998, the Company had 315 full-time employees, (106 in customer service and operations, 104 in sales and marketing, 61 in research and development and 44 in administration), of whom 283 were based in the United States and 32 were based in other countries. With the exception of the Company's subsidiary employees in Mexico, none of the employees of the Company are covered by a collective bargaining agreement. The Company considers its employee relations 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 personnel is intense, and there can be no assurance that the Company will be successful in retaining or recruiting key personnel. 6 8 EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Aleksander Szlam......................... 46 Chairman of the Board and Chief Executive Officer Mark B. Adams............................ 46 Vice President, Finance & Chief Financial Officer Dan K. Lowring........................... 38 Vice President, Corporate and Strategic Planning, Treasurer and Secretary William K. Dumont........................ 48 Vice President, Sales John A. Lamb............................. 45 Vice President, New Business Development Lee H. Davies............................ 54 Vice President, International Donald L. House.......................... 56 Director Don W. Hubble............................ 59 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. 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. Dan K. Lowring has served as Vice President, Corporate and Strategic Planning since December 1997, and served as Secretary since March 1997 and as Treasurer of the Company since January 1997. From July 1993 to December 1996 he served as Director of Finance, from March 1993 to July 1993, he served as Controller, and from October 1990 to March 1993 he served as Manager of Finance for the Company. 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, International of the Company since September 1997 and was Vice President, Operations of the Company from September 1995 to September 1997. 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. 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 Microhelp, Inc., a software development company. From 1990 to 1995, he held various positions in the sales and engineering departments of the Company. 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 7 9 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 is Chairman, President and CEO of Angelica Corporation. Mr. Hubble served with National Service Industries, Inc. ("NSI") from 1980 until October 1996, most recently serving as President and Chief Operating Officer. 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. 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. 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. Please see Exhibit 99.1 "Safe Harbor Compliance Statement for Forward Looking Statements", the terms of which are incorporated herein, for additional factors to be considered by shareholders and prospective shareholders. ITEM 2. 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. The facility is owned by a partnership controlled by the Company's Chairman of the Board, Chief Executive Officer and principal shareholder. The Company also leases space for several sales and support centers located throughout the United States and in Mexico, 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. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. 8 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Melita's Common Stock has been traded on the Nasdaq National Market under the symbol "MELI" since its initial public offering on June 4, 1997. Prior to that date there was no public market for Melita's Common Stock. The following table sets forth the range of high and low daily closing prices per share of Common Stock on the National Market System for each quarter since the IPO of the year ended December 31, 1997 as reported by the National Association of Securities Dealers Automated Quotation System (NASDAQ).
FISCAL 1997 HIGH LOW - ----------- ------- ------- Second Quarter.............................................. $13.000 $10.000 Third Quarter............................................... 12.875 8.000 Fourth Quarter.............................................. 11.750 8.125
As of March 11, 1998 there were approximately 151 registered holders of record of the Company's Common Stock and approximately 1,110 beneficial shareholders of the Company's Common Stock. The Company has never paid cash dividends on its Common Stock and has no present intentions to pay cash dividends in the future. The Company intends to retain any future earnings to finance the growth of the Company. During the past three years, the Company has issued the following securities which were not registered under the Securities Act of 1933 as amended (the "Securities Act"). In connection with the Company's acquisition of all the outstanding shares of Melita Europe Limited ("Melita Europe") and Inventions, Inc. ("Inventions") by share exchange, on June 4, 1997, the Company issued a total of 3,143,395 shares of its Common Stock to the former shareholders of Melita Europe and Inventions. The consideration issued by the Company was determined based on a share exchange ratio analysis of the Company, Melita Europe and Inventions by an independent appraiser. No underwriter was engaged in connection with the issuance of the shares. The sale and issuance of shares was exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Regulation D promulgated thereunder. 9 11 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain financial data with respect to the Company for each of the five years in the period ended December 31, 1997.
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: NET REVENUES: Product.............................. $46,065 $32,077 $24,620 $18,186 $17,709 Service.............................. 19,725 15,463 10,662 8,970 6,959 ------- ------- ------- ------- ------- Total revenues............. 65,790 47,540 35,282 27,156 24,668 COST OF REVENUES: Product.............................. 15,531 11,494 8,730 6,310 5,181 Service.............................. 9,642 6,863 5,282 3,254 2,924 ------- ------- ------- ------- ------- Total cost of revenues..... 25,173 18,357 14,012 9,564 8,105 ------- ------- ------- ------- ------- GROSS MARGIN......................... 40,617 29,183 21,270 17,592 16,563 OPERATING EXPENSES: Engineering, research and development........................ 6,880 5,070 4,050 3,660 3,386 Selling, general and administrative..................... 22,320 16,765 12,559 11,332 9,528 ------- ------- ------- ------- ------- Total operating expenses... 29,200 21,835 16,609 14,992 12,914 ------- ------- ------- ------- ------- INCOME FROM OPERATIONS............... 11,417 7,348 4,661 2,600 3,649 OTHER INCOME (EXPENSE), Net.......... 662 261 88 46 186 ------- ------- ------- ------- ------- INCOME BEFORE INCOME TAXES........... 12,079 7,609 4,749 2,646 3,835 INCOME TAX PROVISION (BENEFIT): Tax provision as a C corporation..... 3,023 -- -- (26) 25 Deferred tax adjustment.............. (1,473) -- -- -- -- ------- ------- ------- ------- ------- NET INCOME................. $10,529 $ 7,609 $ 4,749 $ 2,672 $ 3,810 ======= ======= ======= ======= ======= INCOME BEFORE PRO FORMA INCOME TAXES.............................. $12,079 $ 7,609 $ 4,749 $ 2,672 $ 3,810 PRO FORMA INCOME TAXES............... 4,469 2,827 1,794 1,164 1,454 ------- ------- ------- ------- ------- PRO FORMA NET INCOME....... $ 7,610 $ 4,782 $ 2,955 $ 1,508 $ 2,356 ======= ======= ======= ======= ======= EARNINGS PER SHARE: Diluted earnings per share........... $ 0.73 $ 0.62 $ 0.38 $ 0.24 $ 0.34 Pro forma diluted earnings per share.............................. $ 0.53 $ 0.39 $ 0.24 $ 0.14 $ 0.21 WEIGHTED AVERAGE SHARES OUTSTANDING: Diluted.............................. 14,386 12,363 12,338 11,143 11,143 ======= ======= ======= ======= =======
DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital...................... $32,251 $ 8,124 $ 6,904 $ 8,594 $ 8,955 Total assets......................... 56,395 27,069 20,928 17,635 15,679 Long-term debt, net of current portion............................ -- -- 2,644 3,068 3,111 Total shareholders' equity........... 37,289 10,872 6,657 7,103 7,385
10 12 MELITA INTERNATIONAL CORPORATION QUARTER ENDED
1996 1997 -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- (IN THOUSANDS) NET REVENUES: Product.................. $7,691 $ 8,108 $ 7,428 $ 8,850 $10,265 $10,714 $11,728 $13,358 Service.................. 3,330 3,778 4,161 4,194 4,404 4,816 5,200 5,305 ------ ------- ------- ------- ------- ------- ------- ------- Total revenues..... 11,021 11,886 11,589 13,044 14,669 15,530 16,928 18,663 ------ ------- ------- ------- ------- ------- ------- ------- COST OF REVENUES: Product.................. 2,449 2,990 2,660 3,395 3,836 3,565 3,812 4,318 Service.................. 1,439 1,733 1,902 1,789 1,931 2,433 2,628 2,650 ------ ------- ------- ------- ------- ------- ------- ------- Total cost of revenues..... 3,888 4,723 4,562 5,184 5,767 5,998 6,440 6,968 ------ ------- ------- ------- ------- ------- ------- ------- GROSS MARGIN............. 7,133 7,163 7,027 7,860 8,902 9,532 10,488 11,695 ------ ------- ------- ------- ------- ------- ------- ------- OPERATING EXPENSES: Engineering, research and development............ 945 1,151 1,409 1,565 1,381 1,644 1,793 2,062 Selling, general and administrative......... 4,137 3,992 4,212 4,424 5,134 5,231 5,732 6,223 ------ ------- ------- ------- ------- ------- ------- ------- Total operating expenses..... 5,082 5,143 5,621 5,989 6,515 6,875 7,525 8,285 ------ ------- ------- ------- ------- ------- ------- ------- INCOME FROM OPERATIONS... 2,051 2,020 1,406 1,871 2,387 2,657 2,963 3,410 OTHER INCOME (EXPENSE), Net.................... (11) 54 20 198 (51) (9) 396 326 ------ ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE INCOME TAXES.................. 2,040 2,074 1,426 2,069 2,336 2,648 3,359 3,736 INCOME TAX PROVISION (BENEFIT): Tax provision as a C corporation............ -- -- -- -- 16 393 1,276 1,338 Deferred tax adjustment............. -- -- -- -- -- (1,473) -- -- ------ ------- ------- ------- ------- ------- ------- ------- NET INCOME..... $2,040 $ 2,074 $ 1,426 $ 2,069 $ 2,320 $ 3,728 $ 2,083 $ 2,398 ====== ======= ======= ======= ======= ======= ======= ======= INCOME BEFORE PRO FORMA INCOME TAXES........... 2,040 2,074 1,426 2,069 2,336 2,648 3,359 3,736 PRO FORMA INCOME TAXES... 762 775 517 773 911 983 1,276 1,299 ------ ------- ------- ------- ------- ------- ------- ------- PRO FORMA NET INCOME....... $1,278 $ 1,299 $ 909 $ 1,296 $ 1,425 $ 1,665 $ 2,083 $ 2,437 ====== ======= ======= ======= ======= ======= ======= =======
11 13 MELITA INTERNATIONAL CORPORATION QUARTER ENDED
1996 1997 -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- (AS A PERCENTAGE OF TOTAL NET REVENUES) NET REVENUES: Product.................. 69.8% 68.2% 64.1% 67.8% 70.0% 69.0% 69.3% 71.6% Service.................. 30.2 31.8 35.9 32.2 30.0 31.0 30.7 28.4 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues..... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- ----- COST OF REVENUES: Product.................. 22.2 25.2 23.0 26.0 26.1 23.0 22.5 23.1 Service.................. 13.1 14.6 16.4 13.7 13.2 15.6 15.5 14.2 ----- ----- ----- ----- ----- ----- ----- ----- Total cost of revenues..... 35.3 39.8 39.4 39.7 39.3 38.6 38.0 37.3 ----- ----- ----- ----- ----- ----- ----- ----- GROSS MARGIN............. 64.7 60.2 60.6 60.3 60.7 61.4 62.0 62.7 ----- ----- ----- ----- ----- ----- ----- ----- OPERATING EXPENSES: Engineering, research and development............ 8.6 9.7 12.2 12.0 9.4 10.6 10.6 11.0 Selling, general and administrative......... 37.5 33.6 36.3 33.9 35.0 33.7 33.9 33.4 ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses..... 46.1 43.3 48.5 45.9 44.4 44.3 44.5 44.4 ----- ----- ----- ----- ----- ----- ----- ----- INCOME FROM OPERATIONS... 18.6 16.9 12.1 14.4 16.3 17.1 17.5 18.3 OTHER INCOME (EXPENSE), Net.......... (0.1) 0.5 0.2 1.5 (0.4) (0.1) 2.3 1.7 ----- ----- ----- ----- ----- ----- ----- ----- INCOME BEFORE INCOME TAXES.................. 18.5 17.4 12.3 15.9 15.9 17.0 19.8 20.0 INCOME TAX PROVISION AS A C CORPORATION.......... -- -- -- -- 0.1 2.5 7.5 7.2 DEFERRED TAX ADJUSTMENT............. -- -- -- -- -- (9.5) -- -- ----- ----- ----- ----- ----- ----- ----- ----- NET INCOME..... 18.5% 17.4% 12.3% 15.9% 15.8% 24.0% 12.3% 12.8% ===== ===== ===== ===== ===== ===== ===== ===== INCOME BEFORE PRO FORMA INCOME TAXES........... 18.5 17.4 12.3 15.9 15.9 17.0 19.8 20.0 PRO FORMA INCOME TAXES... 6.9 6.5 4.5 5.9 6.2 6.3 7.5 6.9 ----- ----- ----- ----- ----- ----- ----- ----- PRO FORMA NET INCOME....... 11.6% 10.9% 7.8% 10.0% 9.7% 10.7% 12.3% 13.1% ===== ===== ===== ===== ===== ===== ===== =====
12 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Melita International Corporation is a leading provider of integrated customer interaction and intelligent call management solutions that enable businesses to automate call center activities and enhance their telephony-based customer commerce. The Company's principal products, PhoneFrame CS and PhoneFrame Explorer, are integrated systems 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. 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 if there are no significant post-delivery obligations, if collection is probable and if the agreement requires payment within one year. Revenues from post-contract maintenance support are recognized ratably over the term of the support period. Post-contract maintenance support revenues accounted for approximately 21.2% of revenues in 1997. Revenues from consulting, installation and training services are recognized as the services are performed. Of these revenues, only revenues from maintenance contracts are expected to be recurring. In any given period, a significant portion of the Company's revenues may be derived from large sales to a limited number of customers. During 1995 and 1996, no customer accounted for more than 10% of revenues. During 1997, only BancOne Services Corporation, at 11.8%, accounted for greater than 10% of the Company's revenues. Revenues of the five largest customers approximated 25.0%, 24.5% and 27.9%, for 1995, 1996 and 1997, respectively. International revenues, or revenues from sales to customers outside the United States accounted for 22.5%, 21.0% and 18.4% of the Company's revenues for 1995, 1996 and 1997 respectively. The Company relies on VARs to sell, install and support its products in countries outside of the United States, Canada, Mexico and the United Kingdom. The Company believes that its continued growth and profitability will require further expansion of its international operations. To successfully expand international sales, the Company must establish additional foreign operations, hire additional personnel and recruit additional VARs. To the extent the Company is unable to do so on a timely basis, the Company's revenue growth, if any, may be slowed, and profitability may be adversely affected as significant costs may be incurred in advance of the international revenues. The Company's international revenues are denominated primarily 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 ($2,000), $162,000 and ($20,000) in 1995, 1996 and 1997, 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. RESULTS OF OPERATIONS The following table sets forth items shown in the Company's Consolidated Statement of Operations as a percentage of total revenues for the periods indicated. The table should be read in conjunction with the Financial Statement and notes to Consolidated Financial Statements contained elsewhere herein. 13 15
YEAR ENDED DECEMBER 31, --------------------- 1997 1996 1995 ----- ----- ----- NET REVENUES: Product................................................... 70.0% 67.5% 69.8% Service................................................... 30.0 32.5 30.2 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 ----- ----- ----- COST OF REVENUES: Product................................................... 23.6 24.2 24.7 Service................................................... 14.7 14.4 15.0 ----- ----- ----- Total cost of revenues............................ 38.3 38.6 39.7 ----- ----- ----- GROSS MARGIN................................................ 61.7 61.4 60.3 ----- ----- ----- OPERATING EXPENSES: Engineering, research and development..................... 10.5 10.7 11.5 Selling, general and administrative....................... 33.8 35.2 35.6 ----- ----- ----- Total operating expenses.......................... 44.3 45.9 47.1 ----- ----- ----- INCOME FROM OPERATIONS...................................... 17.4 15.5 13.2 OTHER INCOME (EXPENSE), Net................................. 1.0 0.5 0.3 ----- ----- ----- INCOME BEFORE INCOME TAXES.................................. 18.4 16.0 13.5 INCOME TAX PROVISION (BENEFIT):............................. 2.4 -- -- ----- ----- ----- NET INCOME........................................ 16.0 16.0 13.5 ===== ===== ===== INCOME BEFORE INCOME TAXES.................................. 18.4 16.0 13.5 PRO FORMA INCOME TAXES...................................... 6.8 6.0 5.1 ----- ----- ----- PRO FORMA NET INCOME.............................. 11.6% 10.0% 8.4% ===== ===== =====
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:
YEAR ENDED DECEMBER 31, --------------------- 1997 1996 1995 ----- ----- ----- Cost of product revenues.................................... 33.7% 35.8% 35.5% Cost of service revenues.................................... 48.9% 44.4% 49.5%
REVENUES Product. The Company increased its product revenues by 30.3% from $24.6 million in 1995 to $32.1 million in 1996, and by 43.6% to $46.1 million in 1997. The increase in product revenues was due to continued strong demand for the intelligent call center management solutions provided by the Company's products, new product offerings and increased sales and marketing efforts. Over this period, the call center solutions provided by the Company were expanded by the introduction of PhoneFrame CS in the first half of 1995, the introduction of Magellan in the fourth quarter of 1996, and the introduction of PhoneFrame Explorer in the fourth quarter of 1997. Service. The Company increased its service revenues by 45.0% from $10.7 million in 1995 to $15.5 million in 1996, and by 27.6% to $19.7 million in 1997. Service revenues increased primarily due to an increase in the number of post-contract maintenance support agreements and, to a lesser degree, from revenues generated by installation of new systems and upgrades to existing systems. 14 16 COST OF REVENUES Product. The cost of product revenues includes the cost of material, cost of sublicensing third-party software and employee-related costs for product assembly. Cost of product revenues increased from $8.7 million, or 35.5% of related product revenues, in 1995, to $11.5 million, or 35.8% of related product revenues, in 1996, and to $15.5 million, or 33.7% of related product revenues, in 1997. The increase in absolute dollars in the cost of product revenues was due to the increase in the volume of shipments of the Company's products. The 1996 increase, as a percentage of product revenues, was primarily 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. The 1997 decrease, as a percentage of product revenues, was primarily due to product design improvements and reduced material purchase costs. Service. The cost of service revenues is primarily comprised of employee-related costs for customer support, consulting and field service personnel and fees paid to third-parties for installation services and post- installation hardware maintenance services. Cost of service revenues increased from $5.3 million, or 49.5% of related service revenues, in 1995, to $6.9 million, or 44.4% of related service revenues, in 1996, and to $9.6 million, or 48.9% of related product revenues, in 1997. The increase in absolute dollars in the cost of service revenues was primarily due to the increase in service personnel to support the larger installed customer base and higher volume of installations. The 1996 decrease, as a percentage of service revenues, was primarily due to operational efficiencies, reduced third-party hardware maintenance fees and improved functionality within the software to facilitate the installation. The 1997 increase, as a percentage of service revenues, was primarily due to increases in support service personnel, increases in the salary compensation levels and higher third-party hardware maintenance fees. OPERATING EXPENSES Engineering, research and development. Engineering, research and development expenses primarily consist of employee-related costs for engineering personnel involved with software, voice processing and CTI technology development. Also included are outside contractor costs for development projects and expendable equipment purchases. Engineering, research and development costs increased from $4.1 million, or 11.5% of revenues, in 1995 to $5.1 million, or 10.7% of revenues, in 1996, and to $6.9 million, or 10.5% of revenues, in 1997. The increase in absolute dollars resulted primarily from the addition of developers and outside contractors to support the Company's new product development efforts, which resulted in the release of PhoneFrame CS 2.0 and Magellan in 1996 and PhoneFrame Explorer in 1997. The Company intends to continue to invest heavily in product development activities. As a result, engineering, research and development costs are expected to increase in absolute dollars and may increase as a percentage of revenues in the future. Selling, general and administrative. Selling, general and administrative expenses consist primarily of employee-related costs for sales, marketing, administrative, finance and human resources personnel. Also included are marketing expenditures for trade shows, advertising and other promotional expenditures. Selling, general and administrative costs increased from $12.6 million, or 35.6% of revenues, in 1995 to $16.8 million, or 35.2% of revenues, in 1996, and to $22.3 million, or 33.8% of revenues, in 1997. These increases in absolute dollars were primarily related to the expansion of the Company's sales and marketing resources, increased commission expenses due to higher sales, and increased levels of marketing activities. The decreases as a percentage of total revenues were primarily a result of leveraging the infrastructure and improvements to operating efficiencies. The Company intends to continue to expand its sales, marketing and sales support operations in 1998. As result, selling, general and administrative costs are expected to increase in absolute dollars and may increase as a percentage of revenue in the future. 15 17 OTHER INCOME (EXPENSE), NET Other income (expense), net. Other income (expense), net increased from $88,000 in 1995 to $261,000 in 1996 and to $662,000 in 1997. The increase in 1996 was primarily attributable to foreign exchange gains, as the British pound strengthened against the U.S. dollar. The increase in 1997 was primarily due to interest income earned on the Company's investments in marketable securities, which increased substantially due to the net proceeds of the June, 1997, initial public offering of its stock and the $11.2 million of positive cash flow from operations recorded during 1997. INCOME TAX PROVISION (BENEFIT) Income Taxes. In connection with the initial public offering on June 4, 1997, the Company converted its U.S. taxable status 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 deferred tax assets of $1,473,000. Subsequent to its conversion, the Company also recorded tax provisions at the effective tax rate of 37.0% in 1997. Pro Forma Income Taxes. Pro forma income taxes increased from $1.8 million in 1995 to $2.8 million in 1996 and to $4.5 million in 1997. The Company's pro forma effective tax rates were 37.8% in 1995, 37.2% in 1996, and 37.0% in 1997. The Company expects its effective tax rate to decrease for 1998. (See Note 3 of the Notes to Financial Statements.) QUARTERLY RESULTS OF OPERATIONS 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 order dates and actual order dates, as well as non-recurring or unanticipated large orders, can cause significant variations in the Company's operating results from quarter to quarter. FINANCIAL CONDITION Total assets as of December 31, 1997, were $56.4 million, an increase of $29.3 million from December 31, 1996. The increase was primarily due to increases in cash, cash equivalents and marketable securities, accounts receivable, net property and equipment and the establishment of deferred tax assets. Cash, cash equivalents and marketable securities increased by $21.0 million, primarily due to the net proceeds from the initial public offering in June, 1997, and positive operating cash flow during 1997. Accounts receivable increased $3.9 million primarily due to increased sales levels. Net property and equipment increased by $2.2 million primarily due to purchases of equipment and software to support the increased number of employees and communications equipment used for development purposes. 16 18 Current liabilities as of December 31, 1997, were $19.1 million, an increase of $2.9 million from December 31, 1996. The increase was primarily due to an increase in accounts payable and accrued liabilities partially offset by a decrease in the note payable to a stockholder which was paid in 1997. 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 $7.5 million in 1995, $9.3 million in 1996 and $11.2 million in 1997. In 1996, the Company's cash was generated by net income, an increase in customer deposits and offset by an increase in accounts receivable. In 1997, the Company's cash was generated by net income, an increase in accounts payable and accrued liabilities, partially offset by an increase in accounts receivable and a decrease in customer deposits. The Company's investing activities used cash of $1.7 million in 1995, $1.5 million in 1996 and $27.5 million in 1997. The Company's use of cash was primarily for the purchase of capital equipment and software to support the Company's growth and the investment in marketable securities. The increase from 1996 to 1997 of funds available for investing is principally due to the proceeds from the Company's initial public offering in 1997. The Company's financing activities used cash of $5.2 million in 1995, $3.8 million in 1996 and generated $13.2 million in 1997. During 1997, the Company received $36.0 million of cash from the initial public offering of its stock. The Company paid out $22.8 million to stockholders in distributions or repayments of notes payable to stockholders. The balance was invested in marketable securities. As of December 31, 1997, the Company had working capital of $32.3 million. Cash and marketable securities were $30.8 million. The Company estimates that it will incur capital expenditures of approximately $4.0 million in 1998, related to anticipated increased capital needs of technology and facility upgrades, and support of increased staffing. The Company believes that existing cash and marketable securities and potential cash flow from operations will be sufficient to meet its cash requirements for the next twelve months. YEAR 2000 COMPLIANCE The Company has completed an initial assessment of its internal systems and received confirmation from its principal suppliers that the systems either are or will be Year 2000 compliant. Neither the cost nor impact of any necessary compliance efforts are expected to be material. The Company also has evaluated its products for issues relating to Year 2000 compliance. Although the Company has made substantial changes to its current products to ensure Year 2000 compliance, no assurance can be made that the Products will, in fact, operate correctly. In the event that Year 2000 related defects are detected, the Company will necessarily have to redirect resources from development of other products which could result in delays in deploying additional products and features. The Company has initiated a comprehensive program through which it is making available to existing customers upgrades for currently installed products which are not Year 2000 compliant. See Risk Factors -- Risks Associated with Technological Advances; Necessity of Developing New Products; Compliance to Industry Requirements. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." Statement of Financial Accounting Standards ("SFAS") No. 130 is designed to improve the reporting of changes in equity from period to period. SFAS No. 130 is effective for the Company's fiscal year ending December 31, 1998. Management does not expect SFAS No. 130 to have a significant impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires that an enterprise disclose certain information about operating segments. SFAS No. 131 is effective for financial statements for the 17 19 Company's fiscal year ending December 31, 1998. The Company does not expect that SFAS No. 131 will require significant revision of prior disclosures. In December 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The standard is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company has adopted the standard during the first quarter of fiscal 1998. The adoption of the standard is not expected to have significant impact on the Company's financial statements. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... 19 Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 20 Consolidated Statements of Operations for the years ended December 31, 1997, 1996, and 1995......................... 21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.............. 22 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995......................... 23 Notes to Consolidated Financial Statements.................. 24
18 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Melita International Corporation: We have audited the accompanying consolidated balance sheets of MELITA INTERNATIONAL CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Melita International Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia January 30, 1998 19 21 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 IN THOUSANDS, EXCEPT SHARE DATA
1997 1996 ------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 6,845 $ 9,849 Marketable securities..................................... 23,969 -- Accounts receivable, net of allowance for doubtful accounts of $876 and $487 at December 31, 1997 and 1996, respectively............................................ 15,796 11,860 Inventories............................................... 2,461 2,442 Deferred taxes............................................ 2,035 -- Prepaid expenses and other................................ 251 170 ------- ------- Total current assets............................... 51,357 24,321 ------- ------- PROPERTY AND EQUIPMENT, AT COST Furniture and fixtures.................................... 1,648 1,361 Equipment................................................. 8,195 5,476 Leasehold improvements.................................... 831 343 ------- ------- Total property and equipment....................... 10,674 7,180 Less accumulated depreciation...................... 5,735 4,456 ------- ------- Net property and equipment......................... 4,939 2,724 Other assets................................................ 99 24 ------- ------- $56,395 $27,069 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 5,326 $ 2,429 Accrued liabilities....................................... 7,763 4,210 Deferred revenue.......................................... 4,029 3,065 Customer deposits......................................... 1,988 3,849 Current maturities of note payable to stockholder (Note 2)...................................................... -- 2,625 Current maturities of capital lease obligations (Note 5)...................................................... -- 19 ------- ------- Total current liabilities.......................... 19,106 16,197 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Preferred stock: Melita International Corporation, no par value; 20,000,000 shares authorized, 0 shares issued and outstanding at December 31, 1997, and 1996............................. -- -- Common stock: Melita International Corporation, no par value; 100,000,000 shares authorized, 15,168,395 shares issued and outstanding at December 31, 1997, and 8,000,000 shares issued and outstanding at December 31, 1996...... 69 2 Melita Europe Limited, L1 par value; 50,000 shares authorized, no shares issued and outstanding at December 31, 1997 and 31,328 shares issued and outstanding at December 31, 1996....................................... -- 46 Inventions, Inc., $5 par value; 100 shares authorized, no shares issued and outstanding December 31, 1997, 100 shares issued and outstanding December 31, 1996......... -- 1 Additional paid-in capital................................ 36,046 20 Net change in unrealized gains of marketable securities... 15 -- Foreign currency translation adjustment................... 15 35 Retained earnings......................................... 1,144 10,768 ------- ------- Total stockholders' equity......................... 37,289 10,872 ------- ------- $56,395 $27,069 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets. 20 22 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 IN THOUSANDS, EXCEPT PER SHARE DATA
1997 1996 1995 ------- ------- ------- NET REVENUES: Product..................................................... $46,065 $32,077 $24,620 Service..................................................... 19,725 15,463 10,662 ------- ------- ------- Total revenues.................................... 65,790 47,540 35,282 ------- ------- ------- COST OF REVENUES: Product..................................................... 15,531 11,494 8,730 Service..................................................... 9,642 6,863 5,282 ------- ------- ------- Total cost of revenues............................ 25,173 18,357 14,012 ------- ------- ------- GROSS MARGIN................................................ 40,617 29,183 21,270 ------- ------- ------- OPERATING EXPENSES: Engineering, research and development....................... 6,880 5,070 4,050 Selling, general, and administrative........................ 22,320 16,765 12,559 ------- ------- ------- Total operating expenses.......................... 29,200 21,835 16,609 ------- ------- ------- INCOME FROM OPERATIONS...................................... 11,417 7,348 4,661 OTHER INCOME (EXPENSE), NET................................. 662 261 88 ------- ------- ------- INCOME BEFORE INCOME TAXES.................................. 12,079 7,609 4,749 ------- ------- ------- INCOME TAX PROVISION (BENEFIT): Tax provision as C corporation.............................. 3,023 -- -- Deferred tax adjustment..................................... (1,473) -- -- ------- ------- ------- NET INCOME.................................................. $10,529 $ 7,609 $ 4,749 ======= ======= ======= INCOME BEFORE INCOME TAXES.................................. $12,079 $ 7,609 $ 4,749 PRO FORMA INCOME TAXES...................................... 4,469 2,827 1,794 ------- ------- ------- PRO FORMA NET INCOME........................................ $ 7,610 $ 4,782 $ 2,955 ======= ======= ======= EARNINGS PER SHARE: Basic earnings per share.................................... $ 0.76 $ 0.63 $ 0.39 ======= ======= ======= Diluted earnings per share.................................. $ 0.73 $ 0.62 $ 0.38 ======= ======= ======= Pro forma basic earnings per share.......................... $ 0.55 $ 0.40 $ 0.24 ======= ======= ======= Pro forma diluted earnings per share........................ $ 0.53 $ 0.39 $ 0.24 ======= ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic....................................................... 13,832 12,088 12,088 ======= ======= ======= Diluted..................................................... 14,386 12,363 12,338 ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. 21 23 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
FOREIGN UNREALIZED COMMON STOCK ADDITIONAL CURRENCY GAIN ON ------------------- PAID-IN TRANSLATION MARKETABLE RETAINED SHARES AMOUNT CAPITAL ADJUSTMENT SECURITIES EARNINGS TOTAL ---------- ------ ---------- ----------- ---------- -------- -------- BALANCE, December 31, 1994................. 8,031,428 $49 $ 20 $ 5 $-- $ 7,030 $ 7,104 Net income before pro forma income taxes.................................. -- -- -- -- -- 4,749 4,749 Cash distributions to stockholders....... -- -- -- -- -- (5,196) (5,196) Foreign currency translation adjustment............................. -- -- -- -- -- -- -- ---------- --- ------- ---- --- -------- -------- BALANCE, December 31, 1995................. 8,031,428 49 20 5 -- 6,583 6,657 Net income before pro forma income taxes.................................. -- -- -- -- -- 7,609 7,609 Cash distributions to stockholders....... -- -- -- -- -- (3,424) (3,424) Foreign currency translation adjustment............................. -- -- -- 30 -- -- 30 ---------- --- ------- ---- --- -------- -------- BALANCE, December 31, 1996................. 8,031,428 49 20 35 -- 10,768 10,872 Net income before pro forma income taxes.................................. -- -- -- -- -- 10,529 10,529 Issuance of common stock................. 4,025,000 -- 36,046 -- -- -- 36,046 Issuance of stock in combination transaction (Note 1)................... 3,143,395 67 (20) -- -- -- 47 Cancellation of stock in combination transaction (Note 1)................... (31,428) (47) -- -- -- -- (47) Note and cash distributions to stockholders........................... -- -- -- -- -- (20,153) (20,153) Unrealized gain on marketable securities............................. -- -- -- -- 15 -- 15 Foreign currency translation adjustment............................. -- -- -- (20) -- -- (20) ---------- --- ------- ---- --- -------- -------- BALANCE, December 31, 1997................. 15,168,395 $69 $36,046 $ 15 $15 $ 1,144 $ 37,289 ========== === ======= ==== === ======== ========
The accompanying notes are an integral part of these consolidated statements. 22 24 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Pro forma net income........................................ $ 7,610 $ 4,782 $ 2,955 Adjustments to reconcile pro forma net income to net cash provided by operating activities: Pro forma income taxes.................................... 1,446 2,827 1,794 Deferred taxes............................................ (562) -- -- Depreciation and amortization............................. 1,279 1,141 997 Loss (gain) on sale of property and equipment............. -- 6 (51) Changes in assets and liabilities: Accounts receivable.................................... (3,935) (2,657) (1,095) Inventories............................................ (19) 585 (990) Prepaid expenses and other assets...................... (81) 172 165 Accounts payable....................................... 2,897 (334) 1,595 Accrued liabilities.................................... 3,552 794 161 Deferred revenue....................................... 964 472 607 Customer deposits...................................... (1,861) 1,417 1,416 Other, net............................................. (95) 63 (18) -------- ------- ------- Total adjustments................................. 3,585 4,486 4,581 -------- ------- ------- Net cash provided by operating activities......... 11,195 9,268 7,536 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (3,494) (1,531) (1,879) Purchases of marketable securities........................ (23,954) -- -- Proceeds from sale of property and equipment.............. -- -- 132 -------- ------- ------- Net cash used in investing activities............. (27,448) (1,531) (1,747) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of capital lease obligations.................... (19) (48) (40) Net proceeds from issuance of common stock................ 36,046 -- -- Repayment of notes payable to stockholder................. (2,625) -- -- Repayment of notes payable to stockholder representing distributions.......................................... (12,900) (375) -- Distributions to stockholder.............................. (7,253) (3,424) (5,196) -------- ------- ------- Net cash provided by (used in) financing activities...................................... 13,249 (3,847) (5,236) -------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS........... (3,004) 3,890 553 CASH AND CASH EQUIVALENTS, beginning of year................ 9,849 5,959 5,406 -------- ------- ------- CASH AND CASH EQUIVALENTS, end of year...................... $ 6,845 $ 9,849 $ 5,959 ======== ======= ======= MARKETABLE SECURITIES....................................... $ 23,969 $ -- -- ======== ======= ======= CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES............ $ 30,814 $ 9,849 $ 5,959 ======== ======= ======= CASH PAID FOR INTEREST DURING THE YEAR...................... $ 335 $ 279 $ 302 ======== ======= ======= INCOME TAXES PAID........................................... $ 3,198 $ -- -- ======== ======= =======
The accompanying notes are an integral part of these consolidated statements. 23 25 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Melita International Corporation (the "Company") is a leading provider of integrated customer interaction and intelligent call management solutions that enable customers to operate efficient call centers. The Company's principal product is an integrated suite of client/server software applications and hardware that provides outbound and blended call management solutions. Melita offers periodic ongoing maintenance support for its products, as well as 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 the Pacific Rim. COMPLETION OF INITIAL PUBLIC OFFERING On June 4, 1997, the Company completed an initial public offering (the "Offering") of 4,025,000 shares at $10 per share resulting in net proceeds of $36,046,000. BASIS OF COMBINATION Prior to June 4, 1997, the financial statements are presented on a combined basis and include the accounts of Melita International Corporation ("Melita"), Melita Europe Limited ("Melita Europe") and Inventions, Inc. ("Inventions"), since all were under common control. All significant intercompany accounts and transactions have been eliminated in combination. Concurrent with the Offering, the stockholders of Melita Europe and Inventions contributed their respective shares in exchange for 3,143,395 shares of Melita. The combination was treated similar to a pooling of interest and no step-up basis was recorded as the entities involved were under common control. PRINCIPLES OF CONSOLIDATION The accompanying financial statements since June 4, 1997 include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated in consolidation. 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. MARKETABLE SECURITIES The Company's marketable securities are categorized as available-for-sale securities, as defined by the Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a net amount in a separate component of stockholders' equity until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. 24 26 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Inventories consist of the following at December 31, 1997 and 1996 (in thousands):
1997 1996 ------ ------ Raw materials............................................... $1,251 $1,055 Work in process............................................. 457 337 Finished goods.............................................. 753 1,050 ------ ------ Total inventories........................................... $2,461 $2,442 ====== ======
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. The straight-line method of depreciation was adopted for property placed in service after September 30, 1997. Prior to September 30, 1997 an accelerated method was used. The difference between the accelerated method and the straight-line method was immaterial. The estimated useful lives are as follows: Furniture and fixtures............................. Five to seven years Equipment.......................................... Three to seven years Leasehold improvements............................. Remaining life of lease
INCOME TAXES In connection with the Offering, the Company converted its U.S. taxable status 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 deferred tax assets of $1,473,000. Prior to June 4, 1997, Melita and Inventions were organized as S corporations under the Internal Revenue Code and, therefore, were not subject to federal income taxes. The income or loss of Melita and Inventions was included in the stockholders' individual federal and state tax returns, and as such, no provision for income taxes was recorded in the accompanying combined statements of operations. The Company historically made distributions to cover the stockholders' anticipated tax liability. The accompanying financial statements prior to June 4, 1997 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 SFAS No. 52, "Foreign Currency Translation." Net assets of Melita Europe are translated at the current rates of exchange at December 31. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded in stockholders' equity. The Company has recognized foreign exchange gains (losses) of approximately ($20,000), $162,000 and ($2,000) in 1997, 1996 and 1995, respectively. REVENUE RECOGNITION The Company generates product revenues primarily from the sale and licensing of its call center systems or software. The Company's service revenues are generated from maintenance contracts which include 25 27 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 five 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 $4,029,000 and $3,065,000 at December 31, 1997 and 1996, respectively. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Research and development expenditures are charged to expenses as incurred. Software development costs 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, 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, 1997, 1996 and 1995. Therefore, the Company has charged all software development costs to expense as incurred for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, the Company did not consider itself to have any significant concentrations of credit risk. During 1997, only BancOne Services Corporation, at 11.8%, accounted for greater than 10% of revenues. In 1997, 1996 and 1995 the Company's five largest customers accounted for approximately 27.9%, 24.5% and 25.0% respectively, of its total revenues. These sales were predominantly to customers in the financial services industry. 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. 26 28 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 BASIC AND DILUTED NET INCOME PER SHARE Pro forma basic earnings per share are computed using pro forma net income divided by (i) the weighted average number of shares of common stock outstanding ("Weighted Shares") for the period presented including the number of shares issued in the combination of Melita, Melita Europe and Inventions discussed in Note 1; and (ii) the number of shares pursuant to Staff Accounting Bulletin 1B.3 that, at the assumed public offering price, would yield proceeds in the amount necessary to pay the distribution to the majority stockholder as a result of the Offering that are not covered by the earnings for the year ("Distribution Shares"). The only difference between basic and diluted net income per share is the result of the treasury stock method effect of common equivalent shares (CESs). Pro forma diluted net income per share is computed using pro forma net income divided by (i) Weighted Shares, (ii) the Distribution Shares and (iii) the treasury stock method effect of CESs outstanding for each period presented of 554,000; 275,000 and 250,000 for the years ended December 31, 1997, 1996 and 1995, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of accounts receivable, accounts payable, and other financial instruments approximate their fair values at December 31, 1997 and 1996 principally because of the short-term maturities of these instruments. ACCRUED LIABILITIES Accrued liabilities at December 31, 1997 and 1996 include the following (in thousands):
1997 1996 ------ ------ Accrued salaries and wages.................................. $3,279 $2,437 Other current liabilities................................... 4,169 1,496 Accrued rent................................................ 315 277 ------ ------ Total accrued liabilities......................... $7,763 $4,210 ====== ======
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is designed to improve the reporting of changes in equity from period to period. SFAS No. 130 is effective for the Company's fiscal year ending December 31, 1998. Management does not expect SFAS No. 130 to have a significant impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires that an enterprise disclose certain information about operating segments. SFAS No. 131 is effective for financial statements for the Company's fiscal year ending December 31, 1998. The Company does not expect that SFAS No. 131 will require significant revision of prior disclosures. 27 29 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition." The standard is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company will adopt the standard during the first quarter of fiscal 1998. The adoption of the standard is not expected to have a significant impact on the Company's 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 STOCKHOLDER Notes payable to stockholder during the years ended December 31, 1997 and 1996 is as follows (in thousands):
1997 1996 ------ ------ Note payable to stockholder; due in equal quarterly installments of $187,500 beginning July 1, 1996, interest payable monthly at the prime rate plus 1%................. $ -- $2,625 Less current maturities..................................... -- 2,625 ------ ------ Note payable to stockholder, net of current maturities...... $ -- $ -- ====== ======
Interest paid to stockholder was $335,000, $271,000 and $294,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In 1997, the Company issued notes payable in the amount of $12,900,000 representing undistributed earnings through December 31, 1996. Additionally, the Company accumulated earnings of $7,253,000 through the closing date of the Offering. With the proceeds from the Offering, the Company paid the $2,625,000 and the $12,900,000 notes payable and the $7,253,000 of additional accumulated earnings through the closing date of the Offering. 3. INCOME TAXES In connection with the Offering, the Company converted its U.S. taxable status from an S corporation to a C corporation and, accordingly, is subject to federal and state income taxes. The components of the total deferred tax assets as of December 31, 1997 are as follows (in thousands): Deferred tax assets and liabilities: Deferred revenue.......................................... $1,207 Accrued liabilities....................................... 230 Allowance for doubtful accounts........................... 263 Depreciation.............................................. (70) Inventory................................................. 405 ------ Total deferred tax assets......................... $2,035 ======
28 30 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the components of the pro forma income tax provision for the years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ------ ------ ------ Current domestic taxes: Federal................................................ $4,405 $2,775 $1,572 State.................................................. 517 326 185 Foreign taxes............................................ 109 (75) 2 Deferred taxes........................................... (562) (199) 35 ------ ------ ------ Pro forma tax provision........................ $4,469 $2,827 $1,794 ====== ====== ======
A reconciliation from the federal statutory rate to the pro forma tax provision for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ---- ---- ---- 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.......................................... (1.2) (1.3) (0.9) Other....................................................... 0.2 0.5 0.7 ---- ---- ---- Pro forma effective tax rate...................... 37.0% 37.2% 37.8% ==== ==== ====
4. BENEFIT PLAN Melita has a defined contribution 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 $429,000, $119,000 and $90,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 5. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS At December 31, 1997, the future minimum operating lease payments (including leases with related parties) under noncancelable operating leases were as follows (in thousands): 1998........................................................ $ 663 1999........................................................ 631 2000........................................................ 620 2001........................................................ 600 2002........................................................ 607 Thereafter.................................................. 1,768 ------ Total future minimum lease payments............... $4,889 ======
The Company's leases are primarily for equipment and rental of facilities. Total rental expense for operating leases was $714,000, $751,000 and $728,000 in 1997, 1996 and 1995, 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 stockholder purchased 29 31 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 stockholder was $544,000, $543,000 and $60,000 in 1997, 1996 and 1995, respectively. LEGAL MATTERS 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 not currently a party to any material legal proceedings. 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 are granted at the fair market value and are exercisable based on the specific terms of the grant up to ten years from the grant date. Options granted primarily vest ratably over a four- or five-year employment period. The Company reserved the right to purchase vested options at the then-estimated fair market value prior to the date of an IPO. During 1996 and 1995, the Company purchased 30,250 and 44,294 respectively, vested but unexercisable options held by terminated employees for $39,774 and $2,658, respectively. No options were purchased during 1997. 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 Plan. Options are granted at the fair market value and are exercisable based on the specific terms of the grant up to ten years from the grant date. The options vest primarily over a four-year period subject to acceleration upon the achievement of certain performance measures. 30 32 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Activity for the 1992 Plan and 1997 Plan is as follows:
OPTION OPTIONS PRICE --------- ------------ OUTSTANDING AT DECEMBER 31, 1993............................ 303,848 $2.75-$2.96 Granted..................................................... 36,375 2.91 Exercised................................................... -- 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................................................... -- Forfeited/repurchased....................................... (161,200) 2.81 --------- OUTSTANDING AT DECEMBER 31, 1995............................ 861,450 2.75-3.00 Granted..................................................... 133,785 4.07 Exercised................................................... -- Forfeited/repurchased....................................... (57,463) 2.75-4.07 --------- OUTSTANDING AT DECEMBER 31, 1996............................ 937,772 2.75-4.07 Granted..................................................... 457,325 5.50-10.00 Exercised................................................... -- Forfeited/repurchased....................................... (120,309) 2.91-10.00 --------- OUTSTANDING AT DECEMBER 31, 1997............................ 1,274,788 2.75-10.00 =========
At December 31, 1997, options to purchase 75,212 shares were available for future grant and 498,638 shares were exercisable. 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. During 1995, the Financial Accounting Standards Board issued SFAS No. 123, which defines a fair value-based method of accounting for an employee stock option plan or similar equity instrument. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by 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 1997 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 1997, 1996 and 1995:
1997 1996 1995 --------- --------- --------- Risk-free interest rate........................ 5.7%-6.5% 5.4%-6.5% 6.0%-7.8% Expected dividend yield........................ -- -- -- Expected lives................................. 5 years 5 years 5 years Expected volatility............................ 65% 65% 65%
31 33 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The total value of the options granted during the years ended December 31, 1997, 1996 and 1995 were computed as approximately $1,716,000, $264,000 and $996,000 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 Company's reported pro forma net income and pro forma net income per share for the years ended December 31, 1997, 1996 and 1995 would have decreased to the following pro forma amounts (in thousands):
1997 1996 1995 ------ ------ ------ Pro forma net income: As reported in the financial statements................ $7,610 $4,782 $2,955 Pro forma in accordance with SFAS No. 123.............. 7,288 4,581 2,867 Pro forma basic net income per common and common equivalent share: As reported in the financial statements................ .55 .40 .24 Pro forma in accordance with SFAS No. 123.............. .53 .38 .24 Pro forma diluted net income per common and common equivalent share: As reported in the financial statements................ .53 .39 .24 Pro forma in accordance with SFAS No. 123.............. .51 .37 .23
NUMBER OF SHARES WEIGHTED NUMBER WEIGHTED OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICES DECEMBER 31, 1997 EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE - --------------- ----------------- -------------- ----------------- -------------- $2.75 - $ 4.00 785,252 $2.8811 425,073 $2.8567 4.01 - 8.00 226,536 4.9905 64,565 4.7114 8.01 - 10.00 263,000 9.2676 9,000 9.1667 2.75 - 10.00 1,274,788 4.5736 498,638 3.2107
7. SEGMENT AND GEOGRAPHIC INFORMATION The Company is a multinational corporation with operations in the United States, Canada, Mexico and Europe. The following represents total revenues, net income and total assets of the following countries representing over 10% of the combined totals for years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ------- ------- ------- United States: Total revenues.................................... $53,694 $37,568 $27,356 Net income........................................ 8,682 6,217 3,949 Total assets...................................... 51,612 23,799 19,305 Europe: Total revenues.................................... $ 7,347 $ 4,292 $ 3,252 Net income........................................ 1,680 452 125 Total assets...................................... 4,594 3,270 1,623 Other: Total revenues.................................... $ 4,749 $ 5,680 $ 4,674 Net income........................................ 167 940 675 Total assets...................................... 189 -- --
8. 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 32 34 MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 on the effective date of the Offering, the Company effected a 100 to 1 reverse stock split to return the number of authorized shares to 20,000,000 shares and issued and outstanding shares to 8,000,000 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 the Offering, the Company's authorized capital stock consisted 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. 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Following is a summary of the pro forma quarterly results of operations for the years ended December 31, 1997, 1996 and 1995 (in thousands except per share amounts):
FIRST SECOND THIRD FOURTH TOTAL ------- ------- ------- ------- ------- 1997 Net revenues......................... $14,669 $15,530 $16,928 $18,663 $65,790 Gross margin......................... 8,902 9,532 10,488 11,695 40,617 Pro forma net income................. 1,425 1,665 2,083 2,437 7,610 Pro forma diluted earnings per share.............................. .11 .13 .13 .15 .53 1996 Net revenues......................... $11,021 $11,886 $11,589 $13,044 $47,540 Gross margin......................... 7,133 7,163 7,027 7,860 29,183 Pro forma net income................. 1,278 1,299 909 1,296 4,782 Pro forma diluted earnings per share.............................. .10 .11 .07 .10 .39 1995 Net revenues......................... $ 7,889 $ 7,665 $ 8,780 $10,948 $35,282 Gross margin......................... 5,012 4,723 5,049 6,486 21,270 Pro forma net income................. 713 544 695 1,003 2,955 Pro forma diluted earnings per share.............................. .06 .04 .06 .08 .24
33 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 34 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Stockholders and the Board of Directors of Melita International Corporation: We have audited in accordance with generally accepted auditing standards, the financial statements of Melita International Corporation (a Georgia Corporation) and Subsidiaries included in this Form 10-K and have issued our report thereon dated January 30, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule on page 36 is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia January 30, 1998 35 37 MELITA INTERNATIONAL CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BEGINNING COST AND BALANCE AT OF YEAR EXPENSES DEDUCTIONS END 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 1997 Allowance for doubtful accounts............. $487,000 $1,140,000 $ 751,000 $876,000 Allowance for inventory obsolescence........ 485,000 986,000 596,000 875,000
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS The information concerning the directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's 1997 fiscal year ended December 31, 1997 under the heading "Election of Directors". Certain information regarding directors and executive officers of the Company is included in Part I, Item 1 of this report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information concerning the directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's 1997 fiscal year ended December 31, 1997 under the heading "Compensation and Other Information Concerning Directors and Officers". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning the directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's 1997 fiscal year ended December 31, 1997 under the heading "Principal Holders of Voting Securities" and "Election of Directors". ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS The information concerning the directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's 1997 fiscal year ended December 31, 1997 under the heading "Principal Holders of Voting Securities" and "Election of Directors". 36 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements The financial statements of Melita International Corporation and reports of independent auditors as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference. 2. Financial Statement Schedule (i) The Financial Statement Schedule of Melita International Corporation for the Years Ended December 31, 1997, 1996 and 1995 is filed as part of this Report on Form 10-K and should be read in conjunction with the Financial Statements, and related notes thereto, of Melita International Corporation. (ii) Report of Independent Public Accountants on Financial Statement Schedule. (b) Reports on Form 8-K with respect to resignation of J. Neil Smith, President, filed December 9, 1997. (i) Report on Form 8-K with respect to the resignation of J. Neil Smith, President, filed December 9, 1997. (c) Exhibits. The following exhibits are filed as part of, or are incorporated by reference into, this report on Form 10-K:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 10.1 -- Lease Agreement between the Company and 5051 Peachtree Corners Circle, L.L.C. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.2 -- 1992 Stock Option Plan effective June 4, 1992, as amended March 1, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.3 -- 1997 Stock Option Plan effective February 6, 1997, as amended October 21, 1997. 10.4 -- Employee Stock Purchase Plan adopted March 1, 1997 (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 10.5 -- 401(k) Profit Sharing Plan as amended effective January 1, 1993 (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.6 -- Employment Agreement between the Company and Aleksander Szlam dated March 5, 1997 (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997).
37 39
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.7 -- Form of Tax Indemnification Agreement between the Company and certain shareholders of the Company (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.8 -- Form of Tax Indemnification Agreement between Inventions, Inc. and certain shareholders of Inventions, Inc. (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 11.1 -- Statement re: Computation of per share earnings. 21.1 -- List of subsidiaries of the Company. 23.1 -- Consent of Arthur Andersen LLP. 27.1 -- Financial Data Schedule (SEC use only). 27.2 -- Restated Financial Data Schedule (SEC use only). 27.3 -- Restated Financial Data Schedule (SEC use only). 99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements.
38 40 SIGNATURES Pursuant to the requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MELITA INTERNATIONAL CORPORATION By: /s/ ALEKSANDER SZLAM ------------------------------------ Aleksander Szlam Chairman of the Board and Chief Executive Officer March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ALEKSANDER SZLAM Chairman of the Board and Chief March 30, 1998 - ----------------------------------------------------- Executive Officer (Principal Aleksander Szlam Executive Officer) /s/ MARK B. ADAMS Vice President -- Finance and March 30, 1998 - ----------------------------------------------------- Chief Financial Officer Mark B. Adams (Principal Financial and Accounting Officer) /s/ DON W. HUBBLE Director March 30, 1998 - ----------------------------------------------------- Don W. Hubble /s/ DONALD L. HOUSE Director March 30, 1998 - ----------------------------------------------------- Donald L. House
39 41 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 10.1 -- Lease Agreement between the Company and 5051 Peachtree Corners Circle, L.L.C. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.2 -- 1992 Stock Option Plan effective June 4, 1992, as amended March 1, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.3 -- 1997 Stock Option Plan effective February 6, 1997, as amended October 21, 1997. 10.4 -- Employee Stock Purchase Plan adopted March 1, 1997 (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 10.5 -- 401(k) Profit Sharing Plan as amended effective January 1, 1993 (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.6 -- Employment Agreement between the Company and Aleksander Szlam dated March 5, 1997 (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 28, 1997). 10.7 -- Form of Tax Indemnification Agreement between the Company and certain shareholders of the Company (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 10.8 -- Form of Tax Indemnification Agreement between Inventions, Inc. and certain shareholders of Inventions, Inc. (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 No. 333-22855 filed March 6, 1997). 11.1 -- Statement re: Computation of per share earnings. 21.1 -- List of subsidiaries of the Company. 23.1 -- Consent of Arthur Andersen LLP. 27.1 -- Financial Data Schedule (SEC use only). 27.2 -- Restated Financial Data Schedule (SEC use only). 27.3 -- Restated Financial Data Schedule (SEC use only). 99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements.
40 EX-10.3 2 AMENDED 1997 STOCK OPTION PLAN 1 EXHIBIT 10.3 AMENDMENT NO. 1 TO MELITA INTERNATIONAL CORPORATION 1997 STOCK OPTION PLAN The Melita International Corporation 1997 Stock Option (the "Plan") is hereby amended as follows: 1. Amendment Regarding Option Replenishment. Section 3 of the Plan is hereby amended as follows: SECTION 3. SHARES SUBJECT TO OPTIONS The initial number of Shares reserved for issuance under this Plan shall be 1,850,000 Shares of Common Stock, less the number of Shares (a) which have been issued pursuant to exercised grants made under the Melita International Corporation 1992 Discounted Stock Option Plan (the "1992 Plan"), or (b) which are subject to options granted which remain outstanding under the 1992 Plan. The number of shares of Common Stock available for issuance under the Plan shall be automatically adjusted on the first day of each fiscal year, beginning with the 1998 fiscal year, by a number of Shares such that the total number of shares reserved for issuance under this Plan equals the sum of (i) the aggregate number of Shares previously issued under this Plan and the 1992 Plan; (ii) the aggregate number of Shares subject to then outstanding options granted under this Plan and the 1992 Plan; and (iii) 5% of the number of shares of Common Stock outstanding on the last day of the preceding fiscal year. Notwithstanding the foregoing, not more than 750,000 of the Shares available for grant each year shall be available for issuance pursuant to ISOs, such that not more than 7,500,000 shares resulting from such automatic adjustments may ever be issued pursuant to ISOs during the term of the Plan. Such Shares shall be reserved, to the extent that the Company deems appropriate, from authorized but unissued Shares, and from Shares which have been reacquired by the Company. Furthermore, any Shares subject to an Option which remain unissued after the cancellation, expiration or exchange of such Option thereafter shall again become available for use under this Plan, and any Shares subject to an option granted under the 1992 Plan which remain unissued after the cancellation, expiration or exchange of such option thereafter shall become available for use under this Plan. Notwithstanding the above, any Surrendered Shares which remain after the surrender of an Option under Section 11 shall not again become available for use under this Plan. 2. Effective Date. The effective date of this Amendment shall be October 21, 1997, provided, the shareholders of the Company approve this Amendment within 12 months after such effective date. Any Options granted under the Plan as amended hereby before the date of such approval automatically shall be granted subject to such approval. 3. Miscellaneous. (a) Capitalized terms not otherwise defined herein shall have the meanings given them in the Plan. (b) Except as specifically amended hereby, the Plan shall remain in full force and effect. 2 MELITA INTERNATIONAL CORPORATION 1997 STOCK OPTION PLAN SECTION 1. PURPOSE The purpose of this Plan is to promote the interests of the Company by granting Options to purchase Shares to Employees and Key Persons in order to attract and retain Employees and Key Persons by providing an additional incentive to work to increase the value of Shares and a stake in the future of the Company which corresponds to the stake of each of the Company's shareholders. SECTION 2. DEFINITIONS Each term set forth in this Section 2 shall have the meaning set forth opposite such term for purposes of this Plan and, for purposes of such definitions, the singular shall include the plural and the plural shall include the singular, and reference to one gender shall include the other gender. 2.1 BOARD means the Board of Directors of the Company. 2.2 CODE means the Internal Revenue Code of 1986, as amended. 2.3. COMMITTEE means the Committee appointed in Section 5. 2.4 COMMON STOCK means the common stock of the Company, no par value per share. 2.5 COMPANY means Melita International Corporation, a Georgia corporation, and any successor to such organization. 2.6 CONTINUOUS SERVICE means a period of continuous performance of services by an Employee or Key Person for the Company, a Subsidiary or a Parent. 2.7 EMPLOYEE means an employee of the Company, a Subsidiary or a Parent. 2.8 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.9 EXERCISE PRICE means the price which shall be paid to purchase one (1) Share upon the exercise of an Option granted under this Plan. 2.10 EXISTING PERSON means (a) a shareholder or holder of any option or warrant of the Company as of the effective date of the Plan or (b) any lineal descendant or antecedent, father, mother, spouse, brother, or sister of such shareholder or option or warrant holder or (c) a partnership, corporation, limited liability company, trust or other entity formed primarily for the benefit of any of the foregoing. 2.11 FAIR MARKET VALUE of each Share on any date means the price determined below on the last business day immediately preceding the date of valuation: 3 (a) The closing sales price per Share, regular way, or in the absence thereof the mean of the last reported bid and asked quotations, on such date on the exchange having the greatest volume of trading in the Shares during the thirty-day period preceding such date (or if such exchange was not open for trading on such date, the next preceding date on which it was open); or (b) If there is no price as specified in (a), the final reported sales price per Share, or if not reported, the mean of the closing high bid and low asked prices in the over-the-counter market for the Shares as reported by the National Association of Securities Dealers Automatic Quotation System, or if not so reported, then as reported by the National Quotation Bureau Incorporated, or if such organization is not in existence, by an organization providing similar services, on such date (or if such date is not a date for which such system or organization generally provides reports, then on the next preceding date for which it does so); or (c) If there also is no price as specified in (b), the price per Share determined by the Board by reference to bid-and-asked quotations for the Shares provided by members of an association of brokers and dealers registered pursuant to Subsection 15(b) of the Exchange Act, which members make a market in the Shares, for such recent dates as the Board shall determine to be appropriate for fairly determining current market value; or (d) If there also is no price as specified in (c), an amount per Share determined in good faith by the Board to be the price at which the Committee acting in good faith determines through any reasonable valuation method that a Share might change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. The Fair Market Value may be based on the most recent valuation of the Company performed by the Company's auditors or by other professionals retained to value the Company. 2.12 INITIAL PUBLIC OFFERING means the first offering of Common Stock for sale by the Company pursuant to a registration statement filed in accordance with the 1933 Act or any comparable law then in effect. 2.13 ISO means an option granted under this Plan to purchase Shares which is intended by the Company to satisfy the requirements of Code Section 422 as an incentive stock option. 2.14 KEY PERSON means (i) a member of the Board who is not an Employee, (ii) a consultant, distributor or other person who has rendered valuable services to the Company, a Subsidiary or a Parent, (iii) a person who has incurred, or is willing to incur, financial risk in the form of guaranteeing or acting as co-obligor with respect to debts or other obligations of the Company, or (iv) a person who has extended credit to the Company. Key Persons are not limited to individuals and, subject to the preceding definition, may include corporations, partnerships, associations and other entities. 2.15 NON-ISO means an option granted under this Plan to purchase Shares which is not intended by the Company to satisfy the requirements of Code Section 422. 2.16 OPTION means an ISO or a Non-ISO. 2.17 OPTIONEE means any grantee of an Option. -2- 4 2.18 PARENT means any corporation which is a parent of the Company (within the meaning of Code Section 424). 2.19 PLAN means the Melita International Corporation 1997 Stock Option Plan, as amended from time to time. 2.20 SHARE means a share of the Common Stock of the Company. 2.21 STOCK OPTION GRANT means the written agreement or instrument which sets forth the terms of an Option granted to an Employee or Key Person under this Plan. 2.22 SUBSIDIARY means any corporation which is a subsidiary of the Company (within the meaning of Code Section 424(f)). 2.23 SURRENDERED SHARES means the Shares described in Section 11.2 which (in lieu of being purchased) are surrendered for cash or Shares, or for a combination of cash and Shares, in accordance with Section 11. 2.24 TEN PERCENT SHAREHOLDER means a person who owns (after taking into account the attribution rules of Code Section 424(d)) more than ten percent (10%) of the total combined voting power of all classes of shares of either the Company, a Subsidiary or a Parent. 2.25 1933 ACT means the Securities Act of 1933, as amended. SECTION 3. SHARES SUBJECT TO OPTIONS 1,350,000 Shares of Common Stock, less the number of Shares (a) which have been issued pursuant to exercised grants made under the Melita International Corporation 1992 Discounted Stock Option Plan, or (b) which are subject to options granted which remain outstanding under the Melita International Corporation 1992 Discounted Stock Option Plan, shall be reserved for issuance under this Plan. Such Shares shall be reserved, to the extent that the Company deems appropriate, from authorized but unissued Shares, and from Shares which have been reacquired by the Company. Furthermore, any Shares subject to an Option which remain unissued after the cancellation, expiration or exchange of such Option thereafter shall again become available for use under this Plan, and any Shares subject to an option granted under the Melita International Corporation 1992 Discounted Stock Option Plan which remain unissued after the cancellation, expiration or exchange of such option thereafter shall become available for use under this Plan. Notwithstanding the above, any Surrendered Shares which remain after the surrender of an Option under Section 11 shall not again become available for use under this Plan. SECTION 4. EFFECTIVE DATE The effective date of this Plan shall be February 6, 1997, provided, the shareholders of the Company approve this Plan within twelve (12) months after such effective date. If such effective date comes before such shareholder approval, any Options granted under this Plan before the date of such approval automatically shall be granted subject to such approval. -3- 5 SECTION 5. COMMITTEE This Plan shall be administered by the Committee appointed by the Board. The Committee acting in its absolute discretion shall exercise such powers and take such action as expressly called for under this Plan and, further, the Committee shall have the power to interpret this Plan and (subject to Section 15) to take such other action in the administration and operation of this Plan as the Committee deems equitable under the circumstances. The Committee's actions shall be binding on the Company, on each affected Employee or Key Person, and on each other person directly or indirectly affected by such actions. Notwithstanding anything else to the contrary herein, the Board shall have the authority and the final and conclusive decision to assume the powers and responsibilities outlined above with respect to the Committee, in whole or in part. SECTION 6. ELIGIBILITY Except as provided below, only Employees shall be eligible for the grant of Options under this Plan, but no Employee shall have the right to be granted an Option under this Plan merely as a result of his or her status as an Employee. Key Persons may be eligible, subject to written approval by the Board, for the grant of Options under this Plan, but only if the Key Person has provided valuable services to the Company, a Subsidiary or a Parent and only if the Option is a Non-ISO. SECTION 7. GRANT OF OPTIONS The Committee, acting pursuant to the procedure established by the Board, shall either have the right to grant Options under this Plan, or recommend to the Board that Options be granted under this Plan. In accordance with the procedure established by the Board, the Committee, in its absolute discretion, shall have the right to grant Options under this Plan from time to time to purchase Shares and, further, shall have the right to grant new Options in exchange for outstanding Options. Such Options shall be granted to Employees or Key Persons selected by the Committee, acting in its discretion as set forth above, and neither the Board nor the Committee shall be under any obligation whatsoever to grant Options to all Employees or Key Persons, or to grant all Options subject to the same terms and conditions. Each grant of an Option shall be evidenced by a Stock Option Grant and each Stock Option Grant shall: 1. specify whether the Option is an ISO or Non-ISO; and 2. incorporate such other terms and conditions as the Committee, acting in its absolute discretion, deems consistent with the terms of this Plan, including (without limitation) a restriction on the number of Shares subject to the Option which first become exercisable or subject to surrender during any calendar year. In determining Employee(s) or Key Person(s) to whom an Option shall be granted and the number of Shares to be covered by such Option, the Committee may take into account the recommendations of the President of the Company and its other officers, the duties of the Employee or Key Person, the present and potential contributions of the Employee or Key Person to the success of the Company, the anticipated number of years of service remaining before the attainment by the Employee of retirement age, and other factors deemed relevant by the Committee, in its sole discretion, in connection with -4- 6 accomplishing the purpose of this Plan. An Employee or Key Person who has been granted an Option to purchase Shares of the Company, whether under this Plan or otherwise, may be granted one or more additional Options. If the Committee grants an ISO and a Non-ISO to an Employee on the same date, the right of the Employee to exercise or surrender one such Option shall not be conditioned on his or her failure to exercise or surrender the other such Option. SECTION 8. EXERCISE PRICE If an Option is an ISO, the Exercise Price for each Share subject to such Option shall be no less than the Fair Market Value of a Share on the date such Option is granted or, if such Option is granted to a Ten Percent Shareholder, the Exercise Price for each Share subject to such Option shall be no less than 110% of the Fair Market Value of a Share on the date such Option is granted. If an Option is a Non-ISO, the Exercise Price for each Share shall be no less than the minimum price required by applicable state law, or by the Company's governing instrument, or $0.01, whichever price is greater. The Exercise Price shall be payable in full in cash upon the exercise of any Option. SECTION 9. EXERCISE PERIOD Each Option granted under this Plan shall be exercisable in whole or in part at such time or times as set forth in the related Stock Option Grant, but no Stock Option Grant shall: 1. make an Option exercisable before the date (a) such Option is granted; or (b) on which the Employee or Key Person to whom the Option is granted shall have completed 12 months of Continuous Service following the date of grant plus, for any person who has not continuously performed services for the Company, a Parent or a Subsidiary for at least six months prior to the date of grant, an additional number of months equal to the difference between (i) six months and (ii) the number of months of Continuous Service prior to the date of grant; or 2. make an Option exercisable after the earlier of the: (a) date such Option is exercised in full, or (b) date which is the tenth (10th) anniversary of the date such Option is granted, if such Option is a Non-ISO or an ISO granted to a non-Ten Percent Shareholder, or the date which is the fifth (5th) anniversary of the date such Option is granted, if such Option is an ISO granted to a Ten Percent Shareholder. A Stock Option Grant may provide for the exercise of an Option after the employment of an Employee has terminated for any reason whatsoever, including death or disability. The Committee shall have the right, in its discretion, to accelerate the time during which any Option may be exercised and to include in a Stock Option Grant provisions that will automatically trigger acceleration of the time during which an Option may be exercised, including, without limitation, a Change of Control, as described in Section 17 hereinbelow. -5- 7 The Committee shall have the right, in its sole discretion, to condition the vesting and exercisability of all or any portion of an Option upon an Employee's successful attainment of annual or other periodic performance objectives, as set forth in the Stock Option Grant. SECTION 10. NONTRANSFERABILITY No Option granted under this Plan shall be transferable by an Employee or Key Person other than by will or by the laws of descent and distribution, and such Option shall be exercisable during an Employee's or Key Person's lifetime only by the Employee or Key Person, as the case may be. The person or persons to whom an Option is transferred by will or by the laws of descent and distribution thereafter shall be treated as the Employee or Key Person. SECTION 11. SURRENDER OF OPTIONS 11.1 GENERAL RULE. Only until the occurrence of an Initial Public Offering, the Committee, acting in its absolute discretion, may incorporate a provision in a Stock Option Grant to allow an Employee or Key Person to surrender his or her Option in whole or in part in lieu of the exercise in whole or in part of that Option on any date that: 1. the Fair Market Value of the Shares subject to such Option exceeds the Exercise Price for such Shares; and 2. the Option to purchase such Shares is otherwise exercisable. 11.2 PROCEDURE. The surrender of an Option in whole or in part shall be effected by the delivery of the Stock Option Grant to the Committee, together with a statement signed by the Employee or Key Person which specifies the number of Shares ("Surrendered Shares") as to which the Employee or Key Person surrenders his or her Option and how he or she desires payment be made for such Surrendered Shares. 11.3 PAYMENT. An Employee or Key Person in exchange for his or her Surrendered Shares shall receive a payment in cash or in Shares, or in a combination of cash and Shares, equal in amount on the date such surrender is effected to the excess of the Fair Market Value of the Surrendered Shares on such date over the Exercise Price for the Surrendered Shares. The Committee, acting in its absolute discretion, can approve or disapprove an Employee's or Key Person's request for payment in whole or in part in cash and can make that payment in cash, in shares or in such combination of cash and Shares as the Committee deems appropriate. A request for payment only in Shares shall be approved and made in Shares to the extent payment can be made in whole Shares and (at the Committee's discretion) in cash in lieu of any fractional Shares. 11.4 RESTRICTIONS. Any Stock Option Grant which incorporates a provision to allow an Employee or Key Person to surrender his or her Option in whole or in part also shall incorporate such additional restrictions on the exercise or surrender of such Option as the Committee deems necessary to satisfy the conditions to the exemption under Rule 16b-3 (or any successor exemption) to Section 16(b) of the Exchange Act. Notwithstanding any other provision of the Plan of a Stock Option Grant, no provision permitting the surrender of an Option shall be enforceable or of any force and effect upon the occurrence of an Initial Public Offering. -6- 8 SECTION 12. SECURITIES REGISTRATION Each Stock Option Grant may provide that, upon the receipt of Shares as a result of the surrender or exercise of an Option, the Employee or Key Person shall, if so requested by the Company, hold such Shares for investment and not with a view of resale or distribution to the public and, if so requested by the Company, shall deliver to the Company a written statement satisfactory to the Company to that effect. Each Stock Option Grant may also provide that, if so requested by the Company, the Employee or Key Person shall make a written representation to the Company that he or she will not sell or offer to sell any of such Shares unless a registration statement shall be in effect with respect to such Shares under the 1933 Act, and any applicable state securities law or, unless he or she shall have furnished to the Company an opinion, in form and substance satisfactory to the Company, of legal counsel acceptable to the Company, that such registration is not required. Certificates representing the Shares issued upon the exercise or surrender of an Option granted under this Plan may at the discretion of the Company bear a legend to the effect that such Shares have not been registered under the 1933 Act or any applicable state securities law and that such Shares may not be sold or offered for sale in the absence of an effective registration statement as to such Shares under the 1933 Act and any applicable state securities law or an opinion, in form and substance satisfactory to the Company, of legal counsel acceptable to the Company, that such registration is not required. SECTION 13. LIFE OF PLAN No Option shall be granted under this Plan on or after the earlier of: 1. the tenth (10th) anniversary of the effective date of this Plan (as determined under Section 4 of this Plan), in which event this Plan otherwise thereafter shall continue in effect until all outstanding Options have been surrendered or exercised in full or no longer are exercisable, or 2. the date on which all of the Shares reserved under Section 3 of this Plan have (as a result of the surrender or exercise of Options granted under this Plan) been issued or no longer are available for use under this Plan, in which event this Plan also shall terminate on such date. SECTION 14. ADJUSTMENT The number of Shares reserved under Section 3 of this Plan, and the number of Shares and other securities and property subject to Options granted under this Plan, and the Exercise Price of such Options shall be adjusted by the Committee in an equitable manner to reflect any change in the capitalization of the Company, including, but not limited to, such changes as stock dividends or stock splits. Furthermore, the Committee shall have the right to adjust (in a manner which satisfies the requirements of Code Section 424(a)) the number of Shares reserved under Section 3 of this Plan, and the number of Shares subject to Options granted under this Plan, and the Exercise Price of such Options in the event of any corporate transaction described in Code Section 424(a) which provides for the substitution or assumption of such Options. If any adjustment under this Section 14 creates a fractional Share or a right to acquire a fractional Share, such fractional Share shall be disregarded, and the number of Shares -7- 9 reserved under this Plan and the number subject to any Options granted under this Plan shall be the next lower number of Shares, rounding all fractions downward. An adjustment made under this Section 14 by the Committee shall be conclusive and binding on all affected persons and, further, shall not constitute an increase in the number of Shares reserved under Section 3 of this Plan. SECTION 15. SALE OR MERGER OF THE COMPANY If the Company agrees to sell all or substantially all of its assets for cash or property, or for a combination of cash and property, or agrees to any merger, consolidation, reorganization, division or other transaction in which Shares are converted into another security or into the right to receive securities or property and such agreement does not provide for the assumption of or substitution for the Options granted under this Plan, each Option at the direction and discretion of the Committee, or as is otherwise provided in the Stock Option Grants, may be canceled unilaterally by the Company in exchange for the vested whole Shares (or, subject to satisfying the conditions to the exemption under Rule 16b-3 or any successor exemption to Section 16(b) of the Exchange Act, for the whole Shares and the cash in lieu of a fractional Share) which each Employee or Key Person otherwise would receive if he or she exercised the vested portion of his or her outstanding Option on a date immediately preceding such sale or other corporate transaction, any such exchange to be made only upon the payment of the Exercise Price for such outstanding Options. SECTION 16. AMENDMENT OR TERMINATION This Plan may be amended by the Committee from time to time to the extent that the Committee deems necessary or appropriate; provided, however, no such amendment shall be made absent the approval of the shareholders of the Company (1) to increase the number of Shares reserved under Section 3 except as set forth in Section 14, (2) to extend the maximum life of the Plan under Section 13 or the maximum exercise period under Section 9, (3) to decrease the minimum Exercise Price under Section 8, or (4) to change the designation of Employees or Key Persons eligible for Options under Section 6. The Committee also may suspend the granting of Options under this Plan at any time and may terminate this Plan at any time; provided, however, the Company shall not have the right to modify, amend or cancel any Option granted before such suspension or termination unless (1) the Employee or Key Person consents in writing to such modification, amendment or cancellation or (2) there is a dissolution or liquidation of the Company or a transaction described in Section 14 or Section 15 of this Plan. SECTION 17. CHANGE OF CONTROL For purposes of this Plan and documents evidencing Options granted pursuant to this Plan, a "Change of Control" of the Company shall be deemed to have occurred if one of the following events takes place: 1. Any person other than an Existing Person becomes a holder of record, as reflected on the stock transfer ledger of the Company, of securities of the Company representing a right of the person, acting individually and not in concert with any other party (and not acting through a contract, arrangement, understanding, relationship, proxy, voting trust, voting agreement, or other device), to vote more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; -8- 10 2. A person other than an Existing Person obtains the right to elect a majority of the members of the Board of Directors of the Company, but not including any such right granted solely pursuant to a proxy solicited by the Board of Directors of the Company; 3. The Company or any of its subsidiaries shall sell, assign or otherwise transfer, directly or indirectly, assets (including stock or other securities of subsidiaries, but other than the grant of licenses to intangible assets in the ordinary course of business) having a fair market value of sixty-six percent (66%) or more of all the assets of the Company and its subsidiaries to any third party, other than a wholly-owned subsidiary of the Company; or 4. Any person other than an Existing Person becomes a beneficial owner (as such term is used in Rule 13d-3 under the Exchange Act) of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, as determined for purposes of the election of members of the Board of Directors of the Company. Notwithstanding the above, no Change of Control shall be deemed to occur solely as the result of the issuance of new securities pursuant to (a) an Initial Public Offering or (b) the exercise of warrants and options granted and outstanding as of the effective date of the Plan. In addition, a Change of Control shall not, solely with respect to Section 17, Subsection 3 above, be deemed to occur as a result of any conveyance, transfer or grant to a bank or other financial institution of a collateral assignment of, securities title to or security interest in any goods, accounts, inventory, general intangibles or other assets of the Company or any of its subsidiaries to secure the obligations of the Company or any of its subsidiaries to such bank or other financial institution, or the exercise of any rights or remedies by such bank or other financial institution relation thereto. SECTION 18. MISCELLANEOUS 18.1 SHAREHOLDER RIGHTS. No Employee or Key Person shall have any rights as a shareholder of the Company as a result of the grant of an Option to him or to her under this Plan or his or her exercise or surrender of such Option pending the actual delivery of Shares subject to such Option to such Employee or Key Person. 18.2 NO CONTRACT OF EMPLOYMENT. The grant of an Option to an Employee or Key Person under this Plan shall not constitute a contract of employment or other contract relating to the performance of any services by the Employee or Key Person and shall not confer on an Employee or Key Person any rights upon his or her termination of employment or other relationship in addition to those rights, if any, expressly set forth in the Stock Option Grant which evidences his or her Option. 18.3 WITHHOLDING. The exercise or surrender of any Option granted under this Plan shall constitute an Employee's or Key Person's full and complete consent to whatever action the Committee directs to satisfy the federal and state tax withholding requirements, if any, which the Committee in its discretion deems applicable to such exercise or surrender. -9- 11 18.4 TRANSFER. The transfer of an Employee between or among the Company, a Subsidiary or a Parent shall not be treated as a termination of his or her employment under this Plan. 18.5 CONSTRUCTION. This Plan shall be construed under the laws of the State of Georgia. -10- 12 MELITA INTERNATIONAL CORPORATION 1997 STOCK OPTION PLAN STOCK OPTION GRANT CERTIFICATE MELITA INTERNATIONAL CORPORATION, a Georgia corporation (the "Company"), hereby grants to the optionee named below ("Optionee") an option (this "Option") to purchase the total number of shares shown below of Common Stock of the Company (the "Shares") at the exercise price per share set forth below (the "Exercise Price"), subject to all of the terms and conditions on the reverse side of this Stock Option Grant Certificate and the Melita International Corporation 1997 Stock Option Plan (the "Plan"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Plan. The terms and conditions set forth on the reverse side hereof and the terms and conditions of the Plan are incorporated herein by reference. In witness whereof, this Stock Option Shares Subject to Option: Optionee hereby acknowledges Grant has been executed by the Company -------- receipt of a copy of the Plan, by a duly authorized officer as of the represents that Optionee has read and date specified hereon. Exercise Price Per Share: $ understands the terms and provisions of -------- the Plan, and accepts this Option MELITA INTERNATIONAL CORPORATION subject to all the terms and conditions Term of Option: Years expiring of the Plan and this Stock Option Grant ---- ----- Certificate. Optionee acknowledges that By: there may be adverse tax consequences ----------------------------------- Shares subject to issuance under this upon exercise of this Option or Option shall be eligible for exercise disposition of the Shares and that Date of Grant: according to the vesting schedule Optionee should consult a tax adviser Type of Stock Option: described in Section 10 on the reverse prior to such exercise or disposition. [ ] Incentive of this Stock Option Grant certificate. [ ] Non-Qualified Vesting Extension Period: -------------------------------------- Months Signature of Optionee -------- Not Applicable -------- -------------------------------------- Print Name of Optionee Vesting: Four Year Performance Vesting
13 1. EXERCISE PERIOD OF OPTION. Subject to the terms and conditions of this Option and the Plan, and unless otherwise modified by a written modification signed by the Company and Optionee, this Option may be exercised with respect to all of the Shares, but only according to the vesting schedule specified on the obverse side of this Stock Option Grant Certificate and as described in Section 10 below, prior to the date which is the last day of the Term set forth on the face hereof following the date of grant (hereinafter "Expiration Date"). 2. RESTRICTIONS ON EXERCISE. This Option may not be exercised, unless such exercise is in compliance with the Securities Act of 1933, as amended, and all applicable state securities laws, as they are in effect on the date of exercise, and the requirements of any stock exchange or national market system on which the Company's Common Stock may be listed at the time of exercise. Optionee understands that the Company is under no obligation to register, qualify or list the Shares with the Securities and Exchange Commission ("SEC"), any state securities commission or any stock exchange or national market system to effect such compliance. 3. TERMINATION OF OPTION. Except as provided below in this Section, this Option may not be exercised after the date which is thirty (30) days after Optionee ceases to perform services for the Company, or any Parent or Subsidiary. Optionee shall be considered to perform services for the Company, or any Parent or Subsidiary, for all purposes under this Section and Section 10 hereof, if Optionee is an officer or full-time employee of the Company, or any Parent or Subsidiary, or if the Committee determines that Optionee is rendering substantial services as a part-time employee, consultant, contractor or advisor to the Company, or any Parent or Subsidiary. The Committee shall have discretion to determine whether Optionee has ceased to perform services for the Company, or any Parent or Subsidiary, and the effective date on which such services cease (the "Termination Date"). Notwithstanding anything contained herein to the contrary, if the corporate position of Optionee is, at any time, altered or revised such that Optionee's responsibilities are materially reduced or decreased for any reason, as determined by the Committee in its sole discretion, the vesting of Shares under Section 10 shall cease, effective as of the date of such reduction in Optionee's employment responsibilities; provided, however, except as otherwise provided in this Option and the Plan, Optionee shall have the right to exercise this Option with respect to Shares which have vested under Section 10 as of the date of such reduction of Optionee's responsibilities. (a) Termination Generally. If Optionee ceases to perform services for the Company, or any Parent or Subsidiary, for any reason, except death or disability (within the meaning of Code Section 22(e)(3)), this Option shall immediately be forfeited, along with any and all rights or subsequent rights attached thereto, thirty (30) days following the Termination Date, but in no event later than the Expiration Date. (b) Death or Disability. If Optionee ceases to perform services for the Company, or any Parent or Subsidiary, as a result of the death or disability of Optionee (as determined by the Committee in its sole discretion), this Option, to the extent (and only to the extent) that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee (or, in the event of Optionee's death, by Optionee's legal representative) within ninety (90) days after the Termination Date, but in no event later than the Expiration Date. (c) No Right to Employment. Nothing in the Plan or this Stock Option Grant Certificate shall confer on Optionee any right to continue in the employ of, or other relationship with, the Company, or any Parent or Subsidiary, or limit in any way the right of the Company, or any Parent or Subsidiary, to terminate Optionee's employment or other relationship at any time, with or without cause. 4. MANNER OF EXERCISE. (a) Exercise Agreement. This Option shall be exercisable by delivery to the Company of an executed Exercise and Shareholder Agreement ("Exercise Agreement") in the form of the Exercise Agreement delivered to Optionee, if applicable, or in such other form as may be approved or accepted by the Company, which shall set forth Optionee's election to exercise this Option with respect to some or all of the Shares, the number of Shares being purchased, any restrictions imposed on the Shares, and such other representations and agreements as may be required by the Company to comply with applicable securities laws. (b) Exercise Price. Such Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased. Payment for the Shares may be made in U.S. dollars in cash (by check). (c) Withholding Taxes. Prior to the issuance of Shares upon exercise of this Option, Optionee must pay, or make adequate provision for, any applicable federal or state withholding obligations of the Company. (d) Issuance of Shares. Provided that such Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall cause the Shares to be issued in the name of Optionee or Optionee's legal representative. 5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If this Option is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of: (a) the date two (2) years after the Date of Grant, or (b) the date one (1) year after exercise of the ISO, with respect to the Shares to be sold or disposed, Optionee shall immediately notify the Company in writing of such sale or disposition. Optionee acknowledges and agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by Optionee from any such early disposition by payment in cash or out of the current wages or earnings payable to Optionee. 6. NONTRANSFERABILITY OF OPTION. This Option may not be transferred in any manner, other than by will or by the laws of descent and distribution, and may be exercised during Optionee's lifetime only by Optionee. The terms of this Option shall be binding upon the executor, administrators, successors and assigns of Optionee. 7. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT THE GRANT AND EXERCISE OF THIS OPTION, AND THE SALE OF SHARES OBTAINED THROUGH THE EXERCISE OF THIS OPTION, MAY HAVE TAX IMPLICATIONS THAT COULD RESULT IN ADVERSE TAX CONSEQUENCES TO OPTIONEE. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH, OR WILL CONSULT WITH, HIS OR HER TAX ADVISOR AND OPTIONEE FURTHER ACKNOWLEDGES THAT OPTIONEE IS NOT RELYING ON THE COMPANY OR ANY EMPLOYEE, OFFICER OR DIRECTOR OF, OR COUNSEL OR ACCOUNTANTS FOR, THE COMPANY FOR ANY TAX, FINANCIAL OR LEGAL ADVICE. 8. INTERPRETATION. Any dispute regarding the interpretation of this Stock Option Grant Certificate shall be submitted by Optionee or the Company to the Committee, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Committee shall be final and binding on the Company and Optionee. 9. ENTIRE AGREEMENT. The Plan and the Exercise Agreement are incorporated herein by this reference. Optionee acknowledges and agrees that the granting of this Option constitutes a full accord, satisfaction and release of all obligations or commitments made to Optionee by the Company or any of its officers, directors, shareholders or affiliates with respect to the issuance of any securities, or rights to acquire securities, of the Company or any of its affiliates. This Stock Option Grant Certificate, the Plan and the Exercise Agreement constitute the entire agreement of the parties hereto, and supersede all prior undertakings and agreements with respect to the subject matter hereof. 10. VESTING AND EXERCISE OF SHARES. Subject to the terms of the Plan, this Option and the Exercise Agreement, the Shares issued pursuant to the exercise of this Stock Option Grant Certificate shall be subject to the vesting restrictions selected on the obverse side of this Option and defined below. For purposes of this Section, "Continuous Service" means a period of continuous performance of services by Optionee for the Company, a Parent, or a Subsidiary, beginning on and after the Effective Date, February 7, 1997, or such other date as is established by the Commitee, as determined by the Committee. Four Year Performance Vesting: Optionee may exercise this Option with respect to the percentage of Shares set forth below only after Optionee has completed the following periods of Continuous Service following the date of grant: (a) After twelve (12) months of Continuous Service, up to twenty-five percent (25%) of the Shares, provided that the Year One Performance Objectives, set forth below, have been achieved, in the sole judgment of the Committee; further provided, that if the Year One Performance Objectives have not been achieved, Optionee may exercise this Option with respect to the aforementioned 25% of the Shares only upon completion of forty-eight months of Continuous Service. YEAR ONE PERFORMANCE OBJECTIVES: (b) After twenty-four (24) months of Continuous Service, an additional twenty-five percent (25%) of the Shares (over and above those subject to Subsection (a) above), provided that the Year Two Performance Objectives, set forth below, have been achieved, in the sole judgment of the Committee; further provided, that if the Year Two Performance Objectives have not been achieved, Optionee may exercise this Option with respect to the aforementioned 25% of the Shares only upon completion of forty-eight months of Continuous Service. YEAR TWO PERFORMANCE OBJECTIVES: (c) After thirty-six (36) months of Continuous Service, an additional twenty-five percent (25%) of the Shares: and (d) After forty-eight (48) months of Continuous Service, up to one hundred percent (100%) of the Shares; provided, however, that for any Optionee who has not continuously performed services for the Company, a Parent or a Subsidiary for at least six months prior to the Date of Grant, each of the periods referred to in clauses (a) through (d) shall be extended by the number of months equal to the difference between (i) six months and (ii) the number of months of Continuous Service prior to the Date of Grant (the "Vesting Extension Period"), as indicated on the obverse hereof. Notwithstanding the above, an Optionee shall become one hundred percent (100%) vested and shall be entitled to exercise the Option as to one hundred percent (100%) of the Shares granted pursuant to this Stock Option Grant Certificate upon a Change of Control of the Company, as defined in Section 17 of the Plan. 14 MELITA INTERNATIONAL CORPORATION 1997 STOCK OPTION PLAN EXERCISE AND SHAREHOLDER AGREEMENT This Exercise and Shareholder Agreement (the "Exercise Agreement") is made this_____ day of__________ , 199___ by and between Melita International Corporation (the "Company") and the optionee named below ("Optionee") pursuant to that certain Stock Option Grant described below which was granted to Optionee under the Melita 1997 Stock Option Plan (the "Plan"). Optionee: --------------------------------------- Social Security Number: --------------------------------------- Address: --------------------------------------- --------------------------------------- --------------------------------------- Number of Shares Purchased: --------------------------------------- Price Per Share $ -------------------------------------- Aggregate Purchase Price: $ -------------------------------------- Date of Stock Option Grant: -------------------------------------- Optionee hereby delivers to the Company the Aggregate Purchase Price by check in the amount of $___________, receipt of which is acknowledged by the Board of Directors ("Board") of the Company. The Company and Optionee hereby agree as follows: 1. PURCHASE OF SHARES. On this date and subject to the terms and conditions of this Exercise Agreement and the Plan, Optionee hereby exercises, subject to the contingencies below, the Stock Option Grant between the Company and Optionee dated as of the "Date of Stock Option Grant" set forth above (the "Option") with respect to the "Number of Shares Purchased" set forth above of the Company's Common Stock at the "Aggregate Purchase Price" set forth above (the "Purchase Price") and the "Price per Share" set forth above (the "Purchase Price Per Share"). The term "Shares" refers to the shares of the Company's no par value common stock purchased under this Exercise Agreement and includes all securities received (a) in replacement of the Shares and (b) as a result of stock dividends or stock splits in respect of the Shares. Capitalized terms used in this Exercise Agreement that are not defined herein have the definitions ascribed to them in the Plan and the Option. 2. REPRESENTATIONS OF PURCHASER. Optionee represents and warrants to the Company that: (a) Optionee acknowledges that Optionee has received, read and understood the Plan and the Option and agrees to abide by and be bound by their terms and conditions; 15 (b) Optionee is purchasing the Shares for Optionee's own account for investment purposes only and not with a view to, or for sale in connection with, a distribution of the Shares within the meaning of the Securities Act of 1933, as amended (the "1933 Act"); (c) Optionee has no present intention of selling or otherwise disposing of all or any portion of the Shares; (d) Optionee is fully aware of (i) the highly speculative nature of the investment in the Shares; (ii) the financial hazards involved in the investment of the Shares; and (iii) the lack of liquidity of the Shares and the restrictions on transferability of the Shares (e.g., that Optionee may not be able to sell or dispose of the Shares or use them as collateral for loans); and (e) Optionee is capable of evaluating the merits and risks of this investment, has the ability to protect Optionee's own interests in this transaction and is financially capable of bearing a total loss of this investment. 3. COMPLIANCE WITH SECURITIES LAWS. Optionee understands and acknowledges that the Shares have not been registered under the 1933 Act and that, notwithstanding any other provision of the Option to the contrary, the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the 1933 Act and all applicable state securities laws. Optionee agrees to cooperate with the Company to ensure compliance with such laws. 4. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company shall have an assignable right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 4 (the "Right of First Refusal"). (a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating (i) the Holder's bona fide intention to sell or otherwise transfer such Shares, (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"), (iii) the number of Shares to be transferred to each Proposed Transferee, and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"); in addition, by providing the Notice, the Holder is deemed to be offering to sell the Shares at the Offered Price to the Company. (b) Exercise of Right of First Refusal. At any time within thirty (30) days after receipt of the Notice, the Company or its assignee may, by giving written notice to the Holder, elect to purchase any or all of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with Subsection (c) below. (c) Purchase Price. The purchase price for the Shares purchased under this Section 4 shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board in good faith. (d) Payment. Payment of the purchase price shall be made, at the option of the Company or its assignee, either (i) in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company or such assignee, or by any combination thereof -2- 16 within thirty (30) days after receipt of the Notice or (ii) in the manner and at the time(s) set forth in the Notice. (e) Holder's Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee as provided in this Section 4, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within one hundred and twenty (120) days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section 4 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company shall again be offered the Right of First Refusal, before any Shares held by the Holder may be sold or otherwise transferred. (f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section 4 notwithstanding, the transfer of any or all of the Shares, during Optionee's lifetime or on Optionee's death by will or intestacy, to Optionee's immediate family or to a trust for the benefit of Optionee or Optionee's immediate family shall be exempt from the provisions of this Section; provided, that as a condition to receiving the Shares, the transferee or other recipient shall agree in writing to receive and hold the Shares so transferred subject to the provisions of this Agreement, and to transfer such Shares no further except in accordance with the terms of this Agreement. As used herein, "immediate family" shall mean the Optionee's spouse, lineal descendant or antecedent, father, mother, brother or sister. (g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares upon an Initial Public Offering (as such term is defined in the Plan). 5. COMPANY'S REPURCHASE OPTION. The Company shall have the option to repurchase all or a portion of the Shares on the terms and conditions set forth in this Section 5 (the "Repurchase Option") if Optionee should cease to be employed by the Company for any reason, or no reason, including without limitation Optionee's death, disability, voluntary resignation or termination by the Company with or without cause. (a) Right of Termination Unaffected. Nothing in this Agreement shall be construed to limit or otherwise affect in any manner whatsoever the right or power of the Company to terminate Optionee's employment or association with the Company at any time, for any reason or no reason, with or without cause. For purposes of this Agreement, Optionee shall be considered to be employed by the Company or associated with the Company if Optionee is an officer, director or full-time employee of the Company or any Parent or Subsidiary of the Company or if the Board determines that Optionee is rendering substantial services as a part-time employee, consultant, contractor or advisor to the Company or any Parent or Subsidiary of the Company. The Board shall have discretion to determine whether Optionee has ceased to be employed by or associated with the Company or any Parent or Subsidiary and the effective date on which such employment or association is terminated (the "Termination Date"). (b) Exercise of Repurchase Option. Subject to Section 5(e) below, any time following the Termination Date, the Company may elect to repurchase any or all of the Shares by giving Optionee written notice of exercise of the Repurchase Option. -3- 17 (c) Calculation of Repurchase Price. In the event Optionee's employment with the Company terminates for any reason whatsoever, the Company or its assignee shall have the option to repurchase from Optionee (or from Optionee's personal representative as the case may be) any or all of the Shares at a price equal to the Fair Market Value (as defined in the Plan) of such Shares on the Termination Date. (d) Payment of Repurchase Price. The repurchase price shall be payable, at the option of the Company or its assignee, by (i) check, (ii) by cancellation of all or a portion of any outstanding indebtedness of Optionee to the Company or such assignee, (iii) by delivery of a promissory note of the Company payable in equal annual installments over a four (4) year period from the date of repurchase at a per annum interest rate equal to the prime rate as announced from time to time by the Company's principal bank or, if the Company has no principal bank, that rate announced by the Wall Street Journal as the prevailing "prime rate" of interest per annum, as of the Termination Date, or (iv) any combination of the above. (e) Termination of Repurchase Rights. The Repurchase Option shall terminate as to any Shares upon an Initial Public Offering (as such term is defined in the Plan). 6. COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. Optionee understands and acknowledges that, in reliance upon the representations and warranties made by Optionee herein, the Shares have not been registered with the Securities and Exchange Commission ("SEC") under the 1933 Act, but have been issued under an exemption or exemptions from the registration requirements of the 1933 Act which impose certain restrictions on Optionee's ability to transfer the Shares and have not been registered under any Georgia securities laws or the securities laws of any other state. Optionee understands that Optionee may not transfer any Shares unless such Shares are registered under the 1933 Act and the securities laws of Georgia (or the securities laws of any other state, if applicable) or unless, in the opinion of counsel to the Company, an exemption from such registration is available. Optionee understands that only the Company may file a registration statement with the SEC or Georgia (or other applicable states), and that the Company is under no obligation to do so with respect to the Shares. Optionee has also been advised that an exemption from registration may not be available or may not permit Optionee to transfer all or any of the Shares in the amounts or at the times proposed by Optionee. 7. ESCROW. As security for the faithful performance of this Exercise Agreement, Optionee agrees, immediately upon receipt of the certificate(s) evidencing the Shares, to deliver such certificate(s), to the Secretary of the Company or its designee ("Escrow Holder"), who is hereby appointed to hold such certificate(s) in escrow and to take all such actions and to effectuate all such transfers and/or releases of such Shares as are in accordance with the terms of this Exercise Agreement. Optionee and the Company agree that Escrow Holder shall not be liable to any party to this Exercise Agreement (or to any other party) for any actions or omissions unless Escrow Holder is grossly negligent relative thereto. The Escrow Holder may rely upon any letter, notice or other document executed by any signature reputed to be genuine and may rely upon advice of counsel and obey any order of any court with respect to the transactions contemplated herein. The Shares shall be released from escrow upon termination of both the Right of First Refusal set forth in Section 4 and the Repurchase Option set forth in Section 5; provided, however, that such release shall not affect the rights of the Company with respect to any pledge of Shares to the Company. Optionee hereby irrevocably constitutes and appoints Escrow Holder as Optionee's agent and attorney-in-fact for the purpose of executing and delivering any and all documents necessary to transfer any Shares purchased hereunder to the Company pursuant to the terms of this Exercise Agreement and to record such transfer on the books of the Company, such appointment being made with full power of substitution in the premises. -4- 18 8. LEGENDS. Optionee understands and agrees that the certificate(s) representing the Shares will bear legends in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED ("GEORGIA ACT"), UNDER ANY OTHER STATE SECURITIES LAW, OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("FEDERAL ACT"). THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, HYPOTHECATED, SOLD OR TRANSFERRED, NOR WILL ANY ASSIGNEE OR TRANSFEREE THEREOF BE RECOGNIZED BY THE CORPORATION AS HAVING AN INTEREST IN SUCH SHARES, IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES UNDER THE FEDERAL ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED, AND (II) AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES UNDER THE GEORGIA ACT AND UNDER ANY OTHER APPLICABLE STATE LAW, OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH SHARES WILL BE OFFERED FOR SALE, HYPOTHECATED, SOLD OR TRANSFERRED ONLY IN A TRANSACTION WHICH IS EXEMPT UNDER, OR WHICH IS OTHERWISE IN COMPLIANCE WITH, THE GEORGIA ACT AND ANY OTHER APPLICABLE STATE SECURITIES LAWS. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN EXERCISE AND SHAREHOLDER AGREEMENT DATED THE _____ DAY OF _______________, 19___, A COPY OF WHICH IS ON FILE WITH THE CORPORATION." 9. STOP-TRANSFER NOTICES. Optionee understands and agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 10. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. IN PARTICULAR, OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH OPTIONEE'S TAX ADVISORS CONCERNING THE ADVISABILITY OF FILING AN ELECTION WITH THE INTERNAL REVENUE SERVICE UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE OF 1986, AS IT MAY BE AMENDED FROM TIME TO TIME. 11. ENTIRE AGREEMENT. The Plan and the Option are incorporated herein by reference. This Exercise Agreement, the Plan and the Option constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and are governed by Georgia law except for that body of law pertaining to conflict of laws. -5- 19 Submitted by: Accepted by: OPTIONEE: COMPANY: - -------------------------------------- MELITA INTERNATIONAL (Print name of Optionee) CORPORATION By: - -------------------------------------- -------------------------------- (Signature of Optionee) Title: ----------------------------- Dated: Dated: ------------------------------- ----------------------------- -6- EX-11.1 3 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 Net Income Per Share MELITA INTERNATIONAL CORPORATION COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share data)
1997 1996 1995 ---- ---- ---- BASIC Weighted average common shares outstanding 8,000 8,000 8,000 Effect of the combination 3,143 3,143 3,143 Effect of the issuance of shares in the IPO 2,395 -- -- Dilutive effect of common equivalent shares -- -- -- Effect of shareholder distribution 294 945 945 Weighted average common equivalent shares outstanding 13,832 12,088 12,088 ====== ====== ====== Net income after income tax 10,529 7,609 4,749 Earnings per share 0.76 0.63 0.39 ====== ====== ====== Pro forma net income 7,610 4,782 2,955 Pro forma earnings per share 0.55 0.40 0.24 ====== ====== ====== FULLY DILUTED Weighted average common shares outstanding 8,000 8,000 8,000 Effect of the combination 3,143 3,143 3,143 Effect of the issuance of shares in the IPO 2,395 -- -- Dilutive effect of common equivalent shares 554 275 250 Effect of shareholder distribution 294 945 945 Weighted average common equivalent shares outstanding 14,386 12,363 12,338 ====== ====== ====== Net income after income tax 10,529 7,609 4,749 Earnings per share 0.73 0.62 0.38 ====== ====== ====== Pro forma net income 7,610 4,782 2,955 Pro forma earnings per share 0.53 0.39 0.24 ====== ====== ======
49 EX-21.1 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 Subsidiaries of the Company
Name of Subsidiary Jurisdiction of Incorporation ------------------ ----------------------------- Melita Finance Corporation Delaware Melita Intellectual Property, Inc. Delaware Inventions, Inc. Georgia Melita de Mexico, S. de R.L.de C.V. Mexico Support Groups, S. de R.L.de C.V. Mexico Melita Europe Limited United Kingdom Melita International FSC, Ltd. Barbados
51 EX-23.1 5 CONSENT OF ARTHUR ANDERSEN 1 Exhibit 23.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statement File No. 333-41503. ARTHUR ANDERSEN LLP Atlanta, Georgia March 26, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 6,845 23,969 15,796 0 2,461 51,357 10,674 5,735 56,395 19,106 0 0 0 69 37,220 56,395 65,790 65,790 25,173 25,173 28,538 0 0 12,079 1,550 10,529 0 0 0 1,0529 0.76 0.73
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 47,540 47,540 18,357 18,357 21,574 0 0 7,609 0 7,609 0 0 0 7,609 0.63 0.62
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MELITA INTERNATIONAL FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 DEC-31-1995 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 35,282 35,282 14,012 14,012 16,521 0 0 4,749 0 4,749 0 0 0 4,749 0.39 0.38
EX-99.1 9 SAFE HARBOR COMPLI. STMT FOR FORWARD LOOKING STMT. 1 EXHIBIT 99.1 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Melita International Corporation ("Melita" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of Melita. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for forward-looking statements (the "Safe Harbor Statement") to reflect future developments. In addition, Melita undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. This Safe Harbor Statement supersedes that certain Safe Harbor Statement filed as Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q dated August 14, 1997. Melita provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the following: DEPENDENCE ON LIMITED 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 Explorer and upgrades and additions to its PhoneFrame CS products and related services. PhoneFrame CS was introduced in early 1995 and PhoneFrame Explorer in late 1997. The Company expects that these products 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 customer contact and intelligent call center management solutions as its primary line of business. As a result, any factors adversely affecting the market for call center systems in general, or the PhoneFrame Explorer and PhoneFrame CS products in particular, could adversely affect the Company's business, financial condition and results of operations. The Company faces a potential charge resulting from the impact of having to write down inventory of outdated products which cannot be sold. 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 automated solutions, 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 1997, the Company's five largest customers accounted for 27.9% of the Company's total revenues. In 1996, the Company's five largest customers accounted for 24.5% of its total revenues. In 1995, the Company's five largest customers accounted for 25.0% 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 54 2 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 order dates and actual order dates, as well as non-recurring 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 55 3 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 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 Corporation ("Davox"), EIS International, Inc. ("EIS") and Mosaix International, Inc. ("Mosaix"). The Company also competes in the CTI segment of the market, where principal competitors include AnswerSoft, Inc., Genesys Telecommunications Laboratories, Inc., and Nabnasset Corporation, among others. The Company may face additional competition from PBX/ACD vendors, system integrators, other communications equipment and service providers, computer hardware and software vendors and others. The Company may also face additional competition from non-traditional competitors in the emerging computer telephony market. Such competitors may include Interactive Intelligence 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. Competition from these or other sources could result in price reductions and loss of market share which could adversely affect the Company's business, financial condition and results of operations. 56 4 CONTROL BY PRINCIPAL SHAREHOLDER Aleksander Szlam, the Company's Chairman of the Board, Chief Executive Officer and principal shareholder, is the beneficial owner of approximately 73.5% of the outstanding shares of Common Stock. Accordingly, Mr. Szlam is 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; COMPLIANCE TO INDUSTRY REQUIREMENTS 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 and technological 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 anticipate, 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 57 5 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 applications to function properly with existing applications, difficulty in recruiting sufficient numbers of programmers with the proper technical skills and capabilities, loss of programmers and other technical personnel with existing 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. The Company recently evaluated its Products for issues relating to Year 2000 ("Y2K") Compliance. Although the Company has made substantial changes to its Products to assure Y2K Compliance, no assurance can be made that the Products will, in fact, operate correctly. Any Y2K related defects which are detected will necessarily detract resources from development of other products and may result in delays in deploying additional products and features. In addition, any litigation as a result of Y2K non-compliance may materially adversely affect the Company's financial condition, the Company's business or results of operations. 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, 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 recently implemented 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 58 6 support organization will be effective. The Company is also implementing a plan to outsource a significant portion of the Product's production and integration to a non-affiliated third party. There can be no assurance that the implementation of this outsourcing plan will be successful or that managing the transition can be accomplished without disruption to the Company's normal operation. In addition, due to the highly complex nature of the Company's products, no assurance can be made that the Products produced and integrated by the outsourcing third-party will provide operation as reliable as those produced and integrated by Employees of the Company. Any disruptions resulting from the implementation of the help-desk information system the decentralization plan or the outsourcing 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 1995, 1996 and 1997 accounted for 22.5%, 21.0% and 18.4%, 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. 59 7 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, time consuming and may not uncover all defects prior to shipment and installation at a Customer's location. 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 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 which the Company is dependent upon the third-party to correct and that may be difficult for the Company to detect and correct. POTENTIAL LIABILITY TO CUSTOMERS The Company's products may be critical to the operations of its customers' businesses and provide benefits that may be difficult to quantify. Any failure in a Company product or a customer'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. 60 8 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 the 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 the 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. 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 or other communications practices, if enacted, would not adversely affect the Company. 61 9 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. 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 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. 62 10 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 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. Although the Company has an employment agreement with Mr. Szlam, the agreement does not obligate him to continue his employment with the Company. There can be no assurance that the Company will be able to retain the services of Mr. Szlam. The Company does not maintain key man life insurance on Mr. Szlam. The loss of the services of Mr. Szlam would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently in the process of searching for a President/COO. There is no assurance that this position will be filled in the near term. 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. 63 11 SHARES ELIGIBLE FOR FUTURE SALE As described in the Company's Form S-8 dated December 4, 1997 and filed with the Commission, the Company has 1,600,000 shares of Common Stock reserved for issuance under its stock plans, of which 1,116,541 shares were subject to outstanding options as of the date of filing of the S-8. 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 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. 64 -----END PRIVACY-ENHANCED MESSAGE-----