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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MELITA INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 3661 58-1378534
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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J. NEIL SMITH
PRESIDENT AND CHIEF OPERATING OFFICER
MELITA INTERNATIONAL CORPORATION
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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COPIES TO:
JOHN FRANKLIN SMITH, ESQ. MARK G. BORDEN, ESQ.
LARRY W. SHACKELFORD, ESQ. BRENT B. SILER, ESQ.
MORRIS, MANNING & MARTIN, L.L.P. HALE AND DORR LLP
1600 ATLANTA FINANCIAL CENTER 1455 PENNSYLVANIA AVENUE, N.W.
3343 PEACHTREE ROAD, N.E. WASHINGTON, D.C. 20004
ATLANTA, GEORGIA 30326 (202) 942-8400
(404) 233-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, no par value................................ $35,000,000 $10,606.06
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(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 6, 1997
3,500,000 SHARES
MELITA(R) INTERNATIONAL LOGO
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Common Stock will be between $ and $ per share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made to have
the Common Stock approved for listing on the Nasdaq National Market under the
symbol "MELI."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share............... $ $ $
Total(3)................ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
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MONTGOMERY SECURITIES
, 1997
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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[ARTWORK/DIAGRAMS DEPICTED IN PROSPECTUS]
1. Inside front page (fold-out) portrays the following:
Center: Photograph of a Call Center agent and a customer speaking over the
telephone illustrating the Company's concept of "People To People
Communication." Arrows to the top, left, bottom and right of the photograph
point to additional diagrams.
Top: Arrow extending from central photograph points to the word
"Applications." Above and to the left of "Applications" is a list of the
CTI applications: MPACT, PowerPACT and ActionPACT. Above and to the right
of "Applications," the Company's Megellan application is listed.
Right: Arrow extending from central photograph points to the words "System
Management" which are superimposed over a picture of five overlapping
screens generated by PhoneFrame CS Command Post Desktop.
Bottom: Arrow extending from central photograph points to the text:
"Applications and solutions for customer communications:
- Comprehensive Call Center Solutions
- Build and Improve Customer Relationships
- Increase Agent Productivity
- Reduce Operating Costs"
Left: Arrow extending from central photograph points to the word
"Technology." To the immediate left of "Technology" is a diagram of the
Company's call center system.
2. Graphic on page 29 of the prospectus in the "Business" section is labeled
"PhoneFrame CS Architecture." The center portion of the graphic depicts a
bar labeled "Local Area Network." Below the Local Area Network bar are
drawings representing a customer's host computing center, the Company's
call processor, the Company's Universal Switch components, the customer's
PBX/ACD and a "cloud" labeled "PSTN" (public switch telephone network).
Each of these components are linked to the Local Area Network. The
Universal Switch, PBX/ACD and PSTN are linked together.
Above the Local Area Network bar are drawings representing the Company's
Universal Workstations and corresponding telephone sets, the Company's
Command Post Windows NT and the Company's Universal Server RISC/6000
Sybase. The telephone sets are connected to the PBX/ACD with a dotted line.
The Command Post and the Universal Server each are connected to the Local
Area Network.
3. Inside (second to) back page graphics portray a screen generated by the
Company's Magellan product. The screen is labeled "Magellan Application
Interpreter." The text appearing above the picture of the screen is as
follows:
"Provides agent with information, not just data....
Magellan(TM) navigates multiple corporate data sources and presents
needed information in a Single System Image View(TM). Solutions from basic
"screen pops" to sophisticated customer interaction applications can be created
and modified on-the-fly without programming. Magellan(TM) allows applications to
be developed and deployed quickly, making agents more efficient by presenting
them with the information needed to make timely and informed decisions."
The image of the "Magellan Application Interpreter" screen is enhanced by text
that highlights Magellan's features as follows:
- Employs script windows to bring together text and real-time
data from multiple resources.
- Customer data may be entered with the click of a mouse.
- Customizes on-line help functions.
- Displays talk time with the call gauge.
- Programmable action buttons for background applications.
- Buttons may be customized to display specific actions and
reactions.
- Imports visual elements in graphic boxes.
4. Inside back page is captioned:
"Melita's Command Post(TM) graphical desktop lets supervisors monitor
call center activity at a glance." Graphics portray a screen generated by
the Company's PhoneFrame(R) CS product. The screen is labeled "Production
Monitoring." Features of the screen are highlighted by the following text:
" - Call List Display Panel. Displays status of active calling
lists.
- The Tool Bar. Brings up different productivity views to
monitor and control the activity of a call center.
- Agent Status Legend. User defined legends to choose conditions
or calling states.
- ViewPort Display Area. Real time production monitoring of
agent status using customized floor plans.
- Trunk State Display Panel. Graphically depicts enabled and
disabled trunk states."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Combined Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Melita International Corporation ("Melita" or the "Company") is a leading
provider of customer contact and call management systems that enable businesses
to automate call center activities and enhance their telephony-based customer
interaction. The Company's principal product, PhoneFrame CS, is used by
organizations to increase agent productivity, reduce the costs of call center
operations and enhance revenue-generating capabilities for a broad range of
activities, including debt collection, telemarketing and customer service.
PhoneFrame CS is an innovative, comprehensive call center solution based on
client/server software that integrates with industry standard computing and
telephony infrastructures. The Company's customers include leading organizations
in industries such as banking, financial services, retail, communications and
others, where businesses are engaged in frequent telephone contact with
customers or prospects.
In many industries, customer retention costs are significantly lower than
the costs of customer acquisition. Consequently, many businesses have come to
view long-term customer relationships as a key corporate asset and a source of
competitive advantage. To build customer loyalty, organizations are leveraging
available customer information by disseminating this information to employees
responsible for customer interaction in order to enhance the quality of each
customer contact. In addition, organizations recognize that telephony-based
interaction has become an increasingly effective means of customer contact as
telecommunications costs have decreased and enabling technology such as
computer/telephony integration ("CTI") has emerged to automate the customer
interaction process.
According to industry sources, the CTI, outbound call management and
automatic call distribution market segments of the worldwide call center systems
market aggregated $2.8 billion in 1996 and are expected to grow at a compound
annual growth rate of 19% to $6.7 billion by 2001. The Company's primary target
markets, CTI and outbound call management, were approximately $1.3 billion
worldwide in 1996 and are together expected to grow at a compound annual growth
rate of approximately 28% to $4.4 billion by 2001.
The Company provides comprehensive solutions to the call center industry
based on a scaleable client/server software architecture capable of supporting
installations with more than 500 simultaneous users on a single server.
PhoneFrame CS provides comprehensive functionality and a user-friendly
application development environment designed to provide increased agent
productivity, lower telecommunication costs and low nuisance call rates. The
Company's software allows call center system managers to control and monitor
call center activity at a glance, providing call flow script creation and
editing, call campaign configuration, resource definition and management, and
system management and reporting capabilities. The Company's products also
provide enhanced interaction with customers through front-end applications which
utilize real-time access to information to guide call center agents through each
step of the customer interaction process. The Company's call management solution
leverages existing investments in call center, information and telephony
systems.
The Company currently has over 500 systems in operation worldwide. Selected
customers include AirTouch Communications, Inc., BancOne Services Corporation,
Barclays Bank PLC, Citicorp, Credicard SA Brazil, Dun & Bradstreet Corporation,
Grupo Financiero, Bancomer, S.A. de C.V., J.C. Penney Company, National
Westminster Bank and Snyder Communications, Inc. The Company sells its products
through a direct sales force in the United States, Canada and the United
Kingdom. In 1996, the Company derived approximately 21.0% of its total revenues
from sales outside the United States. International distribution is largely
through direct sales and value-added resellers ("VARs").
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Melita International Corporation is a Georgia corporation organized in
1979. Unless the context otherwise requires, references in this Prospectus to
"Melita" or the "Company" refer to Melita International Corporation and its
combined affiliates, Melita Europe Limited and Inventions, Inc. The Company's
principal executive offices are located at 5051 Peachtree Corners Circle,
Norcross, Georgia 30092-2500, and its telephone number is (770) 239-4000.
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THE OFFERING
Common Stock offered by the Company.... 3,500,000 shares
Common Stock to be outstanding after
the offering........................... 14,643,395 shares(1)
Use of proceeds........................ For (i) repayment of notes payable
to the Company's principal
shareholder, (ii) payment of
undistributed S corporation earnings
and (iii) general corporate purposes
and working capital.
Proposed Nasdaq National Market
symbol................................. MELI
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(1) Excludes an aggregate of 1,600,000 shares of Common Stock reserved for
issuance under the 1992 Stock Option Plan, the 1997 Stock Option Plan and
the Stock Purchase Plan (as defined herein), of which 1,106,097 shares were
subject to options outstanding as of the date of this Prospectus at a
weighted average exercise price of $3.42 per share. See
"Management -- Employee Benefit Plans" and Note 6 of the Notes to Combined
Financial Statements.
SUMMARY COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
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1992 1993 1994 1995 1996
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Total revenues................................... $24,703 $24,668 $27,156 $35,282 $47,540
Gross margin..................................... 16,059 16,563 17,592 21,270 29,183
Income from operations........................... 3,178 3,649 2,600 4,661 7,348
Pro forma net income (1)......................... $ 2,157 $ 2,356 $ 1,508 $ 2,955 $ 4,782
Pro forma net income per common and common
equivalent share............................... $ 0.42
Pro forma weighted average number of common and
common equivalent shares outstanding(2)........ 11,395
DECEMBER 31, 1996
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PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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BALANCE SHEET DATA:
Working capital (deficit).................................. $ 8,124 $(5,403) $
Total assets............................................... 27,069 18,281
Long-term debt, net of current portion..................... -- --
Shareholders' equity (deficit)............................. 10,872 (2,655)
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(1) Upon the effective date of this offering, the Company will terminate its
status as an S corporation. Thereafter, the Company will be subject to
federal and state corporate income taxes. Pro forma net income is presented
as if the Company had been subject to corporate income taxes for all periods
presented. See "Termination of S Corporation Status and Related
Distributions" and Notes 1 and 3 of the Notes to Combined Financial
Statements.
(2) See Note 1 of the Notes to Combined Financial Statements.
(3) Pro forma to give effect to the following: (i) the issuance of 3,143,395
shares of Common Stock in connection with the combination (the
"Combination") of the Company, Melita Europe Limited ("Melita Europe") and
Inventions, Inc. ("Inventions"), which will occur concurrently with the
effective date of this offering, (ii) the distribution subsequent to
December 31, 1996 of undistributed S corporation earnings of $14.4 million
(the "Distribution"), which included a cash distribution of $1.5 million and
the issuance of notes payable (the "1997 Notes") of $12.9 million, together
with the related accrual of interest of $200,000 (the "Interest Accrual")
(iii) the inclusion of current deferred tax assets of $1.1 million due to
the termination of the S corporation status (the "Deferred Tax Adjustment")
and (iv) the
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repayment at the closing of this offering of a note payable to the
principal shareholder (the "1992 Note") with a principal balance of $2.6
million and the 1997 Notes (the "Note Repayment"). See "Termination of S
Corporation Status and Related Distributions," " Use of Proceeds,"
"Capitalization," "Certain Transactions" and Notes 2, 3 and 8 of the Notes
to Combined Financial Statements.
(4) Pro forma as adjusted to give effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $ per share and the receipt of the estimated net
proceeds therefrom. See "Use of Proceeds," "Capitalization."
FORWARD-LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. The Company faces many risks and
uncertainties, including those described in this Prospectus under the caption
"Risk Factors." Because of these many risks and uncertainties, the Company's
actual results may differ materially from any results presented in or implied by
the forward-looking statements included in this Prospectus.
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Except as otherwise noted, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) gives effect to the
recapitalization of the Company's Common Stock whereby each share of the
Company's outstanding Voting Common Stock and Non-Voting Common Stock (each
having no par value per share) will be converted into 1/100 of a share of voting
Common Stock, no par value per share ("Common Stock") and (iii) gives effect to
the Combination (as defined in footnote 3 above). The recapitalization and the
Combination will be effected contemporaneously with the effectiveness of this
offering. See "Certain Transactions," "Underwriting" and Note 9 of the Notes to
Combined Financial Statements.
Cancel Dial(R), Melita(R), PhoneFrame(R), Universal Access(R), Universal
Server(R) and Universal Switch(R) are registered trademarks or service marks of
the Company. ActionPACT(TM), Customer Care(SM), PhoneFrame Command Post(TM),
Magellan(TM), MPACT(TM), PowerPACT(TM), Qflow(TM), Single System Image View(TM),
Universal Workstation(TM) and UTP(TM) are trademarks or service marks of the
Company. This Prospectus also includes trademarks, service marks and trade names
of other companies.
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RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, in evaluating
the Company and its business before purchasing shares of Common Stock offered
hereby.
DEPENDENCE ON SINGLE PRODUCT LINE; RISKS ASSOCIATED WITH SERVICING THE MARKET
FOR CALL CENTER SOLUTIONS
The Company currently derives substantially all of its revenues from sales
of its PhoneFrame CS product and related services. PhoneFrame CS was introduced
in early 1995, and the Company expects that this product and related services
will continue to account for a substantial portion of the Company's revenues for
the foreseeable future. Although the Company intends to enhance these products
and develop related products, the Company expects to continue to focus on
providing call center systems as its primary line of business. As a result, any
factor adversely affecting the market for call center systems in general, or the
PhoneFrame CS product in particular, could adversely affect the Company's
business, financial condition and results of operations. The market for call
center systems is intensely competitive, highly fragmented and subject to rapid
change. The Company's future success will depend on continued growth in the
market for call center systems, and there can be no assurance that this market
will continue to grow. If this market fails to grow or grows more slowly than
the Company currently anticipates, the Company's business, financial condition
and results of operations would be materially adversely affected.
RELIANCE ON SIGNIFICANT CUSTOMERS
The Company has derived and believes that it will continue to derive a
significant portion of its revenues in any period from a limited number of large
corporate clients. During 1996, the Company's five largest customers accounted
for approximately 26.6% of the Company's total revenues. In 1995, the Company's
five largest customers accounted for approximately 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 Company's business, financial condition and results of operations.
See "Business -- Customers."
POTENTIAL VARIABILITY OF QUARTERLY FINANCIAL RESULTS
The Company's revenues and operating results could vary substantially from
quarter to quarter. Among the factors that could cause these variations are
changes in the demand for the Company's products, the level of product and price
competition, the length of the Company's sales process, the size and timing of
individual transactions, the mix of products and services sold, software defects
and other product quality problems, any delay in or cancellation of customer
installations, the Company's success in expanding its direct sales force and
indirect distribution channels, the timing of new product introductions and
enhancements by the Company or its competitors, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, commercial strategies adopted by competitors, changes in foreign
currency exchange rates, customers' fiscal constraints, the Company's ability to
control costs and general economic conditions. In addition, a limited number of
relatively large customer orders has accounted for and is likely to continue to
account for a substantial portion of the Company's total revenues in any
particular quarter. Sales of the Company's software products generally involve a
significant commitment of management attention and resources by prospective
customers. Accordingly the Company's sales process is often lengthy and subject
to delays associated with the long approval process that accompanies significant
customer initiatives or capital expenditures. The Company's sales cycle, from
initial trial to complete installation, varies substantially from customer to
customer. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short term, variations between
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anticipated order dates and actual order dates, as well as nonrecurring or
unanticipated large orders, can cause significant variations in the Company's
operating results from quarter to quarter. As a result of the foregoing factors,
the Company's operating results for a future quarter may be below the
expectations of securities analysts and investors. In such event, the market
price of the Company's Common Stock likely will be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
LIMITED PREDICTABILITY OF SALES DUE TO LENGTHY SALES PROCESS
The sale of the Company's products generally requires the Company to
provide a significant level of education to prospective customers regarding the
use and benefits of the Company's products. In addition, implementation of the
Company's products involves a significant commitment of resources by prospective
customers and is commonly associated with substantial integration efforts which
may be performed by the Company or the customer. For these and other reasons,
the length of time between the date of initial contact with the potential
customer and the installation and use of the Company's products is typically six
months or more, and may be subject to delays over which the Company has little
or no control. The Company's implementation cycle could be lengthened in the
future by increases in the size and complexity of its installations. Delay in or
cancellation of sales could have a material adverse effect on the Company's
business, financial condition and results of operations, and could cause the
Company's operating results to vary significantly from quarter to quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
COMPETITION
The market for the Company's products is intensely competitive, fragmented
and subject to rapid change. Because the Company's principal products are call
management systems, which include both software applications and hardware, the
Company competes with a variety of companies which provide these components
independently or as an integrated system. The Company's primary competitors in
the field of integrated inbound/outbound call management systems are Davox
Corporation ("Davox"), EIS International, Inc. ("EIS") and Mosaix International,
Inc. ("Mosaix"). The Company competes primarily against Davox and Mosaix in the
collections segment of the outbound call management systems market, and against
EIS in the telemarketing and telesales segments of the inbound/outbound call
management systems market. The Company also competes in the CTI segment of the
market, where principal competitors include AnswerSoft, Inc., Genesys
Telecommunications Laboratories, Inc., Nabnasset Corporation and Brock
International, Inc., among others. The Company may face additional competition
from PBX/ACD vendors, other telecommunications equipment providers,
telecommunications service providers, computer hardware and software vendors and
others. The Company generally faces competition from one or more of its
principal competitors on major installations and believes that price is a major
factor considered by its prospective customers. Increased competition has
contributed significantly to price reductions and the Company expects these
price reductions to continue. In addition, increased competition may result in
reduced operating margins and loss of market share, either of which could
materially adversely affect the Company's business, financial condition and
results of operations. Many of the Company's current and potential competitors
have significantly greater financial, technical, marketing and other resources
than the Company. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
could the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See
"Business -- Competition."
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of this offering, Aleksander Szlam, the Company's Chairman
of the Board, Chief Executive Officer and principal shareholder, will
beneficially own approximately 76.1% of the outstanding shares of Common Stock
(73.5% if the Underwriters' over-allotment option is exercised in full).
Accordingly,
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Mr. Szlam will be in a position to control the Company through his ability to
control any election of members of the Board of Directors, as well as any
decision whether to merge or sell the assets of the Company, to adopt, amend or
repeal the Company's Amended and Restated Articles of Incorporation and Bylaws,
or to take other actions requiring the vote or consent of the Company's
shareholders. This concentration of ownership could also discourage bids for the
shares of Common Stock at a premium to, or create a depressive effect on, the
market price of the Common Stock. See "Principal Shareholders" and "Description
of Capital Stock."
COMPETITIVE MARKET FOR PERSONNEL
The future success of the Company's growth strategy will depend to a
significant extent on its ability to attract, train, motivate and retain highly
skilled professionals, particularly software developers, sales and marketing
personnel and other senior technical personnel. An inability to hire such
additional qualified personnel could impair the Company's ability to adequately
manage and complete its existing sales and to bid for, obtain and implement new
sales. Further, the Company must train and manage its growing employee base,
requiring an increase in the level of responsibility for both existing and new
management personnel. There can be no assurance that the management personnel
and systems currently in place will be adequate or that the Company will be able
to assimilate new employees successfully. Highly skilled employees with the
education and training required by the Company are in high demand. Accordingly,
there can be no assurance that the Company will be successful in attracting or
retaining current or future employees. See "Business -- Employees."
RISKS ASSOCIATED WITH TECHNOLOGICAL ADVANCES; NECESSITY OF DEVELOPING NEW
PRODUCTS
The market for call center systems is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in this market could be eroded rapidly by
unforeseen changes in customer requirements for application features, functions
and technologies. The Company's growth and future operating results will depend
in part upon its ability to enhance existing applications and develop and
introduce new applications that meet or exceed technological advances in the
marketplace, that meet changing customer requirements, that respond to
competitive products and that achieve market acceptance. The Company's product
development and testing efforts are expected to require substantial investments
by the Company. There can be no assurance the Company will possess sufficient
resources to make these necessary investments. The Company has in the past
experienced delays both in developing new products and customizing existing
products, and there can be no assurance that the Company will not experience
difficulties that could cause such delays in the future. In addition, there can
be no assurance that such products will meet the requirements of the marketplace
and achieve market acceptance, or that the Company's current or future products
will conform to industry standards. If the Company is unable, for technological
or other reasons, to develop and introduce new and enhanced products in a timely
manner, the Company's business, financial condition and results of operations
could be materially adversely affected.
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in revenue,
operations and personnel. Continued growth will place significant demands on its
management and other resources. In particular, the Company will have to continue
to increase the number of its personnel, particularly skilled technical,
marketing and management personnel, and continue to develop and improve its
operational, financial, communications and other internal systems. The Company's
inability to manage its growth effectively could have a material adverse effect
on the quality of the Company's services and projects, its ability to attract
and retain key personnel, its business prospects and its results of operations
and financial condition. The Company is currently in the process of implementing
a new help-desk information system to upgrade its automated customer support
capability. No assurance can be given that the implementation of this system
will not result in disruptions to the Company's business. In addition, the
Company is in the process of implementing a plan to decentralize its sales and
support functions throughout existing and planned regional offices. There can be
no assurance that the Company will be successful in implementing this
decentralization plan or managing the
8
11
transition without disruptions in the sales and support functions or that the
new decentralized sales and support organization will be effective. Any
disruptions resulting from the implementation of the help-desk information
system or the decentralization plan, or the failure to implement these changes
in a timely manner, could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Employees" and "Management -- Executive Officers and Directors."
INTERNATIONAL OPERATIONS
Revenue from sales outside the United States in 1994, 1995 and 1996
accounted for 20.9%, 22.5% and 21.0%, respectively, of the Company's total
revenues. International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, changes in legal and regulatory requirements including those relating to
telemarketing activities, changes in tariffs, seasonality of sales, costs of
localizing products for foreign markets, longer accounts receivable collection
periods and greater difficulty in accounts receivable collection, difficulties
and costs of staffing and managing foreign operations, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences and political and economic instability. There can be no assurance
that the Company will be able to sustain or increase international revenue, or
that the factors listed above will not have a material adverse impact on the
Company's international operations. While the Company's expenses incurred in
foreign countries typically are denominated in the local currencies, revenues
generated by the Company's international sales typically are paid in U.S.
dollars or British pounds. Accordingly, while exposure to currency fluctuations
to date has been insignificant, there can be no assurance that fluctuations in
currency exchange rates in the future will not have a material adverse impact on
the Company's international operations. The Company currently does not engage in
currency hedging activities.
A significant element of the Company's business strategy is to continue
expansion of its operations in international markets. This expansion has
required and will continue to require significant management attention and
financial resources to develop international sales channels. Because of the
difficulty in penetrating new markets, there can be no assurance that the
Company will be able to maintain or increase international revenues. To the
extent that the Company is unable to do so, the Company's financial condition
and results of operations could be materially adversely affected. See
"Business -- Strategy."
RISK OF SOFTWARE DEFECTS; DEPENDENCE ON THIRD-PARTY SOFTWARE
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has, in the past, discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. In particular, the call center environment is
characterized by a wide variety of standard and non-standard configurations that
make pre-release testing for programming or compatibility errors very difficult
and time consuming. There can be no assurance that, despite extensive testing by
the Company and by current and potential customers, errors will not be found,
resulting in a loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation or increased service
and warranty cost, any of which could have a material adverse affect on the
Company's business, financial condition and results of operations. Certain
software used in the Company's products is licensed by the Company from third
parties. There can be no assurance that the Company will continue to be able to
resell this software under its licenses or, if any licensor terminates its
agreement with the Company, that the Company will be able to develop or
otherwise procure replacement software from another supplier on a timely basis
or on commercially reasonable terms. In addition, such third-party software may
contain errors that would be difficult for the Company to detect and correct.
POTENTIAL LIABILITY TO CLIENTS
The Company's products may be critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. Any failure
in a Company product or a client's system could result in a claim
9
12
for substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to limit
contractually its liability for damages arising from product failures or
negligent acts or omissions, there can be no assurance the limitations of
liability set forth in its contracts will be enforceable in all instances or
would otherwise protect the Company from liability for damages. Although the
Company maintains general liability insurance coverage, including coverage for
product liability and errors or omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could adversely affect the Company's results of operations and financial
condition.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company may in the future engage in selective acquisitions of
businesses that are complementary to those of the Company. While the Company has
from time to time in the past considered acquisition opportunities, it has never
acquired a significant business and has no existing agreements or commitments to
effect any acquisition. Accordingly, there can be no assurance that the Company
will be able to identify suitable acquisition candidates available for sale at
reasonable prices, consummate any acquisition or successfully integrate any
acquired business into the Company's operations. Further, acquisitions may
involve a number of additional risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
circumstances and legal liabilities, some or all of which could have a material
adverse effect on the Company's results of operations and financial condition.
Problems with an acquired business could have a material adverse impact on the
performance of the Company as a whole. The Company expects to finance any future
acquisitions with the proceeds of this offering as well as with possible debt
financing, the issuance of equity securities (common or preferred stock) or a
combination of the foregoing. There can be no assurance that the Company will be
able to arrange adequate financing on acceptable terms. If the Company were to
proceed with one or more significant future acquisitions in which the
consideration consisted of cash, a substantial portion of the Company's
available cash (possibly including a portion of the proceeds of this offering)
could be used to consummate the acquisitions. If the Company were to consummate
one or more significant acquisitions in which the consideration consisted of
stock, shareholders of the Company could suffer significant dilution of their
interests in the Company. Many business acquisitions must be accounted for as a
purchase. Most of the businesses that might become attractive acquisition
candidates for the Company are likely to have significant intangible assets and
acquisition of these businesses, if accounted for as a purchase, would typically
result in substantial goodwill amortization charges to the Company, reducing
future earnings. In addition, such acquisitions could involve non-recurring
acquisition-related charges, such as the write-off or write-down of software
development costs or other intangible items.
TERMINATION OF S CORPORATION STATUS AND SUBSTANTIAL DISTRIBUTION OF OFFERING
PROCEEDS TO CURRENT SHAREHOLDERS; OTHER BENEFITS TO PRINCIPAL SHAREHOLDER
Since September 1, 1988, the Company has been treated for federal income
tax purposes as an S corporation under the Internal Revenue Code of 1986, as
amended (the "Code"). Upon the effective date of this offering (the "Termination
Date"), the Company will terminate its status as an S corporation under the Code
and thereafter will be subject to federal and state income taxes.
The Company will use a substantial portion of the proceeds of this offering
to make the following payments to its principal shareholder: (i) repayment of
the 1992 Note and the 1997 Notes, aggregating approximately $15.4 million, and
(ii) a distribution of accumulated 1997 S corporation earnings. Purchasers of
Common Stock in this offering will not receive any portion of the S corporation
distribution. See "Termination of S Corporation Status and Related
Distributions," "Use of Proceeds," "Certain Transactions" and Note 3 of the
Notes to Combined Financial Statements.
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13
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal,
state and foreign laws and regulations. While the Company's systems are
generally designed to operate in compliance with these laws and regulations
through the use of appropriate calling lists and calling campaign time
parameters, compliance with these laws and regulations may limit the usefulness
of the Company's products to its customers and potential customers, and these
laws and regulations could therefore adversely affect demand for the Company's
products. In addition, there can be no assurance that future legislation or
regulatory activity further restricting telephone practices, if enacted, would
not adversely affect the Company. See "Business -- Regulatory Environment."
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. There can be no
assurance, however, that these measures will be adequate to protect its trade
secrets and proprietary technology. Further, the Company may be subject to
additional risks as it enters into transactions in countries where intellectual
property laws are not well developed or are poorly enforced. Legal protections
of the Company's rights may be ineffective in such countries. Litigation to
defend and enforce the Company's intellectual property rights could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations,
regardless of the final outcome of such litigation. Despite the Company's
efforts to safeguard and maintain its proprietary rights both in the United
States and abroad, there can be no assurance that the Company will be successful
in doing so or that the steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of the
Company's technology or to prevent an unauthorized third party from copying or
otherwise obtaining and using the Company's products or technology. There can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company. Any such events could have a
material adverse affect on the Company's business, financial condition and
results of operations.
The Company has entered into agreements with certain of its distributors
giving them a limited, non-exclusive right to use portions of the Company's
source code to create foreign language versions of the Company's products for
distribution in foreign markets. In addition, the Company has entered into
agreements with a small number of its customers requiring the Company to place
its source code in escrow. These escrow arrangements typically provide that
these customers have a limited, non-exclusive right to use such code in the
event that there is a bankruptcy proceeding by or against the Company, if the
Company ceases to do business or if the Company fails to meet its support
obligations. These arrangements may increase the likelihood of misappropriation
by third parties.
As the number of call management software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. Although the Company believes that its software components and other
intellectual property do not infringe on the intellectual property rights of
others, including those of this competitor, 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
11
14
against the Company could, therefore, have a material adverse effect on the
Company's results of operations and financial condition. See
"Business -- Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon the continued
availability of the services of Aleksander Szlam, the Company's Chairman and
Chief Executive Officer, and J. Neil Smith, the Company's President and Chief
Operating Officer. Although the Company has employment agreements with Mr. Szlam
and Mr. Smith, these agreements do not obligate either of them to continue his
employment with the Company. There can be no assurance that the Company will be
able to retain the services of Messrs. Szlam and Smith. The Company does not
maintain key man life insurance on Mr. Szlam or Mr. Smith. The loss of the
services of one or both of them would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
A substantial portion of the net proceeds to be received by the Company in
connection with this offering is allocated to working capital and general
corporate purposes. Accordingly, management will have broad discretion with
respect to the expenditure of such proceeds. Purchasers of shares of Common
Stock offered hereby will be entrusting their funds to the Company's management,
upon whose judgment they must depend, with limited information concerning the
specific working capital requirements and general corporate purposes to which
the funds will ultimately be applied. See "Use of Proceeds."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Board of Directors has authority to issue up to 20,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of the preferred stock without further vote or action
by the Company's shareholders. The rights of the holders of the Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of preferred stock that may be issued in the future. While the Company has no
present intention to issue shares of preferred stock, such issuance could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. In addition, the Company's
Amended and Restated Articles of Incorporation and Bylaws contain provisions
that may discourage proposals or bids to acquire the Company. The Company's
Amended and Restated Articles of Incorporation provide that, commencing with the
1997 Annual Meeting of the Company's shareholders, the Board of Directors will
be divided into three classes, as nearly equal in size as possible, with
staggered three-year terms. These provisions could have the effect of making it
more difficult for a third party to acquire control of the Company, discourage
proposals or bids to acquire control of the Company and adversely affect
prevailing market prices for the Common Stock. See "Description of Capital
Stock -- Certain Articles of Incorporation and Bylaw Provisions" and "Certain
Provisions of Georgia Law."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 14,643,395 shares
of Common Stock outstanding. The 3,500,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or limitation under the
Securities Act of 1933, as amended (the "Securities Act"), except for shares
purchased by "affiliates" (as defined under the Securities Act). The remaining
11,143,395 shares of Common Stock will become eligible for sale beginning in
February 1998 subject to the volume and other limitations of Rule 144 under the
Securities Act. All of the officers, directors and existing shareholders of the
Company are subject to lock-up agreements under which they have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this Prospectus without the prior written consent of Montgomery
Securities. Upon completion of this offering, the Company will have 1,600,000
shares of Common Stock reserved for issuance under its stock plans, of which
1,106,097 shares are subject to outstanding options. Promptly following the
completion of this offering, the Company intends to file one or more
registration statements on Form S-8 to register these shares. Sales of
substantial amounts of Common Stock in the public markets, pursuant to Rule 144
or otherwise, or the availability of such shares for sale could
12
15
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. See "Management -- Employee
Benefit Plans" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Company has made application for the quotation of the Common
Stock on the Nasdaq National Market, there can be no assurance that an active
trading market will develop or be sustained after the offering. The initial
public offering price of the Common Stock offered hereby will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may bear no relationship to the market price of the Common Stock after the
offering. The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results and other
factors. In addition, the securities markets have experienced significant price
and volume fluctuations from time to time that have often been unrelated or
disproportionate to the operating performance of particular companies. These
broad fluctuations may adversely affect the market price of the Common Stock.
See "Underwriting."
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and significant dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. See "Dilution."
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TERMINATION OF S CORPORATION STATUS AND RELATED DISTRIBUTIONS
Since September 1, 1988, the Company has elected to operate under
Subchapter S of the Code and comparable provisions of certain state income tax
laws. An S corporation generally is not subject to income tax at the corporate
level (with certain exceptions under state income tax laws). Instead, the S
corporation's income generally passes through to shareholders and is taxed on
their personal income tax returns. As a result, the Company's earnings have been
taxed for federal and state income tax purposes, with certain exceptions,
directly to the existing shareholders of the Company.
Upon the effective date of this offering (the "Termination Date"), the
Company will terminate its status as an S corporation under the Code. All
undistributed S corporation earnings through the Termination Date will be
distributed to the Company's principal shareholder using a portion of the net
proceeds of this offering. At December 31, 1996, the undistributed S corporation
earnings of the Company were estimated to be $14.4 million. Subsequent to
December 31, 1996, the Company distributed these amounts to its principal
shareholder, including a distribution of $1.5 million in cash and the issuance
of the 1997 Notes having an aggregate principal amount of $12.9 million. The
1997 Notes bear interest at a rate equal to the applicable federal rate under
the Code (approximately 7%) and will accrue interest of approximately $200,000
through the expected Termination Date. The 1997 Notes will be repaid in full
using a portion of the proceeds of this offering. The Company expects to
accumulate additional earnings from January 1, 1997 to the Termination Date. The
Company currently estimates that such additional earnings will be between
$ million and $ million, although the actual amount of such earnings
may vary significantly. These accumulated earnings will be distributed to the
principal shareholder using a portion of the net proceeds of this offering. The
actual amount of this distribution will be reduced to the extent additional
distributions of 1997 accumulated earnings are made by the Company to the
principal shareholder prior to the Termination Date with other corporate funds.
The principal shareholder has agreed to indemnify the Company should its
status as an S Corporation during any portion of the period for which it claimed
such status in federal or state income tax filings ever be successfully
challenged. See "Risk Factors -- Termination of S Corporation Status and
Substantial Distribution of Offering Proceeds to Current Shareholders; Other
Benefits to Principal Shareholder," "Use of Proceeds" and "Certain
Transactions."
In connection with the termination of its S corporation status, the Company
will report an increase in earnings which will be recognized in the quarter
during which the Termination Date occurs with the addition of approximately $1.1
million in deferred tax assets.
14
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby are estimated to be approximately $ million
($ million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share and after
deducting estimated underwriting discounts and estimated expenses payable by the
Company in connection with the offering.
From the net proceeds of the offering, the Company will make the following
payments to its principal shareholder: (i) repayment of the $12.9 million
principal balance of the 1997 Notes, together with accrued interest thereon
which the Company estimates will then be $200,000, (ii) repayment of the 1992
Note, which the Company expects will then have a principal balance of $2.3
million, and (iii) a distribution of all accumulated S corporation earnings for
the period from January 1, 1997 through the effective date. The Company
currently estimates that such accumulated earnings will be between $ million
and $ million, although the actual amount of such earnings may vary
significantly. The actual amount of this distribution will be reduced to the
extent any prior distributions of 1997 accumulated earnings are made by the
Company to its principal shareholder. See "Termination of S Corporation Status
and Related Distributions" and "Certain Transactions."
The remainder of the net proceeds will be used for working capital and
other general corporate purposes. Such purposes may include possible
acquisitions of, or investments in, businesses and technologies that are
complementary to those of the Company. The Company has no specific agreements,
commitments or understandings with respect to any such acquisitions or
investments. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds in short-term, interest-bearing
securities. See "Risk Factors -- Broad Management Discretion as to Use of
Proceeds."
DIVIDEND POLICY
The Company historically has made substantial distributions to its
shareholders related to its S corporation status and the resulting tax payment
obligations imposed on its shareholders, including a total of $10.2 million
since January 1, 1995. Other than the distribution to be made to the Company's
Pre-Offering Shareholders described under "Termination of S Corporation Status
and Related Distributions," the Company does not intend to declare or pay cash
dividends in the foreseeable future. Management anticipates that all earnings
and other cash resources of the Company, if any, will be retained by the Company
for investment in its business.
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CAPITALIZATION
The following table sets forth the short-term indebtedness and
capitalization of the Company at December 31, 1996 on an actual, pro forma and
pro forma as adjusted basis. This table should be read in conjunction with the
Company's Combined Financial Statements and Notes thereto.
DECEMBER 31, 1996
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
------- -------- --------------
(IN THOUSANDS)
Current portion of long term debt........................... $ 2,644 $ 19 $ 19
======= ======= ======
Long-term debt, net of current portion...................... $ -- $ -- $ --
Shareholders' equity:
Preferred stock:
Melita International Corporation, no par value,
20,000,000 shares authorized(3), no shares issued or
outstanding.......................................... -- -- --
Common stock:
Melita International Corporation, no par value;
100,000,000 shares authorized(3); 8,000,000 shares
issued and outstanding, actual; 11,143,395 shares
issued and outstanding, pro forma; shares issued and
outstanding, pro forma as adjusted(4)................ 2 69
Melita Europe Limited, L1 par value; 50,000 shares
authorized; 31,128 shares issued and outstanding
actual; no shares issued or outstanding pro forma or
pro forma as adjusted................................ 46 -- --
Inventions, Inc., $5 par value; 100 shares authorized;
100 shares issued and outstanding actual; no shares
issued or outstanding pro forma or pro forma as
adjusted............................................. 1 -- --
Additional paid-in capital................................ 20 --
Cumulative foreign currency translation adjustment........ 35 35
Retained earnings......................................... 10,768 (2,571)
------- ------- ------
Total shareholders' equity........................ 10,872 (2,467)
------- ------- ------
Total capitalization......................... $10,872 $(2,467) $
======= ======= ======
- ---------------
(1) Pro forma to give effect to (i) the issuance of 3,143,395 shares of Common
Stock in connection with the Combination, (ii) the Distribution and
Interest Accrual, (iii) the Deferred Tax Adjustment and (iv) the Note
Repayment. See "Termination of S Corporation Status and Related
Distributions," "Use of Proceeds," "Certain Transactions" and Notes 2, 3
and 8 of the Notes to Combined Financial Statements included elsewhere in
this prospectus.
(2) Pro forma as adjusted to give effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share and the receipt of the
estimated net proceeds therefrom. See "Use of Proceeds."
(3) Gives effect to an amendment to the Company's Articles of Incorporation to
be filed after December 31, 1996 to increase its authorized capital stock.
(4) Actual, pro forma and pro forma as adjusted shares issued and outstanding
exclude an aggregate of 1,600,000 shares of Common Stock reserved for
issuance under the 1992 Stock Option Plan, the 1997 Stock Option Plan and
the Stock Purchase Plan, of which 1,106,097 shares were subject to options
outstanding as of the date of this Prospectus at a weighted average
exercise price of $3.42 per share. See "Management -- Employee Benefit
Plans" and Note 6 of the Notes to Combined Financial Statements.
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DILUTION
The net tangible book value of the Common Stock as of December 31, 1996 was
approximately $10.9 million or $1.35 per share. The pro forma net tangible book
deficit of the Common Stock as of December 31, 1996 was approximately $(2.5
million) or $(.24) per share. The pro forma net tangible book deficit per share
represents the excess of the Company's total liabilities over total tangible
assets, divided by the total number of shares of Common Stock outstanding, after
giving effect to the Combination, the Distribution and the Deferred Tax
Adjustment.
After giving effect to the sale by the Company of the 3,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, and the receipt of the estimated net proceeds therefrom, the
pro forma net tangible book value of the Company (total tangible assets less
total liabilities) as of December 31, 1996 would have been approximately
$ million, or $ per share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing shareholders
and an immediate dilution in pro forma net tangible book value of $ per
share to purchasers of Common Stock in this offering, as illustrated in the
following table:
Assumed initial public offering price per share....................... $
--------
Net tangible book value per share as of December 31,
1996................................................... $ 1.35
Decrease per share attributable to pro forma
adjustments............................................ 1.59
--------
Pro forma net tangible book deficit per share as of
December 31, 1996...................................... (.24)
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share as of December 31, 1996
after the offering.................................................. $
--------
Dilution per share to new investors................................... $
========
The following table sets forth, as of December 31, 1996, on a pro forma
basis after giving effect to the issuance of shares of Common Stock in
connection with the Combination, the number of shares of Common Stock issued by
the Company and the total consideration and the average price per share paid by
the existing shareholders and new investors, assuming the sale by the Company of
3,500,000 shares of Common Stock at an assumed initial public offering price of
$ per share, and before deducting the estimated underwriting discount and
estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- -------- -------------
Existing shareholders....... 11,143,395 76.1% $69,000 % $0.01
New investors............... 3,500,000 23.9 $
---------- ----- ------- -----
Total............. 14,643,395 100.0% $ 100.0%
========== ===== ======= =====
Assuming full exercise of the Underwriters' over-allotment option, the
percentage of shares held by existing shareholders would be 73.5% of the total
number of shares of Common Stock to be outstanding after the offering, and the
number of shares held by new investors would be increased to 4,025,000 shares,
or 26.5% of the total number of shares of Common Stock to be outstanding after
the offering. See "Principal Shareholders."
Following the closing of this offering, the Company will have outstanding
options to acquire approximately 1,106,097 shares of Common Stock at exercise
prices ranging from $2.75 to $5.50 per share and a weighted average exercise
price of $3.42 per share. The exercise of these options would have the effect of
increasing the net tangible book value dilution to new investors in this
offering.
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SELECTED COMBINED FINANCIAL DATA
The selected combined financial data of the Company set forth below should
be read in conjunction with the Combined Financial Statements of the Company,
including the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The combined statement of
operations data for the years ended December 31, 1994, 1995 and 1996 and the
combined balance sheet data as of December 31, 1995 and 1996 are derived from,
and are qualified by reference to, the combined financial statements audited by
Arthur Andersen LLP and included elsewhere in this Prospectus. The combined
statement of operations data for the years ended December 31, 1992 and 1993 and
the combined balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from unaudited combined financial statements.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product................................................... $19,047 $17,709 $18,186 $24,620 $32,077
Service................................................... 5,656 6,959 8,970 10,662 15,463
------- ------- ------- ------- -------
Total revenues...................................... 24,703 24,668 27,156 35,282 47,540
Cost of revenues:
Product................................................... 5,298 5,181 6,310 8,730 11,494
Service................................................... 3,346 2,924 3,254 5,282 6,863
------- ------- ------- ------- -------
Total cost of revenues.............................. 8,644 8,105 9,564 14,012 18,357
------- ------- ------- ------- -------
Gross margin................................................ 16,059 16,563 17,592 21,270 29,183
Operating expenses:
Research and development.................................. 3,784 3,386 3,660 4,050 5,070
Selling, general and administrative....................... 9,097 9,528 11,332 12,559 16,765
------- ------- ------- ------- -------
Total operating expenses............................ 12,881 12,914 14,992 16,609 21,835
------- ------- ------- ------- -------
Income from operations...................................... 3,178 3,649 2,600 4,661 7,348
Other income (expense), net................................. 216 186 46 88 261
------- ------- ------- ------- -------
Income before income taxes.................................. 3,394 3,835 2,646 4,749 7,609
Income tax provision (benefit).............................. (19) 25 (26) -- --
------- ------- ------- ------- -------
Net income before pro forma income tax provision............ 3,413 3,810 2,672 4,749 7,609
Pro forma income taxes(1)................................... 1,256 1,454 1,164 1,794 2,827
------- ------- ------- ------- -------
Pro forma net income(1)..................................... $ 2,157 $ 2,356 $ 1,508 $ 2,955 $ 4,782
======= ======= ======= ======= =======
Pro forma net income per common and common equivalent
share..................................................... $0.42
=======
Pro forma weighted average common and common equivalent
shares outstanding(2)..................................... 11,395
=======
DECEMBER 31, PRO FORMA
----------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996(3)
------- ------- ------- ------- ------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)................................. $ 7,831 $ 8,955 $ 8,594 $ 6,904 $ 8,124 $(5,403)
Total assets.............................................. 13,076 15,679 17,635 20,928 27,069 18,281
Long-term debt, net of current portion.................... 3,176 3,111 3,068 2,644 -- --
Total shareholders' equity (deficit)...................... 6,143 7,385 7,103 6,657 10,872 (2,655)
- ---------------
(1) Upon the effective date of this offering, the Company will terminate its
status as an S corporation. Thereafter, the Company will be subject to
federal and state income taxes. Pro forma net income is presented as if the
Company had been subject to corporate income taxes for all periods
presented. See "Termination of S Corporation Status and Related
Distributions," and Notes 1 and 3 of the Notes to Combined Financial
Statements.
(2) See Note 1 of the Notes to Combined Financial Statements.
(3) Presented on a pro forma basis to give effect to (i) the issuance of
3,143,395 shares of Common Stock in connection with the Combination, (ii)
the Distribution and Interest Accrual, (iii) the Deferred Tax Adjustment
and (iv) the Note Repayment. See "Termination of S Corporation Status and
Related Distributions," "Use of Proceeds," "Capitalization," "Certain
Transactions" and Notes 2, 3 and 8 of the Notes to Combined Financial
Statements.
18
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Melita is a leading provider of customer contact and call center systems
that enable customers to operate efficient call centers. The Company's principal
product, PhoneFrame CS, is an integrated system comprised of both hardware and
software based on open, client/server architecture. Melita offers periodic
ongoing maintenance support of its products. The Company also offers fee-based
installation, training and consulting services. Historically, the Company has
internally generated the funds necessary for its growth through profits and cash
provided by operating activities.
In 1988, the Company introduced its first call management solution, which
was DOS-based, driving revenue growth from $10.4 million to $24.7 million during
the period from 1989 to 1992. The Company introduced Stacatto, a UNIX-based
client/server version of its call center software, in 1992. Due to the slow
market acceptance of client/server call center solutions, the Company's revenues
were relatively flat from 1992 to 1994. In 1994, the Company introduced
Interlude, a more open, scaleable and standards-based version of the product,
and in 1995 the Company made significant additions to its management team, sales
and marketing efforts and installation and support capabilities, which
contributed to growth of 29.9% in total revenues from 1994 to 1995.
The Company's revenues are derived primarily from two sources: (i) product
license fees for the use of the Company's software products and revenues from
sales of related computer and telephony hardware to utilize the software and
(ii) service fees for ongoing system support, maintenance, installation,
training and consulting services. The Company recognizes product revenue upon
shipment of the product and when the Company has no significant obligations yet
to be satisfied. Revenues from maintenance contracts are recognized ratably over
the term of the support period. Revenues from consulting, installation and
training services are recognized as the services are performed.
Cost of product revenues primarily includes cost of material and assembly
of components for products shipped, together with salaries and benefits of
production personnel. Cost of service revenues consists primarily of salaries
and benefits of customer support and field service personnel. Cost of service
revenues includes related operating costs such as training, computer support and
travel costs. The Company contracts with third parties to provide maintenance on
hardware provided as part of the Company's systems.
Research and development expenses primarily consist of salaries and
benefits of engineering personnel involved with software and voice processing
technology development. Also included are costs for subcontracted development
projects and expendable equipment purchases.
Selling, general and administrative expenses consist primarily of salaries,
commissions and benefits of sales, marketing, administrative, finance and human
resources personnel. Also included are marketing expenditures, travel, rent and
other costs.
Total revenues from sales outside the United States accounted for 20.9%,
22.5%, and 21.0% of the Company's total revenues for 1994, 1995 and 1996,
respectively. The Company relies on VARs to sell, install and support its
products in countries outside of the United States, Canada and the United
Kingdom. The Company's international revenues are primarily denominated in U.S.
dollars or British pounds. The Company's expenses incurred in foreign countries
are typically denominated in local currencies. The Company has recognized
foreign exchange gains (losses) of approximately $31,000, $(2,000) and $162,000
in 1994, 1995 and 1996, respectively. There can be no assurance that future
fluctuations in currency exchange rates will not have a material adverse impact
on the Company's future international operations.
19
22
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
Net revenues:
Product................................................... 67.0% 69.8% 67.5%
Service................................................... 33.0 30.2 32.5
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Product................................................... 23.2 24.7 24.2
Service................................................... 12.0 15.0 14.4
----- ----- -----
Total cost of revenues............................ 35.2 39.7 38.6
----- ----- -----
Gross margin................................................ 64.8 60.3 61.4
----- ----- -----
Operating expenses:
Research and development.................................. 13.5 11.5 10.7
Selling, general and administrative....................... 41.7 35.6 35.2
----- ----- -----
Total operating expenses.......................... 55.2 47.1 45.9
----- ----- -----
Income from operations...................................... 9.6 13.2 15.5
Other income (expense), net................................. 0.2 0.3 0.5
----- ----- -----
Income before income taxes.................................. 9.8 13.5 16.0
Income tax benefit.......................................... 0.1 -- --
----- ----- -----
Net income before pro forma income taxes.................... 9.9 13.5 16.0
----- ----- -----
Pro forma income taxes...................................... 4.3 5.1 6.0
----- ----- -----
Pro forma net income........................................ 5.6% 8.4% 10.0%
===== ===== =====
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,
-----------------------
1994 1995 1996
----- ----- -----
Cost of product revenues.................................... 34.7% 35.5% 35.8%
Cost of service revenues.................................... 36.3% 49.5% 44.4%
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased 34.7% to $47.5 million in 1996 from
$35.3 million in 1995. Revenues from product sales increased 30.3% to $32.1
million in 1996, or 67.5% of total revenues, from $24.6 million in 1995, or
69.8% of total revenues. The increase in product revenues was due to strong
demand for the Company's PhoneFrame CS product introduced in the first half of
1995, increased sales and marketing efforts and the introduction of Magellan CS
in the fourth quarter of 1996. Service revenues increased 45.0% to $15.5 million
in 1996, or 32.5% of total revenues, from $10.7 million in 1995, or 30.2% of
total revenues. Service revenues increased primarily due to an increase in the
number of contractual maintenance agreements and, to a lesser degree, from
revenues generated by installation and training.
Cost of Revenues. Total cost of revenues was $18.4 million in 1996,
representing a 31.0% increase over total cost of revenues of $14.0 million in
1995. Total cost of revenues represented 38.6% and 39.7% of total revenues in
1996 and 1995, respectively. Cost of product revenues was $11.5 million in 1996,
or 35.8% of product revenues, increasing by 31.7% from $8.7 million in 1995, or
35.5% of product revenues. Cost of product revenues increased slightly as a
percentage of product revenues due to lower per unit sales prices, which were
partially offset by product cost reductions. Cost of service revenues was $6.9
million in 1996, or
20
23
44.4% of service revenues, increasing by 29.9% from $5.3 million in 1995, or
49.5% of service revenues. The cost of service revenues increased as the Company
hired additional support and installation staff to support the increased sales
volume. Cost of service revenues, as a percentage of service revenues, decreased
5.1 percentage points due to operational efficiencies, reduced third-party
maintenance fees for field support of computer equipment resold by the Company
and improved features within the software to facilitate the installation
process.
Research and Development. The Company's research and development expenses
increased by 25.2% to $5.1 million in 1996, or 10.7% of total revenues, from
$4.1 million in 1995, or 11.5% of total revenues. The increase resulted
primarily from the addition of developers to support the Company's new product
development efforts, which resulted in the release of PhoneFrame CS 2.0 and
Magellan CS in 1996. Research and development expenses decreased as a percentage
of total revenues in 1996 due to the growth in total revenues in 1996.
Selling, General and Administrative. Selling, general and administrative
expenses were $16.8 million in 1996, representing a 33.5% increase over selling,
general and administrative expenses of $12.6 million in 1995. The increase was
the result of an increase in sales commissions corresponding to an increase in
revenues and additional staff hired to support the higher sales levels in 1996.
Selling, general and administrative expenses were 35.2% and 35.6% of total
revenues in 1996 and 1995, respectively.
Income from Operations. As a result of the foregoing factors, income from
operations was $7.3 million in 1996, representing a 57.6% increase over income
from operations of $4.7 million in 1995. Operating income increased as a
percentage of total revenues from 13.2% in 1995 to 15.5% in 1996.
Other Income, Net. Other income, net increased to $261,000 in 1996 from
$88,000 in 1995. The increase was primarily attributable to foreign exchange
gains, as the British pound strengthened against the U.S. dollar.
Pro Forma Income Taxes. Pro forma income taxes were $2.8 million in 1996
as compared to $1.8 million in 1995, as a result of the Company's increased net
income before income taxes in 1996. The Company's pro forma effective tax rate
was 37.2% in 1996, compared to 37.8% in 1995.
Pro Forma Net Income. Pro forma net income was $4.8 million in 1996,
representing a 61.8% increase over pro forma net income of $3.0 million in 1995.
As a percentage of total revenues, pro forma net income increased from 8.4% in
1995 to 10.0% in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased 29.9% to $35.3 million in 1995 from
$27.2 million in 1994. Revenues from product sales increased 35.4% to $24.6
million in 1995, or 69.8% of total revenues, from $18.2 million in 1994, or
67.0% of total revenues. The increase in product revenues was due to increased
sales volume attributable primarily to demand for the Company's first release of
PhoneFrame CS introduced in 1995. Service revenues increased 18.9% to $10.7
million in 1995, or 30.2% of total revenues, from $9.0 million in 1994, or 33.0%
of total revenues. Service revenues increased primarily due to an increase in
the number of contractual maintenance agreements and, to a lesser degree, from
revenues generated by installation of systems and upgrading, but declined as a
percentage of total revenues due to the timing of product sales.
Cost of Revenues. Total cost of revenues was $14.0 million in 1995,
representing a 46.5% increase over total cost of revenues of $9.6 million in
1994. Total cost of revenues represented 39.7% and 35.2% of total revenues in
1995 and 1994, respectively. Cost of product revenues was $8.7 million in 1995,
or 35.5% of product revenues, increasing by 38.4% from $6.3 million in 1994, or
34.7% of product revenues. Cost of service revenues was $5.3 million in 1995, or
49.5% of service revenues, increasing by 62.3% from $3.3 million in 1994, or
36.3% of service revenues. The cost of service revenues increased as the Company
hired additional support and installation staff to support the increased sales
volume. Cost of service revenues, as a percentage of service revenues, increased
13.2 percentage points, as the Company increased its customer service and field
service support groups by over 31.0% to improve the Company's level of service
and, to a lesser degree, an increase in the cost of third-party maintenance for
field support of computer equipment resold by the Company.
21
24
Research and Development. The Company's research and development expenses
increased by 10.7% to $4.1 million in 1995, or 11.5% of total revenues, from
$3.7 million in 1994, or 13.5% of total revenues. The increase in expenditures
resulted from the addition of developers to support the Company's new product
development efforts. Research and development expenses decreased as a percentage
of total revenues in 1995.
Selling, General and Administrative. Selling, general and administrative
expenses were $12.6 million in 1995, representing a 10.8% increase over selling,
general and administrative expenses of $11.3 million in 1994. The increase was
the result of the increase in sales commissions corresponding to an increase in
revenues and additional personnel hired to support the higher sales levels in
1995. Selling, general and administrative expenses were 35.6% and 41.7% of total
revenues in 1995 and 1994, respectively. Selling, general and administrative
expenses decreased as a percentage of total revenues primarily as a result of
cost containment initiatives in general and administrative expenses.
Income from Operations. As a result of the foregoing factors, income from
operations was $4.7 million in 1995, representing a 79.2% increase over income
from operations of $2.6 million in 1994. Operating income increased as a
percentage of total revenues from 9.6% in 1994 to 13.2% in 1995.
Other Income, Net. Other income, net increased to $88,000 in 1995 from
$46,000 in 1994. The increase was primarily attributable to increased interest
income due to the Company's higher average investment balances.
Pro Forma Income Taxes. Pro forma income taxes were $1.8 million in 1995
as compared to $1.2 million in 1994, as a result of the Company's increased net
income before income taxes in 1995. The Company's pro forma effective tax rate
was 37.8% in 1995, compared to 43.6% in 1994, due to non-deductible foreign
losses in 1994.
Pro Forma Net Income. Pro forma net income was $3.0 million in 1995,
representing a 96.0% increase over pro forma net income of $1.5 million in 1994.
As a percentage of total revenues, pro forma net income increased from 5.6% in
1994 to 8.4% for 1995.
22
25
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statement of
operations data for each of the last eight quarters. This information is derived
from unaudited combined financial statements and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of that information. The results of operations
for any quarter are not necessarily indicative of the results to be expected for
any future period.
QUARTER ENDED
-------------------------------------------------------------------------------
1995 1996
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS)
Net revenues:
Product............................... $5,698 $5,198 $6,051 $ 7,673 $ 7,691 $ 8,108 $ 7,428 $ 8,850
Service............................... 2,191 2,467 2,729 3,275 3,330 3,778 4,161 4,194
------ ------ ------ ------- ------- ------- ------- -------
Total revenues................. 7,889 7,665 8,780 10,948 11,021 11,886 11,589 13,044
------ ------ ------ ------- ------- ------- ------- -------
Cost of revenues:
Product............................... 1,867 1,905 2,471 2,487 2,449 2,990 2,660 3,395
Service............................... 1,010 1,037 1,260 1,975 1,439 1,733 1,902 1,789
------ ------ ------ ------- ------- ------- ------- -------
Total cost of revenues......... 2,877 2,942 3,731 4,462 3,888 4,723 4,562 5,184
------ ------ ------ ------- ------- ------- ------- -------
Gross margin............................ 5,012 4,723 5,049 6,486 7,133 7,163 7,027 7,860
------ ------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development.............. 1,024 885 901 1,240 945 1,151 1,409 1,565
Selling, general and administrative... 2,842 2,998 3,072 3,647 4,137 3,992 4,212 4,424
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses....... 3,866 3,883 3,973 4,887 5,082 5,143 5,621 5,989
------ ------ ------ ------- ------- ------- ------- -------
Income from operations.................. 1,146 840 1,076 1,599 2,051 2,020 1,406 1,871
Other income (expense), net............. (1) 34 41 14 (11) 54 20 198
------ ------ ------ ------- ------- ------- ------- -------
Income before pro forma income taxes.... 1,145 874 1,117 1,613 2,040 2,074 1,426 2,069
Income tax benefit...................... -- -- -- -- -- -- -- --
------ ------ ------ ------- ------- ------- ------- -------
Net income before income taxes.......... 1,145 874 1,117 1,613 2,040 2,074 1,426 2,069
Pro forma income taxes.................. 432 330 422 610 762 775 517 773
------ ------ ------ ------- ------- ------- ------- -------
Pro forma net income.................... $ 713 $ 544 $ 695 $ 1,003 $ 1,278 $ 1,299 $ 909 $ 1,296
====== ====== ====== ======= ======= ======= ======= =======
QUARTER ENDED
-------------------------------------------------------------------------------
1995 1996
-------------------------------------- --------------------------------------
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............................... 72.2% 67.7% 68.9% 70.1% 69.8% 68.2% 64.1% 67.8%
Service............................... 27.8 32.3 31.1 29.9 30.2 31.8 35.9 32.2
------ ------ ------ ------- ------- ------- ------- -------
Total revenues................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- ------- ------- ------- -------
Cost of revenues:
Product............................... 23.7 24.9 28.1 22.7 22.2 25.2 23.0 26.0
Service............................... 12.8 13.6 14.4 18.0 13.1 14.6 16.4 13.7
------ ------ ------ ------- ------- ------- ------- -------
Total cost of revenues......... 36.5 38.5 42.5 40.7 35.3 39.8 39.4 39.7
------ ------ ------ ------- ------- ------- ------- -------
Gross margin............................ 63.5 61.5 57.5 59.3 64.7 60.2 60.6 60.3
------ ------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development.............. 13.0 11.5 10.3 11.3 8.6 9.7 12.2 12.0
Selling, general and administrative... 36.0 39.6 35.0 33.0 37.5 33.6 36.3 33.9
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses....... 49.0 51.1 45.3 44.3 46.1 43.3 48.5 45.9
------ ------ ------ ------- ------- ------- ------- -------
Income from operations.................. 14.5 10.4 12.2 15.0 18.6 16.9 12.1 14.4
Other income (expense), net............. -- 0.4 0.5 0.1 (0.1) 0.5 0.2 1.5
------ ------ ------ ------- ------- ------- ------- -------
Income before pro forma income taxes.... 14.5 10.8 12.7 15.1 18.5 17.4 12.3 15.9
Income tax benefit...................... -- -- -- -- -- -- -- --
Net income before income taxes.......... 14.5 10.8 12.7 15.1 18.5 17.4 12.3 15.9
Pro forma income taxes.................. 5.5 4.1 4.8 5.7 6.9 6.5 4.5 5.9
------ ------ ------ ------- ------- ------- ------- -------
Pro forma net income.................... 9.0% 6.7% 7.9% 9.4% 11.6% 10.9% 7.8% 10.0%
====== ====== ====== ======= ======= ======= ======= =======
23
26
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 the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short term, variations between anticipated order dates and actual
order dates, as well as nonrecurring or unanticipated large orders, can cause
significant variations in the Company's operating results from quarter to
quarter. See "Risk Factors -- Variability of Quarterly Financial Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through internally
generated cash flow.
The Company's operating activities generated cash of $5.1 million in 1994,
$7.5 million in 1995 and $9.3 million in 1996. In 1996, the Company's cash was
generated by operating activities and an increase in customer deposits,
partially offset by an increase in accounts receivable. Both customer deposits
and accounts receivables increased due to the Company's increased business
volume.
The Company's investing activities used cash of $800,000 in 1994, $1.7
million in 1995 and $1.5 million in 1996. The Company's use of cash was
primarily for the purchase of capital equipment to support the Company's growth.
The Company's financing activities used cash of $3.0 million in 1994, $5.2
million in 1995 and $3.8 million in 1996. The primary use of cash was
distributions to the Company's shareholders.
As of December 31, 1996, the Company had working capital of $8.1 million.
Cash and cash equivalents were $9.8 million. The Company estimates that it will
incur capital expenditures of approximately $2.0 million in 1997, of which
$800,000 will be incurred to complete an upgrade of the internal Customer Care
Center. The Company anticipates that its existing cash balances and funds
anticipated to be generated from operations, combined with the net proceeds from
this offering and interest thereon, will be adequate to satisfy its working
capital requirements for its current and planned operations for at least the
next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets to Be Disposed of." The Company's
adoption of SFAS No. 121 in the first quarter of 1996 did not have a significant
impact on the Company's combined financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123") which establishes a fair value based method for accounting
for stock-based compensation plans. With respect to stock options granted to
employees, SFAS 123 permits companies to continue using the accounting method
promulgated by the Accounting Principals Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," to measure compensation or,
alternatively, to adopt the fair value based method prescribed by
24
27
SFAS 123. If the APB 25 method is continued, pro forma footnote disclosures are
required as if SFAS 123 accounting provisions were followed. Management has
determined not to adopt the SFAS 123 accounting recognition provisions.
Accordingly, SFAS 123 will not have any impact on the Company's financial
statements, except for the addition of the required footnote disclosures. See
Note 6 of the Notes to Combined Financial Statements.
The American Institute of Certified Public Accountants has issued an
exposure draft to amend the provisions of Statement of Position 91-1, "Software
Revenue Recognition." The adoption of the standards in the current version of
the exposure draft would not be expected to have a significant impact on the
Company's combined financial statements.
25
28
BUSINESS
OVERVIEW
Melita International Corporation is a leading provider of customer contact
and call management systems that enable businesses to automate call center
activities and enhance their telephony-based customer interaction. The Company's
principal product, PhoneFrame CS, is used by organizations to increase agent
productivity, reduce the costs of call center operations and enhance revenue
generating capabilities for a broad range of activities, including debt
collection, telemarketing and customer service. PhoneFrame CS is a comprehensive
call center solution based on client/server software that integrates with
industry standard computer and telephony hardware. The Company's customers
include leading organizations in industries such as banking, financial services,
retail, communications and others, where businesses are engaged in frequent
telephone contact with customers or prospects.
The Company currently has over 500 systems in operation worldwide. Selected
customers include AirTouch Communications, Inc., BancOne Services Corporation,
Barclays Bank PLC, Citicorp, Credicard SA Brazil, Dun & Bradstreet Corporation,
Grupo Financiero Bancomer, S.A de C.V., J.C. Penney Company, National
Westminster Bank and Snyder Communications, Inc. The Company sells its products
through a direct sales force in the United States, Canada and the United
Kingdom. In 1996, the Company derived approximately 21.0% of its total revenues
from sales outside the United States. International distribution is largely
through direct sales and VARs.
INDUSTRY BACKGROUND
Long-term customer relationships are critical to the success of businesses
operating in an increasingly competitive global marketplace. As customers become
more sophisticated and demanding in the level of service they require,
businesses are striving to develop and improve customer relationships as a means
to distinguish their products and services. This effort requires businesses to
use every opportunity to interact with customers, from marketing and sales
activities to post-sales service, support and collections. Effective customer
interaction can build customer loyalty, which in turn can lead to reduced
customer retention costs and increased revenue potential. As organizations seek
to improve the quality of their interaction with customers across the
enterprise, the use of information systems to facilitate this interaction has
become a core competency.
In recent years, telephony-based customer interaction has become a more
effective means of communication for organizations. Increased usage of
telephony-based customer interaction has been facilitated by decreasing
telecommunications costs, the proliferation of toll-free telephone numbers and
the introduction of new enabling technologies, such as computer/telephony
integration("CTI"). CTI automates the generation and management of
telephony-based customer contacts while providing real-time access to
computer-based information resources. This automation is provided by call
centers that consist of specialized software and hardware that integrate
telephony platforms and computer systems.
According to industry sources, the CTI, outbound call management and
automatic call distribution market segments of the worldwide call center systems
market aggregated $2.8 billion in 1996 and are expected to grow at a compound
annual growth rate of 19% to $6.7 billion by 2001. The Company's primary target
markets, CTI and outbound call management, were approximately $1.3 billion
worldwide in 1996 and are together expected to grow at a compound annual growth
rate of approximately 28% to $4.4 billion by 2001.
Call centers enable agents to process a steady flow of outbound or inbound
telephone contacts relating to products or services. Call centers generally
consist of supervisor and agent workstations linked to a central telephone
switch and computer system. Call centers historically have focused either on
conducting outbound calls, for functions such as collections and product sales,
or managing inbound calls, for functions such as product support, order
processing and customer service. Inbound call centers utilize an interactive
voice response ("IVR") unit and an automatic call distribution ("ACD") system
that together screen and route incoming calls through the call center. Outbound
call centers incorporate predictive dialing software to automate outbound
dialing. Increasingly, call center applications feature dynamic inbound/outbound
or
26
29
"blended" functionality which permits agents to be automatically switched
between inbound and outbound calls as inbound call demand varies. Common
examples of outbound call center applications include debt collection for banks,
finance companies and large retailers, credit card marketing and customer
support activities such as customer surveys. According to industry sources,
collections and telemarketing software applications accounted for 80% of all
outbound call center software application revenues worldwide in 1996.
A key objective of organizations operating outbound call centers is
maximizing the time spent by agents on the telephone with customers or potential
customers while minimizing the "nuisance call" rate. A nuisance call is a live
contact which the call management system must either put on hold or disconnect
because no agent is available. High nuisance call rates caused by overdialing
result in high telecommunications costs and poor customer relations. Call center
systems which utilize sophisticated predictive dialing software can minimize the
nuisance call rate while maintaining high agent productivity. The Company
believes that this capability is essential to organizations operating call
centers.
Call center systems were originally developed as centralized,
mainframe-based information systems, which offered a platform to enable the
automation of many functions, including inbound call distribution, outbound
dialing, and limited database management. These systems were expensive, provided
limited functionality and productivity and were generally closed and
proprietary. With the advent of distributed computing environments, call center
systems have been developed which utilize CTI and the flexibility and openness
of client/server architectures. These developments have allowed companies to
incorporate leading hardware and software products from multiple vendors, have
significantly reduced the cost of implementation and have increased system
functionality and flexibility.
Call centers have evolved into a core competency for businesses engaged in
frequent telephone contacts with customers or prospects. In order to maximize
the return on their call center investment, businesses require call center
solutions that: (i) provide call center agents with the tools needed to
effectively manage interaction with their customers; (ii) provide agents
transparent access to information across the enterprise; (iii) guide agents
through a complex set of customer interaction scenarios; (iv) fully integrate
existing information and telephone systems; (v) are adaptable to the changing
needs of particular businesses and applications; (vi) are scaleable to support
large volumes of calls; and (vii) permit the gathering of valuable information
concerning customer needs, buying patterns and demographics. Customer-focused
organizations are seeking call center solutions which provide state-of-the-art
functionality while remaining adaptable to emerging technologies.
THE MELITA SOLUTION
Melita provides customer contact and call management systems that automate
outbound or blended call centers, enabling its customers to enhance
telephony-based customer interaction. The Company's principal product,
PhoneFrame CS, is a scaleable, integrated software and hardware solution based
on a distributed client/server architecture capable of supporting installations
with more than 500 simultaneous users on a single server. PhoneFrame CS provides
comprehensive functionality and a user-friendly application development
environment enabling organizations to conduct effective telephone calling
programs for a broad range of activities, including debt collection,
telemarketing and customer service. The Melita solution provides:
- High agent productivity, low nuisance call rates and low
telecommunications costs through patented predictive dialing and
inbound/outbound call blending functionality;
- Enhanced agent interaction with customers through front-end software
applications which utilize real-time access to information to guide agents
through each step of the customer interaction;
- Dynamic campaign development, deployment and modification through
powerful, easy-to-use script generation and application development
software.
- The ability to leverage existing investment in call center systems and
adapt to emerging technologies through an open, scaleable, distributed
client/server architecture.
The Company believes that a critical element of the comprehensive solutions
it provides is its underlying philosophy of Customer Care. The Company's
products represent a critical link between the business
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enterprise and its customers, providing the business with a solution that allows
it to provide the best customer care. The Company's Customer Care philosophy
focuses on enhancing the quality of people-to-people communication and is
reflected in all facets of the Company's operations. The Company has
incorporated features into its existing products which reflect this philosophy,
including its patented predictive dialing features, Cancel Dial and dynamic
inbound/outbound call blending functionality. As part of its commitment to
Customer Care, the Company intends to continue to develop and introduce new
products and features to improve the ability of a business to interact with its
customers.
STRATEGY
The Company's objective is to be a leading provider of customer contact and
call management systems. The Company's strategy to achieve this objective
includes the following key elements:
Leverage Installed Base of Customers: The Company currently targets
customers in the banking, financial services, retail, communications and
service bureau industries. In 1996, 56.6% of the Company's product revenues
were from sales to its existing customer base. The Company will continue to
focus sales and marketing efforts on its installed base of customers. The
Company also intends to continue to leverage its penetration of currently
targeted vertical markets by using its existing customers as a reference
base to gain new customers.
Maintain Technology Leadership: The Company believes it is a
technology leader in the field of call center software and CTI, having
pioneered many of the industry's fundamental call center technologies. The
Company owns 15 U.S. patents, with six additional U.S. patents pending, and
19 related foreign patents covering various processes and technologies
utilized in call management systems. The Company believes that in the
future advanced call management systems will consist primarily of
innovative software utilizing off-the-shelf hardware. As a result, the
Company intends to focus its development efforts on software, with an
emphasis on customer interaction and distributed applications.
Continue to Focus on Providing Comprehensive Call Center
Solutions: The Company provides system design, application configuration
and integration services in conjunction with the installation of its call
center solutions. The Company believes its ability to provide comprehensive
call center systems integration is an important factor in the purchasing
decisions of customers, and it intends to continue its emphasis on
providing these design and integration services.
Continue to Expand Sales and Marketing: The Company intends to pursue
an increased share of the market for call management systems by hiring
additional sales and marketing personnel. The Company plans to open
additional sales offices both domestically and internationally and is
implementing a program aimed at targeted vertical markets. In addition, the
Company is establishing a national account program which is intended to
focus sales and marketing efforts on large, multinational corporations.
Increase Penetration of International Markets: In 1996, the Company
generated 21.0% of its total revenues from sales outside the United States
and has 26 employees dedicated to its international operations. The Company
currently has relationships with 10 VARs in Europe, Latin America and the
Pacific Rim. The Company intends to leverage these relationships in
selected international markets to enhance its revenue base. The Company
also intends to expand its international operations through hiring
additional personnel, opening new offices and forming additional
relationships with VARs in Latin America and the Pacific Rim.
Pursue Adjacent Markets: The Company has developed a leadership
position in the collections segment of the outbound call management systems
market. In 1996, approximately 80% of the Company's total revenues were
attributable to systems sold for collections applications, with the
remainder attributed primarily to telemarketing and telesales applications.
The Company recently introduced Magellan CS which leverages the existing
dynamic inbound/outbound functionality of PhoneFrame CS to target
applications in telemarketing and telesales. The Company seeks to leverage
its existing dynamic inbound/outbound functionality to gain market share in
the overall call management systems market. The Company believes the
distinction between inbound and outbound call management
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systems will diminish and that it is well positioned to provide both
inbound and outbound call management solutions.
PRODUCTS
The Company's principal product, PhoneFrame CS, is an integrated suite of
client/server software applications and hardware that provides outbound and
blended call management solutions. PhoneFrame CS software components are based
on open standards, allowing integration with varied and complex user
environments.
PhoneFrame CS is sold to organizations that operate outbound and blended
call centers. These call centers require solutions that integrate with existing
communication and information systems including mainframe-based information
systems, local area networks, agent workstations and PBX/ACDs. Utilizing
customer records residing in an organization's existing databases, PhoneFrame CS
automates customer contacts and guides agents through the customer interaction
process.
ARCHITECTURE OVERVIEW CHART
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The key components of PhoneFrame CS are the Universal Server, Command Post,
Universal Workstation and the Universal Switch.
PHONEFRAME CS
PRODUCT COMPONENT DESCRIPTION
UNIVERSAL SERVER Server software that controls and coordinates system operation. Used to
manage calling list data, call attempt and contact history, agent profiles,
time zone and area code data, call processing, agent and supervisor
activity.
PLATFORM: IBM RISC/6000, AIX operating system, Sybase database
COMMAND POST Suite of software applications used by system managers to configure,
operate, monitor and report on system activities utilizing an interactive
GUI.
PLATFORM: Pentium PC, Windows NT
UNIVERSAL WORKSTATION Client-based software which runs on the agent workstation and manages the
client session with the UNIVERSAL SERVER for each call routed to the agent
workstation. The UNIVERSAL WORKSTATION utilizes one of the following
options:
UNIVERSAL ACCESS Software that controls screen presentation and data manipulation and allows
the agent to work within an enterprise information system.
MTACCESS Software that runs in the background and interacts with screen presentation
and data manipulation applications provided by the existing enterprise
information systems.
MAGELLAN CS Software that controls Windows GUI screen presentation on the agent
workstation. Provides read/write access to data in customer's existing
systems. Additionally, MAGELLAN BUILDER, which resides on the COMMAND POST
or a dedicated PC, facilitates development of customer interaction and call
flow applications featuring an interactive GUI.
PLATFORM: PC, Windows 3.1, 95 and NT
UNIVERSAL SWITCH Proprietary switching component of the system. Interfaces with existing
telephony equipment or directly with PSTN using digital or analog
interfaces.
CALL PROCESSOR PC-based SWITCH and VOICE PROCESSOR controller and client-based software
interface to UNIVERSAL SERVER.
VOICE PROCESSOR Software that performs call progress analysis and call characterization for
each call attempt (e.g., busy signal, ringback signal, fax machine, modem,
voicemail, answering machine, live contact). Also provides voice messaging
services for inbound and outbound applications.
PLATFORM: PC, Dialogic voice processing cards
SWITCH High speed, real-time digital switching matrix.
PLATFORM: Motorola 68030 CPU, VME-Bus, OS/9 operating system
MPACT Software option for the Universal Server that communicates with leading
PBX/ACDs through CTI links, using one or both of the following:
PowerPACT Software option that provides ability to use an existing PBX/ACD for
switching and/or call progress analysis in place of the Voice Processor and
Switch.
ActionPACT Software option that monitors service levels on a call center's ACD via its
CTI links and dynamically and automatically move agents from outbound
applications to inbound applications and vice versa.
The Universal Server software is the heart of each PhoneFrame CS system,
providing centralized control for the operation and management of the system. It
integrates a Sybase database to provide calling list management, and to store
operational data for real-time and historical reporting. TCP/IP is used as the
transport protocol for communication with all client components of the system.
The Universal Server also
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includes software that facilitates integration with popular user platforms to
perform extended functions such as real-time calling list data acquisition,
dynamic call blending, Internet callback and enterprise reporting.
The Command Post is a suite of software applications used for call flow
script creation and editing, call campaign configuration, resource definition
and management, agent and production monitoring and system reporting. Command
Post runs on Windows NT and consists of software modules that automate the
operation and monitoring of the system. Builder is used to automate data
exchange with user databases and create calling campaigns. QFlow is used to
implement user-defined strategies for calling campaigns based on real-time
events such as time of day, hit rate and list penetration. Production Monitoring
provides an interactive graphical representation of the call center that allows
managers to access, monitor and control system resources such as agents and
trunks. The Report Scheduler automates the generation of system reports. Reports
can be written in any Windows SQL-based report writer.
The Company's Universal Workstation is client-based software which runs on
the agent workstation, and is available in three different software options:
Universal Access, MTAccess and Magellan CS. Each option supports Microsoft's
Dynamic Data Exchange ("DDE") and industry standard Enhanced High Level Language
Application Programming Interface ("EHLLAPI") for exchanging information with
external applications. Each Universal Workstation software option meets
different needs for agent workstation functionality.
Universal Access for Windows and Universal Access for OS/2 manage the
client session with the Universal Server for each call routed to an agent
workstation and provide basic information about the called party, including
customer identification or account number. Universal Access facilitates
automated access to other enterprise information systems and can be configured
to toggle between applications.
MTAccess interfaces with screen presentation and data manipulation
applications software provided by the customer. Similar to the Universal Access
options, MTAccess manages the client session with the Universal Server for each
call routed to the agent workstation. Initial contact information about the
called party is provided to the agent through the customer's application.
Magellan CS is the Company's recently introduced Universal Workstation
software. Magellan CS consists of two components, Magellan Interpreter and
Magellan Builder. Magellan Builder allows system managers to create and
dynamically modify call flow applications, complete with many features of a
Windows GUI, such as buttons and checklists, without any programming. Magellan
Interpreter provides agents with a composite view of enterprise-wide customer
information through a Windows GUI. Agent interaction with customers is guided by
Magellan CS applications, which provide agents with the customer information
necessary to make timely, informed customer interaction decisions. Magellan CS
supports EHLLAPI, DDE, object linking and embedding ("OLE"), open database
connectivity ("ODBC"), telephony application programming interface ("TAPI") and
telephony services application programming interface ("TSAPI") for accessing
customers' information and telephony systems. Additionally, through the use of
resource files, Magellan CS has been designed to facilitate localization for
international deployment.
The Universal Switch is the Company's proprietary switching platform that
interfaces with existing telephone equipment or directly with the Public
Switched Telephone Network ("PSTN") using digital and analog interfaces. All
inbound and outbound calls can be processed through the Universal Switch, which
performs two major functions: call processing and switching. The Call Processor
serves as the controller and client software interface to the Universal Server.
The Voice Processor performs all telephone call processing including call
progress analysis, which determines the type of call result that has been
achieved. Call progress analysis utilizes a digital signal processing algorithm
which detects various tone and voice patterns including busy signals, ringback
signals, fax machines, modems, voice mail and answering machines as well as live
contacts. The Voice Processor also provides voice messaging services for inbound
and outbound applications. The Switch performs high speed switching to connect
live contacts to the next available, appropriate agent in real time.
The Company's MPACT software option enables PhoneFrame CS to be integrated
with industry leading PBX/ACDs through the use of CTI links. PowerPACT allows
PhoneFrame CS to use a customer's existing
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PBX/ACD in place of the Switch and Voice Processor components. The Voice
Processor, in conjunction with PowerPACT software, can provide call progress
analysis for PBX/ACDs that do not provide this functionality. ActionPACT
provides the ability for PhoneFrame CS to monitor service levels on a call
center's PBX/ACD via its CTI link and dynamically and automatically move agents
from outbound applications to inbound applications and vice versa. PowerPACT and
ActionPACT allow users to leverage their investment in installed PBX/ACD
equipment.
SERVICES
A significant portion of the Company's revenues is derived from on-going
system support, maintenance, installation, training, customization and
consulting services. Upon purchase of a system, customers generally enter into a
maintenance agreement covering on-going system support and software upgrades.
These agreements can have a duration of up to five years. In addition, the
Company provides installation, training, customization and consulting services
during the implementation process. For additional fees, the Company will from
time to time provide additional training or consulting services at the
customer's request.
The Customer Care Group consists of the Customer Care Center ("CCC"), the
Technical Assistance Center ("TAC"), the Applications Integration Engineers and
the Training and Customer Education Division. The CCC provides 24 x 7 customer
support by telephone. The TAC provides high level technical support, coordinates
new product development and beta tests, and provides additional expert support
for the other groups within the service function. The Applications Integration
Engineers provide configuration, scripting, reconfiguration, custom application
development and other special customer services. The Training and Customer
Education Division develops documentation for installation and support of the
Company's products, provides on-site and off-site training to customers through
an array of classes, and offers consulting services. Introductory training
classes are provided as part of each initial system purchase and advanced
classes are provided for additional fees. As of January 31, 1997, the Customer
Care Group employed a total of 72 employees.
The Field Implementation Services Group has responsibility for systems
design, sales support, implementation and project management and serves as the
customer installation liaison. The Field Implementation Services Group is
divided into three regional divisions covering the United States and Canada, and
one international division. International support is also provided by technical
support personnel located in the United Kingdom and the Company's international
VARs. As of January 31, 1997, this group employed a total of 38 employees.
The Company contracts with IBM to provide local hardware support in the
United States and Canada, and can dispatch local personnel from IBM national
service centers to address hardware issues.
SALES AND MARKETING
The Company sells its products primarily through a direct sales channel and
through VARs. Sales in the United States, Canada and the United Kingdom are
conducted primarily through direct channels. Distribution in other countries is
conducted through a combination of direct sales and VARs. The Company has sales
offices located in Atlanta, Boston, Dallas, Los Angeles, Philadelphia, Salt Lake
City, White Plains, London and Toronto.
The Company's marketing activities include product management, product
marketing, direct marketing, public relations, press and analyst communications,
event support and management of the Company's Web site. The Company's Business
Development Group is responsible for developing joint marketing and co-
development relationships with call center industry suppliers. The Company is
also implementing a program aimed at specific vertical markets. In addition, the
Company is establishing a national account program which is intended to focus
sales and marketing efforts on large, multinational corporations.
As of January 1, 1997, the Company's sales personnel, including the Sales,
Marketing, Product Management and Business Development groups consisted of 54
employees worldwide.
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The Company's customers independently operate domestic and international
User Groups, which have approximately 300 and 35 members, respectively. The
domestic User Group was formed in 1990, and is managed by an independent board
of directors that coordinate User Group activity. The international User Group
was formed in 1991. Activities of both the domestic and international User
Groups include an annual User Group conference. Additionally, the domestic User
Group conducts regional User Group meetings typically focused on common
applications and call center opportunities. The 1996 annual domestic User Group
conference was attended by approximately 260 people. Although the Company is not
a sponsor of the User Group conferences, it generally sends Company employees
who conduct seminars, product demonstrations and training sessions.
CUSTOMERS
The Company's call management solutions are used by organizations in a
broad range of industries. Since the introduction of PhoneFrame CS in 1995, the
Company has licensed its software for use on over 5,000 agent workstations and
has shipped over 100 systems. The Company's top five customers accounted for
25.0% of the Company's total revenues in 1995. The Company's top five customers
accounted for 26.6% of the Company's total revenues in 1996. Although specific
customers may change from period to period, the Company expects that large sales
to a limited number of customers will continue to account for a significant
percentage of its revenues in any particular period for the foreseeable future.
The following table sets forth certain of the Company's customers who have
purchased $200,000 or more in products and services from the Company during the
two year period ended December 31, 1996:
CUSTOMERS APPLICATIONS
--------- ------------
BANKING
BancOne Services Corporation Citicorp Collections
Banco Popular de Puerto Rico Credicard SA Brazil Telemarketing
Grupo Financiero Bancomer, S.A. de C.V. First USA Bank Customer Service
Barclays Bank PLC (UK) Marine Midland Bank Fraud Detection
Chemical Bank National Westminster Bank
Chevy Chase, FSB Royal Bank of Canada
FINANCIAL SERVICES
Americredit Financial Services, Inc. Green Tree Financial Collections
AmSouth Consumer Collections Corporation Telemarketing
Countrywide Collections Guardian National Acceptance Customer Service
Countrywide Funding Corporation Prospect Outreach
Dun & Bradstreet Corporation Intuition, Inc. Marketing
Strong Capital Management, Inc. Business Information Surveys
RETAIL
Circuit City Stores, Inc. J.C. Penney Company, Inc. Collections
Eagle Managed Care Mercantile Stores Company, Inc. Telemarketing
Financial Management Control The Foschini Group (PTY),
Hudson's Bay Company Limited
COMMUNICATIONS
AirTouch Communications, Inc.
Comcast Cellular Communications
Continental Cablevision of
Broward County, FL
IDT Corporation
Telemarketing
Collections
Customer Service
Customer Welcome
Campaigns
SERVICE BUREAU
The Call Centre Ltd. (UK) Snyder Communications, Inc. Collections
Decisions Group Ltd. (UK) Works & Lentz, Inc. Telemarketing
National Action Financial Services, Inc. Customer Service
Fundraising
Sales
Loan Servicing
Appointment Scheduling
TECHNOLOGY, RESEARCH AND PRODUCT DEVELOPMENT
The Company intends to continue investment in research and development to
maintain its position as a leader in call center technology. The Company has
developed a client/server software architecture that
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facilitates the deployment, configuration and interoperability of its call
center solutions. The design of the system provides three core sets of services:
(i) user interface presentation and navigation, (ii) server-based system
management services, and (iii) telephone call processing services, including the
Company's patented predictive dialing and dynamic call blending features. The
Company's products are based on an open architecture and industry standards and
provide seamless integration with third-party systems or customers' existing
technology infrastructure. The Company will seek to develop future products that
adhere to existing and emerging standards.
The presentation and navigation components of the software have been
implemented using Windows GUI guidelines. Usability labs and focus groups are
used to define interface requirements and verify ease of use. TCP/IP is used as
the transport layer for all client/server communication. Adherence to Winsock
and other standards facilitates integration with third-party desktop
applications and protocol stacks. The Company is working to broaden the
incorporation of Simple Network Management Protocol ("SNMP") into its product
architecture to facilitate enterprise-wide network management for both computer
and telephony components.
The Company's telephony hardware and software have been designed using
industry standards and the Company intends to continue this approach. The
Company's systems use standard analog and digital connectivity to
telecommunications equipment and services. The Company's newest generation of
agent workstation software, Magellan CS, supports the evolving telephony
application program interfaces TAPI and TSAPI, and future products are expected
to support those interfaces as well. CTI links to various PBX/ACDs are often
proprietary and the Company therefore uses various interfaces such as CallPath,
CallBridge, ASAI, Meridian Link and the Application Bridge to facilitate
integration with various switching platforms.
Magellan CS, released in 1996, and Magellan SA, which the Company currently
plans to release in 1997, have been developed using object oriented methods and
technology. Magellan SA is a version of the Company's Magellan CS product that
will provide the functionality of Magellan CS to call center systems not
employing PhoneFrame CS. The Company expects Magellan SA will be used for a
variety of call center applications, including inbound applications, in which an
outbound call management system is not necessary or is already installed.
Magellan SA is intended to allow system managers to develop applications which
present a uniform Windows GUI independent of the application. Each application
can be developed by the system manager with scripting, data processing and
presentation and telephony services specific to the application while providing
agents with a consistent presentation. Like Magellan CS, Magellan SA will
support EHLLAPI, DDE, OLE, ODBC, TAPI and TSAPI for access to customers'
information and telephony systems.
The Company is currently developing the Universal Telephony Platform
("UTP"), a new subsystem which incorporates the functionality of a telephony
switch and voice processor. The UTP has been designed using the Common Object
Request Broker Architecture ("CORBA") to support distributed objects in an open
systems environment. UTP runs on Windows NT and uses off-the-shelf voice
processing components. Asynchronous Transfer Mode ("ATM") technology is used to
link multiple UTP components across standard ATM networks, providing seamless,
multi-site resource allocation, management and utilization. SNMP is used to
provide standards based network management.
As of January 31, 1997, the Company's research and development and quality
assurance staffs consisted of 42 employees. The Company's total expenses for
research and development for 1994, 1995 and 1996 were $3.7 million, $4.1
million, and $5.1 million, respectively. The Company anticipates that it will
continue to commit substantial resources to research and development in the
future. See "Risk Factors -- Risks Associated with Technological Advances;
Necessity of Developing New Products."
COMPETITION
The market for the Company's products is intensely competitive, fragmented
and subject to rapid change. Because the Company's principal products are call
center systems, which include both software applications and hardware, the
Company competes with a variety of companies which provide these components
independently or as an integrated system. The Company's principal competitors in
the field of integrated inbound/outbound call management systems are Davox, EIS
and Mosaix. The Company competes primarily against Davox and Mosaix in the
collections segment of the call management systems market, and against EIS
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in the telemarketing and telesales segments of the call management systems
market. The Company also competes in the CTI segment of the market, where
principal competitors include AnswerSoft, Inc., Genesys Telecommunications
Laboratories, Inc., Nabnasset Corporation and Brock International, Inc., among
others. The Company may face additional competition from PBX/ACD vendors, other
telecommunications equipment providers, telecommunications service providers,
computer hardware and software vendors and others. The Company generally faces
competition from one or more of its principal competitors on major installations
and believes that price is a major factor considered by its prospective
customers. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote more
resources to the development, promotion and sales of products than the Company.
Competition from these or other sources could result in price reductions and
loss of market share which could materially adversely affect the Company's
business, financial condition and results of operations.
The Company believes that the primary competitive factors affecting its
markets include product features such as flexibility, scalability,
interoperability, functionality and ease of use, as well as reputation, quality,
performance, price and customer service and support. See "Risk
Factors -- Competition."
REGULATORY ENVIRONMENT
Certain uses of outbound call management systems are regulated by federal,
state and foreign law. The Federal Telephone Consumer Protection Act (the
"TCPA") prohibits the use of automatic dialing equipment to call emergency
telephone lines, health care and similar facility patient telephone lines, and
telephone lines where the called party is charged for incoming calls, such as
those used by pager and cellular phone services. The TCPA prohibits use of such
equipment to engage two or more lines of a multi-line business simultaneously.
Among other things, the TCPA required the Federal Communications Commission
("FCC") to create regulations protecting residential telephone subscribers from
unwanted telephone solicitations. The rules adopted by the FCC require that
telemarketers maintain a company-specific "do-not-call list" which contains the
names and numbers of residential subscribers who do not want to receive calls.
An entity which has an "established business relationship" with a party it calls
and tax-exempt nonprofit organizations are exempt from do-not-call lists. The
rules also require that telemarketers may call consumers only after 8 a.m. and
before 9 p.m., local time. Certain states have enacted similar laws limiting
access to telephone subscribers who object to receiving solicitations. Fair Debt
Collection Practices Act ("FDCPA") limits communication by certain debt
collectors with consumers only after 8:00 a.m. and before 9:00 p.m., local time,
and not at the consumer's place of business. Many of the Company's customers are
exempt from the FDCPA. Although compliance with these laws may limit the
potential use of the Company's products in some respects, the Company's systems
can be programmed to operate automatically in full compliance with these laws
through the use of appropriate calling lists and calling campaign time
parameters. There can be no assurance, however, that future legislation further
restricting telephone solicitation practices, if enacted, would not adversely
affect the Company. See "Risk Factors -- Regulatory Environment."
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. The Company holds 15
United States patents, with six additional U.S. patents pending, and 19 related
foreign patents, including several patents covering various processes and
technologies utilized in call management systems. These patents cover the
Company's proprietary implementations of features such as inbound/outbound call
blending, call progress analysis, screen pops of the called person's account
information and Cancel Dial. The Company also has a number of pending patent
applications on call technology innovations for which patents have not issued.
In many cases, the Company has also received or applied for patents in other
countries covering the innovations covered by existing patents or patent
applications. With certain exceptions, the Company historically has not actively
pursued infringements of these patents. There can be no assurance that any
future attempt by the Company to enforce its patents would be successful or
would result in royalties which exceed the cost of such enforcement efforts, or
that the Company will be able
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to detect all instances of infringement. The Company generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to, and distribution of, its proprietary
information. The Company maintains trademarks and service marks to identify its
products, development tools and service offerings and relies upon trademark and
trade dress laws to protect its proprietary rights in these marks.
The Company has entered into agreements with certain of its distributors
giving them a limited, non-exclusive right to use portions of the Company's
source code to create foreign language versions of the Company's products for
distribution in foreign markets. In addition, the Company has entered into
agreements with a small number of its customers requiring the Company to place
its source code in escrow. These escrow arrangements typically provide that
these customers have a limited, non-exclusive right to use such code in the
event that there is a bankruptcy proceeding by or against the Company, if the
Company ceases to do business or if the Company fails to meet its support
obligations. These arrangements may increase the likelihood of misappropriation
by third parties.
The Company may be subject to additional risks as it enters into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of the Company's rights may
be ineffective in such countries. Litigation to defend and enforce the Company's
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations, regardless of the final outcome
of such litigation. Despite the Company's efforts to safeguard and maintain its
proprietary rights both in the United States and abroad, there can be no
assurance that the Company will be successful in doing so, or that the steps
taken by the Company in this regard will be adequate to deter misappropriation
or independent third-party development of the Company's technology or to prevent
an unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any such events could have a material adverse
effect on the Company's business, financial condition and results of operations.
As the number of call center software applications in the industry
increases and the functionality of these products further overlaps, software
development companies similar to the Company may increasingly become subject to
claims of infringement or misappropriation of the intellectual property rights
of others. Although the Company believes that its software components and other
intellectual property do not infringe on the intellectual property rights of
others, there can be no assurance that such a claim will not be asserted against
the Company in the future, that assertion of such claims will not result in
litigation or that the Company would prevail in such litigation or be able to
obtain a license for the use of any infringed intellectual property from a third
party on commercially reasonable terms. Furthermore, litigation, regardless of
its outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations. Any infringement claim or
litigation against the Company could, therefore, have a materially adverse
affect on the Company's results of operations and financial condition.
EMPLOYEES
As of January 31, 1997, the Company had 236 full-time employees, of which
215 were based in the United States and 21 were based in other countries. None
of the employees of the Company is covered by a collectively bargaining
agreement. The Company considers its relations with its employees to be good.
The Company believes its future success will depend in large part on its
ability to recruit and retain qualified employees, especially experienced
software engineering personnel. The competition for such personnel is intense,
and there can be no assurance that the Company will be successful in retaining
or recruiting key personnel. See "Risk Factors -- Competitive Market for
Personnel."
PROPERTIES
The Company's principal administrative, sales, marketing, support, and
research and development facility is located in 100,000 square feet of modern
office space in Norcross, Georgia. This facility is leased to the Company
through 2005, and approximately 75% of the space is presently actively utilized.
The facility is
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owned by a partnership controlled by the Company's Chairman of the Board, Chief
Executive Officer and principal shareholder. See "Certain Transactions."
The Company also leases space for seven sales and support centers located
throughout the United States and in London. Management believes its current
facilities are adequate to meet its needs through the next twelve months and
that, if required, suitable additional or alternative space will be available to
accommodate expansion of the Company's operations on commercially reasonable
terms.
LEGAL PROCEEDINGS
One of the Company's customers has filed suit in the Circuit Court for Knox
County, Tennessee asserting, among other things, that the Company misrepresented
the functionality of its products and breached its contract with the customer
for delivery of its products and claiming not less than $2.0 million in damages.
The Company intends to vigorously defend this action and, based upon information
currently available, believes that the action will not have a material impact on
the Company. However, because the proceedings are at a preliminary stage and
discovery has not yet begun, the Company cannot predict the ultimate outcome of
this suit and there can be no assurance that the Company will be successful in
the proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Aleksander Szlam............... 45 Chairman of the Board and Chief Executive Officer
J. Neil Smith.................. 56 President, Chief Operating Officer and Director
Mark B. Adams.................. 45 Vice President -- Finance, Chief Financial
Officer
William K. Dumont.............. 47 Vice President -- Sales
Lee H. Davies.................. 53 Vice President -- Operations
Dean A. Trumbull............... 36 Vice President -- Advanced Technology
John A. Lamb................... 44 Vice President -- New Business Development
A. Scott Anderson.............. 41 Vice President -- International
John M. Goodeve-Docker......... 49 Managing Director of Melita Europe
Dan K. Lowring................. 36 Director -- Finance, Secretary and Treasurer
Aleksander Szlam founded the Company in 1979 and has served as Chairman of
the Board and Chief Executive Officer of the Company since its inception. Mr.
Szlam also has served as Chairman of the Board, President and Chief Executive
Officer of Inventions since 1987, and Chairman of the Board of Melita Europe
since 1991. Prior to founding Melita, Mr. Szlam worked as a design engineer and
scientist at Lockheed Corporation, NCR and Solid State Systems.
J. Neil Smith has served as President, Chief Operating Officer and a
director of the Company since January 1995. Prior to joining the Company, Mr.
Smith served as Chairman of the Board, President and Chief Executive Officer of
American Technical Services Group, Inc., a systems integration company, from
1987 to 1994.
Mark B. Adams has served as Vice President -- Finance and Chief Financial
Officer of the Company since September 1996. From 1993 to 1996, Mr. Adams served
as Executive Vice President, Finance and Chief Financial Officer of INITIAL
Contract Services, a building services company. From 1989 to 1993, Mr. Adams
served as Vice President, Finance for Suntory Water Group, a consumer products
company. Mr. Adams is a member of the American Institute of Certified Public
Accountants and is a Certified Public Accountant in the State of Georgia.
William K. Dumont has served as Vice President -- Sales of the Company
since December 1996. From 1994 to 1996, Mr. Dumont served as Regional Manager
for Octel Communications Corporation, and from 1990 to 1994 he served as
Regional Vice President of VMX, Inc., both of which are voice processing
companies.
Lee H. Davies has served as Vice President -- Operations of the Company
since September 1995. Prior to joining the Company, Mr. Davies served as Vice
President of Sales, Marketing and Customer Support for Aristacom International,
Inc., an inbound call center software company, from 1994 to 1995. From 1991 to
1994, Mr. Davies served as a marketing director for Digital Equipment
Corporation.
Dean A. Trumbull has served as Vice President -- Advanced Technology of the
Company since October 1994. Prior to joining the Company, Mr. Trumbull served as
a software engineering project leader and call processing group manager for
Intecom, Inc., a telecommunications corporation, from 1983 to 1994, and, during
1994, as Software Development Manager for its multimedia software subsidiary,
Incitz Incorporated.
John A. Lamb has served as Vice President -- New Business Development of
the Company since September 1996, and was Director of Special Projects of the
Company from February 1996 to September 1996. From January 1995 to November
1995, he was Vice President, Research and Development of Microhelp, Inc., a
software development company. From 1990 to 1995, he held various positions in
the sales and engineering departments of the Company.
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A. Scott Anderson has served as Vice President -- International of the
Company since February 1997. From 1995 to 1997, Mr. Anderson served as Senior
Vice President -- International Sales of S2 Systems, Inc., a software subsidiary
of Stratus Computer, Inc., a data communications software and development
services company. He served as Director of International Sales of S2 Systems
during 1995. Prior to that time, he was Director of International Operations of
BellSouth Systems Integration, a division of BellSouth Enterprises, from 1992
until its acquisition by S2 Systems in 1994.
John M. Goodeve-Docker has served as Managing Director of Melita Europe
since June 1995. He served as Deputy Managing Director for Melita Europe from
January 1994 to June 1995 and as Business Development Director from November
1992 to December 1993. Prior to joining the Company, Mr. Goodeve-Docker served
as General Manager of Trend Communications Ltd., an information technology data
communications manufacturer and distributor in the U.K., from 1991 to 1992.
Dan K. Lowring has served as Director -- Finance of the Company since July
1993, and as Secretary and Treasurer of the Company since January 1997. From
March 1993 to July 1993, he served as Controller of the Company, and from
October 1990 to March 1993 he served as Manager, Finance of the Company.
The Company intends to add at least two independent members to its Board of
Directors within 90 days after the date of this Prospectus. It will be necessary
for the Company to appoint these directors within the 90 day time period in
order to maintain its Nasdaq National Market listing. Failure to appoint two
such directors could result in a delisting of the Common Stock from the Nasdaq
National Market.
Beginning with the 1997 annual meeting of shareholders, the Board of
Directors will be divided into three classes, Class I, Class II and Class III,
each of whose members will serve for a staggered three-year term. At each annual
meeting of shareholders, after the 1997 annual meeting, a class of directors
will be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring. The terms of the initial Class I, Class II and
Class III directors will expire upon the election and qualification of successor
directors at the annual meeting of shareholders held following the end of
calendar years 1997, 1998 and 1999, respectively. See "Management -- Agreements
with Employees" and "Description of Capital Stock -- Certain Provisions of
Articles of Incorporation and Bylaws."
There are no family relationships between any of the directors or executive
officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors intends to establish an Executive
Committee, an Audit Committee and a Compensation Committee. The Executive
Committee will be empowered to exercise all authority of the Board of Directors
of the Company, except as limited by the Georgia Business Corporation Code
("GBCC"). Under Georgia law, the Executive Committee may not, among other
things, approve or propose to shareholders actions required to be approved by
shareholders, fill vacancies on the Board of Directors, amend the articles of
incorporation or bylaws or approve a plan of merger. The Company expects that
the Executive Committee will include Messrs. Szlam and Smith. The Audit
Committee will be responsible for recommending independent auditors, reviewing
with the independent auditors the scope and results of the audit engagement,
monitoring the Company's financial policies and control procedures, and
reviewing and monitoring the provisions of nonaudit services by the Company's
auditors. The Compensation Committee will be responsible for reviewing and
recommending salaries, bonuses and other compensation for the Company's
executive officers. The Compensation Committee also will be responsible for
administering the Company's stock option and stock purchase plans and for
establishing the terms and conditions of all stock options and purchase rights
granted under these plans. At least two of the new independent directors will be
appointed to each of the Audit and Compensation Committees at the time they are
elected to the Board of the Directors of the Company.
DIRECTOR COMPENSATION
Prior to this offering, no member of the Board of Directors of the Company
received compensation for service on the Board. Following the consummation of
the offering, the Company expects to pay the non-employee directors an annual
retainer for serving on the Board of Directors, plus fees for each board meeting
attended and each committee meeting attended which is held independently of a
board meeting.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company in 1996 for its Chief Executive Officer and the four other most
highly compensated executive officers of the Company in 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION
--------------------------- -------- -------- ------------ ------------ ------------
Aleksander Szlam...................... $300,001 $154,502 $86,040(2) -- --
Chairman of the Board and
Chief Executive Officer
J. Neil Smith......................... 220,399 82,500 --(3) -- --
President and Chief Operating
Officer
Lee H. Davies......................... 127,211 13,320 --(3) -- --
Vice President -- Operations
Dean A. Trumbull...................... 110,816 20,000 --(3) 40,000 --
Vice President -- Advanced
Technology
John M. Goodeve-Docker................ 85,333 32,000 18,576(4) -- $ 3,040(5)
Managing Director of Melita Europe
- ---------------
(1) Bonuses awarded and paid in 1996 were based upon 1995 performance.
(2) Includes the value of the non-business use of two automobiles provided by
the Company and reimbursement of the associated income taxes in the
aggregate amount of $64,068, health and life insurance premiums and
reimbursement of the associated income taxes in the aggregate amount of
$13,623, auto insurance premiums and reimbursement of the associated income
taxes in the aggregate amount of $6,308, and ad valorem tax payments and
reimbursement of the associated income taxes in the aggregate amount of
$2,041.
(3) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), other compensation in the form of perquisites and other
personal benefits has been omitted because such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive Officer for such
year.
(4) Consists of the value of the non-business use of an automobile provided by
the Company.
(5) Consists of a retirement savings contribution of $3,040 paid by the Company.
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The following table sets forth all individual grants of stock options
during the year ended December 31, 1996, to each of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ---------------- ----------- ---------- --------- ---------
Aleksander Szlam............. -- -- -- -- -- --
J. Neil Smith................ -- -- -- -- -- --
Lee H. Davies................ -- -- -- -- -- --
Dean A. Trumbull............. 40,000(1) 23.9% $4.07 1/1/03 $102,384 $259,461
John M. Goodeve-Docker....... -- -- -- -- -- --
- ---------------
(1) This option was granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors. The option is a nonqualified stock option, vests over five
years and has a seven-year term.
(2) The potential realizable value is calculated based on the seven-year term of
the option at the time of its grant. It is calculated by assuming that the
stock price on the date of grant ($4.07) appreciates at the indicated
annual rate, compounded annually for the entire term of the option. The
actual realizable value of the options based on the price to the public in
the offering will substantially exceed the potential realizable value shown
in the table.
The following table summarizes the value of the outstanding options held by
the Named Executive Officers at December 31, 1996. No options were exercised by
the Named Executive Officers during the year ended December 31, 1996.
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Aleksander Szlam........................... -- -- -- --
J. Neil Smith.............................. -- 450,000 -- $1,165,500
Lee H. Davies.............................. -- -- -- --
Dean A. Trumbull........................... -- 40,000 -- 57,200
John M. Goodeve-Docker..................... -- -- -- --
- ---------------
(1) Based on the estimated fair market value of the Company's Common Stock as of
December 31, 1996, of $5.50 per share, less the exercise price payable upon
exercise of such options. Such estimated fair market value as of December
31, 1996, is substantially lower than the initial public offering price per
share in this offering.
EMPLOYEE BENEFIT PLANS
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "1997 Stock Option Plan") became
effective on February 6, 1997. The aggregate number of shares reserved for
issuance under the 1997 Stock Option Plan is 1,350,000 shares, less the number
of shares issued pursuant to the Company's 1992 Discounted Stock Option Plan.
The purpose of the 1997 Stock Option Plan is to provide incentives for key
employees, officers, consultants and directors to promote the success of the
Company, and to enhance the Company's ability to attract and retain the services
of such persons. Options granted under the 1997 Stock Option Plan may be
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either options intended to qualify as "incentive stock options" under Section
422 of the Code or nonqualified stock options.
As of February 28, 1997, options to purchase 125,000 shares of Common Stock
were outstanding under the 1997 Stock Option Plan at a weighted average exercise
price of $5.50 per share and no shares of Common Stock have been issued upon
exercise of options granted under the 1997 Stock Option Plan.
1992 Discounted Stock Option Plan
The Company's 1992 Discounted Stock Option Plan (the "1992 Stock Option
Plan") became effective on June 4, 1992. The aggregate number of shares reserved
for issuance under the 1992 Stock Option Plan is 1,000,000 shares. The purpose
of the 1992 Stock Option Plan is to provide incentives for key employees to
promote the success of the Company, and to enhance the Company's ability to
attract and retain the services of such persons. Options granted under the 1992
Stock Option Plan are not intended to qualify as "incentive stock options" under
Section 422 of the Code. Options granted under the 1992 Stock Option Plan vest
over a period of time specified in the relevant option agreement, and will first
become exercisable as to the vested portion 14 months after the closing of this
offering.
As of February 28, 1997, options to purchase 981,097 shares of Common Stock
were outstanding under the 1992 Stock Option Plan at a weighted average exercise
price of $3.16 per share and no shares of Common Stock have been issued upon
exercise of options granted under the 1992 Stock Option Plan.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan (the "Stock Purchase
Plan") on March 1, 1997, to become effective on the closing of this offering. A
total of 250,000 shares of the Company's Common Stock have been reserved for
issuance under the Stock Purchase Plan. The Stock Purchase Plan is intended to
qualify under sec. 423 of the Code. An employee electing to participate in the
Stock Purchase Plan must authorize on a semi-annual basis a stated dollar amount
or percentage of the employee's regular pay (not to exceed 10%) to be deducted
by the Company from the employee's pay. The price at which employees may
purchase Common Stock is 85% of the closing price of the Common Stock on the
Nasdaq National Market on the first day of the semi-annual period or the last
day of the semi-annual period, whichever is lower. An employee may not sell
shares of Common Stock purchased under the Stock Purchase Plan until the later
of: (i) 180 days after the closing of this offering; or (ii) the first day of
the second semi-annual period following the semi-annual period in which the
right to purchase such shares was granted. Employees of the Company who have
completed six full months of service with the Company and whose customary
employment is more than 20 hours per week for more than nine months per calendar
year are eligible to participate in the Stock Purchase Plan. An employee may not
be granted an option under the Stock Purchase Plan if after the granting of the
option such employee would be deemed to own 5% or more of the combined voting
power or value of all classes of stock of the Company. As of March 1, 1997,
approximately 240 employees are eligible to participate in the Stock Purchase
Plan. The Stock Purchase Plan will be administered by the Compensation Committee
of the Board of Directors.
401(k) Profit Sharing Plan
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan")
which is intended to be a tax-qualified defined contribution plan under Section
401(k) of the Code. In general, all U.S. employees of the Company who have
completed six months of service are eligible to participate. The 401(k) Plan
includes a salary deferral arrangement pursuant to which participants may
contribute, subject to certain Code limitations, a maximum of 15% of their
salary on a pre-tax basis, with a maximum deferral of $9,500. Subject to certain
Code limitations, the Company may make a matching contribution at the discretion
of the Board of Directors. In 1996, the Company's matching contribution was 40%
of each participant's contribution up to 6% of the participant's salary, for an
aggregate contribution of $119,000. A separate account is maintained for each
participant in the 401(k) Plan. The portion of a participant's account
attributable to his or her own contributions is 100% vested. The portion of the
account attributable to Company contributions (including matching contributions)
vests ratably over the next six years of service with the Company. Distributions
from
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the 401(k) Plan may be made in the form of a lump-sum payment in cash or
property or in the form of an annuity.
AGREEMENTS WITH EMPLOYEES
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company restricting the ability of the
employee to compete with the Company during his or her employment and for a
period of one year thereafter, restricting solicitation of customers and
employees following employment with the Company, and providing for ownership and
assignment of intellectual property rights to the Company.
Mr. Szlam has entered into a two-year employment agreement with the Company
which commences on the effective date of this offering. Pursuant to the
agreement, Mr. Szlam is entitled to receive an annual base salary of $300,000,
and is entitled to annual bonuses of at least $160,000. Mr. Szlam's employment
under the agreement automatically renews for additional two-year terms unless
the Company or Mr. Szlam cancels such renewal by giving three months' prior
written notice. Under the terms of the agreement, Mr. Szlam has agreed to assign
to the Company all patents, copyrights and other intellectual property developed
by him during the course of his employment by the Company. In addition, Mr.
Szlam has agreed not to solicit the customers or employees of the Company or to
compete with the Company for two years following any termination of his
employment.
Mr. Smith has entered into an employment agreement with the Company which
commences on the effective date of this offering and terminates on July 31,
1999. Pursuant to the agreement, Mr. Smith is entitled to receive an annual base
salary of $225,000, and is entitled to annual bonuses of up to $100,000 at the
discretion of the Board. Mr. Smith's employment under the agreement
automatically renews for additional two-year terms unless the Company or Mr.
Smith cancels such renewal by giving three months' prior written notice. If Mr.
Smith's employment is terminated by the Company other than for cause, he will be
entitled to severance pay equal to one year's salary. If Mr. Smith terminates
his employment following a material diminishment of the duties, salary, location
or authority of his position, he will be entitled, subject to Board of Directors
review, to severance pay equal to one year of salary. All options currently held
by Mr. Smith will vest upon completion of this offering, but will not be
exercisable until beginning 14 months after completion of this offering.
Notwithstanding the foregoing, if Mr. Smith voluntarily resigns his positions
with the Company without the Company's consent, his right to exercise his
current options will be forfeited with respect to one-fourth of his options for
each full year which the resignation occurs prior to July 1, 2000. Under the
terms of the agreement, Mr. Smith has agreed to assign to the Company all
patents, copyrights and other intellectual property developed by him during the
course of his employment by the Company. In addition, Mr. Smith has agreed not
to solicit the customers or employees of the Company or to compete with the
Company for two years following any termination of his employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, compensation of executive officers of the Company was
determined by Mr. Szlam, Chairman of the Board and Chief Executive Officer of
the Company. See "Certain Transactions" for information concerning certain
transactions and relationships between the Company and Mr. Szlam. Simultaneously
with the expansion of the Board of Directors following the completion of this
offering, the Company will establish a Compensation Committee to review the
performance of executive officers, establish overall employee compensation
policies and recommend to the Board of Directors major compensation programs. No
voting member of the Compensation Committee will be an executive officer of the
Company. Messrs. Szlam and Smith will be ex officio members of the Compensation
Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Upon the closing of this offering, the Company's Amended and Restated
Articles of Incorporation will provide that the liability of the directors for
monetary damages shall be limited to the fullest extent permissible under
Georgia law. Under Georgia law, liability of a director cannot be limited for
(i) any
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appropriation, in violation of his duties, of any business opportunity of the
Company, (ii) acts or omissions which involve intentional misconduct or a
knowing violation of law, (iii) any liability under Section 14-2-832 of the
GBCC, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions, or (iv) any transaction from which he derived an
improper personal benefit. This limitation of liability will not affect the
availability of injunctive relief or other equitable remedies.
Upon the closing of this offering, the Company's Amended and Restated
Bylaws will provide that the Company shall indemnify each of its officers,
directors, employees and agents to the extent that he is or was a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement in connection with such action, suit or
proceeding; provided, however, that no indemnification shall be made for (i) any
appropriation, in violation of his duties, of any business opportunity of the
Company, (ii) acts or omissions which involve intentional misconduct or a
knowing violation of law, (iii) any liability under Section 14-2-832 of the
GBCC, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions, or (iv) any transaction from which he derived an
improper personal benefit.
The Company intends to provide directors and officers liability insurance
coverage to its directors and officers following this offering.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 28, 1997, and
as adjusted to reflect the sale by the Company of the shares offered hereby, by
(i) each director of the Company; (ii) each of the Named Executive Officers;
(iii) each shareholder known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; and (iv) all executive officers and
directors as a group. Except as otherwise noted, the persons or entities named
in the table have sole voting and investment power with respect to all the
shares of Common Stock beneficially owned by them, subject to community property
laws where applicable.
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
NUMBER OF SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
--------------------------------------- ---------------- -------- --------
Aleksander Szlam (2)...................................... 11,143,395 100.0% 76.1%
J. Neil Smith (3)......................................... -- -- --
Lee H. Davies (4)......................................... 5,000 * *
Dean A. Trumbull (5)...................................... -- -- --
John M. Goodeve-Docker (6)................................ 5,000 * *
All executive officers and directors as a group (10
persons)(7)............................................. 11,163,395 100.0% 76.1%
- ---------------
* Less than 1%.
(1) Except as set forth herein, the street address of the named beneficial owner
is c/o Melita International Corporation, 5051 Peachtree Corners Circle,
Norcross, Georgia 30092-2500.
(2) Consists of 11,143,395 shares held by a limited partnership controlled by
Mr. Szlam.
(3) Excludes 450,000 shares issuable pursuant to currently vested options
exercisable beginning 14 months after the closing of this offering, subject
to certain acceleration and defeasance provisions. See "Agreements with
Employees."
(4) Includes 5,000 shares issuable pursuant to currently exercisable options.
(5) Excludes 10,000 shares issuable pursuant to currently vested options
exercisable beginning 14 months after the closing of this offering.
(6) Includes 5,000 shares issuable pursuant to currently exercisable options.
(7) Includes 11,143,395 shares held by a limited partnership controlled by Mr.
Szlam and 20,000 shares issuable pursuant to currently exercisable options.
Excludes 460,000 shares issuable pursuant to currently vested options
exercisable beginning 14 months after the closing of this offering.
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CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
In August 1994, the Company entered into a lease agreement with an
unrelated party to lease its headquarters facility commencing April 1995. The
agreement provides for annual lease payments ranging from $542,000 to $636,000
per year over a ten-year term. In November 1995, Mr. Szlam, the Company's
Chairman of the Board, Chief Executive Officer and principal shareholder,
purchased the facility through a limited liability company controlled by Mr.
Szlam and his wife. The limited liability company now rents the facility to the
Company under the terms of the original lease. Rent expense paid to the limited
liability company was $60,000 and $543,000 in 1995 and 1996, respectively.
During 1994, the Company paid $325,000 in research and development fees to
an entity owned by Mr. Szlam's brother-in-law.
The Board of Directors of the Company has adopted a resolution whereby all
future transactions, including any loans from the Company to its officers,
directors, principal shareholders or affiliates, will be approved by a majority
of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors, if required by law, or a
majority of the disinterested shareholders, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
COMBINATION OF MELITA EUROPE AND INVENTIONS
Upon the effective date of this offering, the Company will acquire Melita
Europe and Inventions by share exchanges with their existing shareholders, which
are Mr. Szlam, a limited partnership controlled by Mr. Szlam and a trust
controlled by his spouse. The Company will issue a total of 3,143,395 shares of
its Common Stock to the shareholders of Melita Europe and Inventions in such
share exchanges. The exchange ratios and number of shares issued in the share
exchanges were based on relative valuations of the Company, Melita Europe and
Inventions determined by an independent appraisal firm.
S CORPORATION DISTRIBUTION AND TERMINATION OF S CORPORATION STATUS
Upon the Termination Date, the Company will terminate its status as an S
corporation under the Code. All undistributed S corporation earnings through the
Termination Date will be distributed to the Company's principal shareholder
using a portion of the net proceeds of this offering. See "Termination of S
Corporation Status and Related Distributions," "-- Repayment of Shareholder
Notes" below and Notes 1 and 3 of the Notes to Combined Financial Statements.
REPAYMENT OF SHAREHOLDER NOTES
In connection with a June 19, 1992 distribution of S corporation
accumulated earnings, Melita issued a note payable (the "1992 Note") to Mr.
Szlam in the principal amount of $3.0 million. The note bears interest at a rate
equal to the prime rate plus 1% per annum, and the outstanding principal balance
of this note as of March 1, 1997, was $2.4 million. Interest on the note is
payable monthly, and principal is payable in 16 equal quarterly installments
beginning July 1, 1996. The note contains an acceleration provision at the
option of the shareholder upon certain designated changes in ownership, which
was triggered by changes in the capital structure in February 1997. The largest
amount outstanding under this note during 1996 was $3.0 million.
In connection with a February 7, 1997 distribution of S corporation
earnings accumulated through December 31, 1996, Melita and Inventions issued
notes payable (the "1997 Notes") to Mr. Szlam. These two notes have an aggregate
principal amount of $12.9 million. Each of the notes bears interest at the
minimum rate required to avoid imputation of interest using the applicable
federal rate under the Code. The outstanding principal balance on these notes as
of March 1, 1997, was $12.9 million, and the largest aggregate amount
outstanding under these notes during the period from issuance to March 1, 1997
was $13.1 million. Payment of these notes is due in full upon demand.
The 1992 Note and 1997 Notes will be repaid in full with a portion of the
net proceeds of this offering.
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TAX INDEMNIFICATION AGREEMENT
Melita and Inventions have entered into Tax Indemnification Agreements with
their existing shareholders prior to this offering providing for, among other
things, the indemnification of the Company by such shareholders for any federal
and state income taxes (including interest) incurred by the Company if for any
reason the Company is deemed to be treated as a C corporation during any period
for which it reported its earnings to the taxing authorities as an S
corporation. The Tax Indemnification Agreements further provide for the
cross-indemnification of the Company and of each existing shareholder for
certain additional taxes (including interest and, in the case of existing
shareholders, penalties) resulting from the Company's operations during the
period in which it was an S corporation.
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DESCRIPTION OF CAPITAL STOCK
Upon the effectiveness of this offering, the Company's authorized capital
stock will consist of 100,000,000 shares of Common Stock, no par value per
share, and 20,000,000 shares of preferred stock, no par value per share. As of
March 1, 1997, after giving effect to the issuance of 3,143,395 shares of Common
Stock in connection with the Combination, the Company had issued and outstanding
11,143,395 shares of Common Stock held by three stockholders of record. The
following description of the capital stock of the Company is a summary and is
qualified in its entirety by the provisions of the Company's Amended and
Restated Articles of Incorporation and Amended and Restated Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and on all matters to be submitted to a vote of the
Company's shareholders. The Common Stock does not have cumulative voting rights,
and, as a result, the holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election and the holders of the remaining shares will not be able
to elect any directors. Subject to the rights of any holders of preferred stock
which may be issued in the future, the holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the Board of
Directors and paid by the Company out of funds legally available therefor. In
the event of dissolution, liquidation or winding up of the Company, holders of
shares of Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities and liquidation preferences, if any. Holders of
shares of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by the Company in connection with this offering will
be, duly authorized, validly issued, fully paid and nonassessable. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights, privileges and preferences of the holders of any shares of preferred
stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 20,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of the Company. There are no outstanding shares of preferred
stock, and no series have been designated. The Company does not currently have
any intention to designate or issue any preferred stock.
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS
The Amended and Restated Bylaws provide that special meetings of
shareholders may be called only by (i) the Board of Directors, (ii) the Chairman
of the Board of Directors (if one is so appointed), (iii) the President of the
Company or (iv) holders of not less than 50% of all votes entitled to be cast on
any issue proposed to be considered at the proposed special meeting. The Amended
and Restated Bylaws permit removal of directors only for cause. The Amended and
Restated Articles of Incorporation also provide for a classified Board of
Directors. See "Management -- Directors and Executive Officers."
The Company's Amended and Restated Bylaws establish an advance notice
procedure for the nomination of candidates for election as directors and other
shareholder proposals to be considered at shareholders meetings, other than by
or at the direction of the Board of Directors or other designated parties.
Notice of shareholder proposals and director nominations must be given timely in
writing to the Secretary of the Company before the meeting at which such matters
are to be acted upon or directors are to be elected. Such
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notice, to be timely, must be received at the principal executive offices of the
Company not less than 60 days before the date of the meeting at which the
director(s) are to be elected or the proposal is to be considered; however, if
less than 70 days notice or prior public disclosure of the date of the scheduled
meeting is given or made, notice by the shareholder, to be timely, must be
delivered or received not later than the close of business on the tenth day
following the earlier of the day on which notice of the date of the meeting is
mailed to shareholders or public disclosure of the date of such meeting is made.
Notice to the Company from a shareholder who intends to present a proposal
or to nominate a person for election as a director at a shareholders' meeting
must contain certain information about the shareholder giving such notice and,
in the case of director nominations, all information that would be required to
be included in a proxy statement soliciting proxies for the election of the
proposed nominee (including such person's written consent to serve as a director
if so elected). If the chairman of the meeting determines that a shareholder's
proposal or nomination is not made in accordance with the procedures set forth
in the Amended and Restated Bylaws, such proposal or nomination, at the
direction of such presiding officer, may be disregarded. The notice requirement
for shareholder proposals contained in the Amended and Restated Bylaws does not
restrict a shareholder's right to include proposals in the Company's annual
proxy materials pursuant to rules promulgated under the Securities Exchange Act
of 1934, as amended.
The Amended and Restated Bylaws provide that directors may be removed only
for cause and only by the affirmative vote, at any annual or special meeting of
the shareholders, of not less than 66 2/3% of the total number of votes of then
outstanding shares of capital stock of the Company that are entitled to vote
generally in the election of directors, voting together as a single class, but
only if notice of such proposed removal was contained in the notice of such
meeting. "For cause" means (i) misconduct as a director of the Company or any
subsidiary of the Company which involves dishonesty with respect to a material
corporate activity or material corporate assets, or (ii) conviction of an
offense punishable by one or more years of imprisonment (other than minor
regulatory infractions and traffic violations which do not materially and
adversely affect the Company). The Board of Directors shall have the power to
increase or decrease the authorized number of directors, with or without
shareholder approval. Newly created directorships resulting from any increase in
the number of directors or any vacancy on the Board of Directors may be filled
by the affirmative vote of a majority of the remaining directors then in office
or, if not filled by the directors, by the shareholders.
In discharging the duties of their respective positions and in determining
what is believed to be in the best interest of the Company, the Board of
Directors, and individual directors, in addition to considering the effects of
any action on the Company or is shareholders, may, to the extent permitted by
applicable Georgia law, consider the interests of the employees, customers,
suppliers and creditors of the Company and its subsidiaries, the communities in
which offices or other establishments of the Company and its subsidiaries are
located, and all other factors such directors may consider pertinent; provided,
however, that this provision of the Company's Amended and Restated Articles of
Incorporation solely grants discretionary authority to the directors and no
constituency shall be deemed to have been given any right to consideration
thereby.
The preceding provisions of the Amended and Restated Articles of
Incorporation and Bylaws may be changed only upon the affirmative vote of
holders of at least a 66 2/3% of the outstanding shares of Common Stock.
The provisions of the Amended and Restated Articles of Incorporation and
Bylaws summarized in the preceding five paragraphs and the provisions of the
GBCC described under "Certain Provisions of Georgia Law," contain provisions
that may have the effect of delaying, deferring or preventing a non-negotiated
merger or other business combination involving the Company. These provisions are
intended to encourage any person interested in acquiring the Company to
negotiate with and obtain the approval of the Board of Directors in connection
with the transaction. Certain of these provisions may, however, discourage a
future acquisition of the Company not approved by the Board of Directors in
which shareholders might receive an attractive value for their shares or that a
substantial number or even a majority of the Company's shareholders might
believe to be in their best interest. As a result, shareholders who desire to
participate in such a transaction may not have the opportunity to do so. Such
provisions could also discourage bids for the Common Stock at a premium to the
prevailing market price, as well as create a depressive effect on the market
price of the Common Stock.
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CERTAIN PROVISIONS OF GEORGIA LAW
Georgia Business Combination Statute. The Company has elected in its
Bylaws to be subject to provisions of the GBCC prohibiting various "business
combinations" involving "interested shareholders" for a period of five years
after the shareholder becomes an interested shareholder of the Company. Such
provisions prohibit any business combination with an interested shareholder
unless either (i) prior to such time, the Board of Directors approves either the
business combination or the transaction by which such shareholder became an
interested shareholder, (ii) in the transaction that resulted in the shareholder
becoming an interested shareholder, the interested shareholder became the
beneficial owner of at least 90% of the outstanding voting stock of the Company
which was not held by directors, officers, affiliates thereof, subsidiaries or
certain employee stock option plans of the Company, or (iii) subsequent to
becoming an interested shareholder, such shareholder acquired additional shares
resulting in such shareholder owning at least 90% of the outstanding voting
stock of the Company and the business combination is approved by a majority of
the disinterested shareholders' shares not held by directors, officers,
affiliates thereof, subsidiaries or certain employee stock option plans of the
Company. Under the relevant provisions of the GBCC, a "business combination" is
defined to include, among other things, (i) any merger, consolidation, share
exchange or any sale, transfer or other disposition (or series of related sales
or transfers) of assets of the Company having an aggregate book value of 10% or
more of the Company's net assets (measured as of the end of the most recent
fiscal quarter), with an interested shareholder of the Company or any other
corporation which is or, after giving effect to such business combination,
becomes an affiliate of any such interested shareholder, (ii) the liquidation or
dissolution of the Company, (iii) the receipt by an interested shareholder of
any benefit from any loan, advance, guarantee, pledge, tax credit or other
financial benefit from the Company, other than in the ordinary course of
business and (iv) certain other transactions involving the issuance or
reclassification of securities of the Company which produce the result that 5%
or more of the total equity shares of the Company, or of any class or series
thereof, is owned by an interested shareholder. An "interested shareholder" is
defined by the GBCC to include any person or entity that, together with its
affiliates, beneficially owns or has the right to own 10% or more of the
outstanding voting shares of the Company, or any person that is an affiliate of
the Company and has, at any time within the preceding two-year period, been the
beneficial owner of 10% or more of the outstanding voting shares of the Company.
The restrictions on business combinations shall not apply to any person who was
an interested shareholder before the adoption of the Bylaw which made the
provisions applicable to the Company nor to any persons who subsequently become
interested shareholders inadvertently, subsequently divest sufficient shares so
that the shareholder ceases to be an interested shareholder and would not, at
any time within the five-year period immediately before a business combination
involving the shareholder, have been an interested shareholder but for the
inadvertent acquisition.
Georgia Fair Price Statute. The Company has elected in its Bylaws to be
subject to the "Fair Price" provisions of the GBCC. These provisions require
that a "business combination" with an "interested shareholder" be (a)
unanimously approved by "continuing directors" who must constitute at least
three members of the board of directors at the time of such approval, or (b)
recommended by at least two-thirds of the "continuing directors" and approved by
a majority of the shareholders excluding the "interested shareholder," unless
certain standards regarding the consideration paid to shareholders in the
transaction are met. Subject to certain exceptions, a "business combination"
includes (i) any merger or consolidation of the corporation or a subsidiary of
the Company; (ii) any share exchange; (iii) any sale, lease, transfer, or other
disposition of assets of the Company or its subsidiary occurring within a 12
month period and having an aggregate book value equal to 10% or more of the net
assets of the Company; (iv) any transaction that results in the issuance or
transfer by the Company of any stock of the Company or the subsidiary
representing 5% or more of the total market value of the outstanding stock of
the Company to any interested shareholder within a 12 month period, except
pursuant to a transaction that effects a pro rata distribution to all
shareholders of the Company; (v) the adoption of any plan or proposal for the
liquidation or dissolution of the corporation in which anything other than cash
will be received by an interested shareholder; and (vi)any transaction occurring
within a 12 month period involving the Company or a subsidiary of the Company
that has the effect of increasing by 5% or more the proportionate share of the
stock of any class or series of the Company or the subsidiary that is directly
or beneficially owned by the interested shareholder. An "interested shareholder"
is
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defined the same as it is defined in the Georgia Business Combination Statute. A
"continuing director" includes any director who is not an affiliate or associate
of an interested shareholder or any board approved successor of such a director
who is not an affiliate or associate of an interested shareholder.
The Fair Price provisions do not restrict a business combination if: (a)
the aggregate amount of the cash, and fair market value of any non-cash
property, measured five days before the consummation date, to be received per
share by the shareholders is at least equal to the highest of: (i) the highest
per share price, including brokerage commissions, transfer taxes, and soliciting
dealers' fees, paid by the interested shareholder for any shares of the same
class or series acquired by it within two years preceding the announcement date
or in the transaction in which it became an interested shareholder; (ii) the
higher of the fair market value per share as determined on the announcement date
or the determination date; or (iii) in the case of shares other than common
shares, the highest amount per share to which preferred shareholders are
entitled in the event of liquidation, dissolution, or winding up of the
corporation, provided that subparagraph (iii) shall only be applicable if the
interested shareholder acquired the shares within the two year period
immediately preceding the announcement date; and (b) shareholders receive cash
or the form of consideration used in the past by the interested shareholder to
purchase the largest number of shares of such class or series. Further, subject
to exceptions, prior to the time the business combination with the interested
shareholder takes place, without the approval of the board of directors, there
must have been: (i) no failure to declare and pay full dividends on the
Company's outstanding preferred shares; (ii) no reduction in the annual rate of
dividends paid on common shares except as to reflect any subdivision of the
shares; (iii) an increase in the annual rate of dividends to reflect any
reclassification of shares; and (iv) not more than a 1% increase in the
interested shareholder's ownership of any of the Company's stock in any 12 month
period. An interested shareholder may not receive a direct or indirect benefit,
except proportionately as a shareholder, of any loans, advances, guarantees,
pledges, or other financial assistance or any tax credits or other tax
advantages provided by the corporation or its subsidiaries, either in
anticipation of or in connection with such business combination or otherwise.
LISTING
Application has been made to include the Company's Common Stock on the
Nasdaq National Market under the trading symbol "MELI."
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Company's Common Stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the securities
of the Company.
Upon completion of this offering, the Company will have outstanding
14,643,395 shares of Common Stock (assuming no exercise of the underwriters'
over-allotment option or options outstanding under the Company's stock option
plans). Of these shares, the 3,500,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, unless they are purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (which sales would be subject to
certain limitations and restrictions described below). The remaining 11,143,395
shares of Common Stock may be sold in the public market beginning in February
1998, subject to the volume and other limitations of Rule 144 promulgated under
the Securities Act. The holders of all of these remaining shares have executed
180-day lock-up agreements with Montgomery Securities. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for a least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 146,500 shares
immediately after this offering) or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice filing provisions of Rule 144. Under Rule 701 under the
Securities Act, persons who purchase shares upon exercise of options granted
prior to this offering are entitled to sell such shares 90 days after this
offering in reliance on Rule 144, without having to comply with the holding
period requirements of Rule 144 and, in the case of non-affiliates, without
having to comply with the volume limitation or notice filing provisions of Rule
144.
After the completion of this offering, the Company intends to file one or
more Registration Statements on Form S-8 under the Securities Act to register an
aggregate of 1,600,000 shares of Common Stock reserved for issuance under the
1992 Stock Option Plan, the 1997 Stock Option Plan and the Stock Purchase Plan.
After the date of such filing, if not otherwise subject to a lock-up agreement,
shares purchased pursuant to these plans generally would be available for resale
in the public market. The Company has granted options under such plans to
purchase an aggregate of 1,106,097 shares of which options to purchase an
aggregate of 20,000 shares are currently exercisable. See
"Management -- Employee Benefit Plans."
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UNDERWRITING
The underwriters named below, represented by Montgomery Securities (the
"Representative"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares, if any are
purchased.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Montgomery Securities.......................................
---------
Total............................................. 3,500,000
=========
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $ per share; and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $
per share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representative. The
Common Stock is offered subject to receipt and acceptance by the Underwriters
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
525,000 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial shares to be purchased by the
Underwriters. To the extent the Underwriters exercise this option, each of the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this offering.
The holders of all of the Company's Common Stock, who immediately following
the offering (assuming no exercise of the over-allotment option) collectively
will beneficially own 11,143,395 shares of Common Stock, and each of the
Company's officers and directors, have agreed that for a period of 180 days
after the date of this Prospectus they will not, without the prior written
consent of Montgomery Securities, directly or indirectly, sell, offer, contract
or grant an option to sell, pledge, transfer, except with respect to certain
transfers to family members or trusts for the benefit of family members,
establish an open put equivalent position or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for shares of Common
Stock, or publicly announce the intention to do any of the foregoing. In
addition, the Company has agreed that for a period of 180 days after the date of
this Prospectus it will not, without the consent of Montgomery Securities,
directly or indirectly, sell, offer, contract or grant an option to sell,
pledge, transfer or otherwise dispose of, or announce the offering of, or file
any registration statement under the Securities Act in respect of, any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for shares of Common
Stock, or publicly announce the intention to do any of the
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foregoing, except for shares of Common Stock offered hereby and shares issued
pursuant to the 1992 Stock Option Plan, the 1997 Stock Option Plan or the Stock
Purchase Plan. See "Management -- Employee Benefit Plans" and "Shares Eligible
for Future Sale."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
Certain persons participating in this offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids, which may involve the purchase of Common Stock of the Company on
the Nasdaq National Market or otherwise. Such transactions may stabilize or
maintain the market price of the Common Stock at a level above that which might
otherwise prevail in the open market and, if commenced, may be discontinued at
any time.
The Representative has advised the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of this offering.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial offering price will be determined through
negotiations between the Company and the Representative. Among the factors to be
considered in such negotiations will be the history of and prospects for the
Company and the industry in which the Company competes, an assessment of the
Company's management, the Company's past and present operations and financial
performance, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the present state of the Company's
development, the general condition of the securities markets at the time of the
offering and the market prices of publicly traded common stocks of comparable
companies in recent periods.
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company by Morris, Manning & Martin, L.L.P.,
Atlanta, Georgia. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Hale and Dorr LLP, Washington, D.C.
EXPERTS
The combined financial statements included in this prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their reports. In those reports,
that firm states that with respect to Melita Europe its opinion is based on the
reports of other independent public accountants, namely BDO Stoy Hayward. The
financial statements referred to above have been included herein in reliance
upon the authority of those firms as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and
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at the following regional offices of the Commission: Seven World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commissions Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system. The Commission maintains a World Wide Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to furnish to its shareholders annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.
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MELITA INTERNATIONAL CORPORATION
MELITA EUROPE LIMITED AND INVENTIONS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... F-2
Report of the Auditors -- BDO Stoy Hayward.................. F-3
Combined Balance Sheets as of December 31, 1995 and 1996.... F-4
Combined Statements of Operations for the three years in the
period ended December 31, 1996............................ F-5
Combined Statements of Shareholders' Equity for the three
years in the period ended December 31, 1996............... F-6
Combined Statements of Cash Flows for the three years in the
period ended December 31, 1996............................ F-7
Notes to Combined Financial Statements...................... F-8
F-1
59
After the stock recapitalization transaction discussed in Note 9 to the
combined financial statements of Melita International Corporation, Melita Europe
Limited and Inventions, Inc. is effected, we expect to be in a position to
render the following audit report.
ARTHUR ANDERSEN LLP
February 28, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Melita International Corporation,
Melita Europe Limited and
Inventions, Inc.:
We have audited the accompanying combined balance sheets of MELITA
INTERNATIONAL CORPORATION (a Georgia corporation), MELITA EUROPE LIMITED (a
private limited company organized in the United Kingdom) and INVENTIONS, INC. (a
Georgia corporation) (collectively the "Company") as of December 31, 1995 and
1996 and the related combined statements of operations, shareholders' equity,
and cash flows for the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Melita Europe Limited,
which statements reflect total assets of 8% and 12% at December 31, 1995 and
1996, respectively, and total revenues of 5%, 9%, and 9% of the combined totals
for the three years in the period ended December 31, 1996, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the entity,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the combined financial position
of Melita International Corporation, Melita Europe Limited and Inventions, Inc.
as of December 31, 1995 and 1996 and the combined results of their operations
and their cash flows for the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
Atlanta, Georgia
F-2
60
MELITA EUROPE LIMITED
REPORT OF THE AUDITORS
To the shareholders of Melita Europe Limited:
We have audited the financial statements of Melita Europe Limited for the
three years ended 31 December 1996.
Respective responsibilities of directors and auditors
The Company's directors are responsible for the preparation of the
financial statements. It is our responsibility to form an independent opinion,
based on our audits, on those statements and to report our opinion to you.
Basis of opinion
We conducted our audits in accordance with Auditing Standards issued by the
Auditing Practices Board. The results of the audits would not have been
materially different had the audits been conducted in accordance with Generally
Accepted Auditing Standards in the United States. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audits so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements and including those for the years
ended 31 December 1994 and 1995 as previously audited by us, give a true and
fair view of the state of the Company's affairs as at 31 December 1996 and of
its profit for the three years ended 31 December 1996 and have been properly
prepared in accordance with the Companies Act 1985.
BDO Stoy Hayward
Chartered Accountants
and Registered Auditors
Ewell, Epsom, Surrey
28 February 1997
F-3
61
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
PRO FORMA
DECEMBER 31,
1995 1996 1996 (NOTE 8)
------- ------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,959 $ 9,849 $ 0
Accounts receivable, net of allowance for doubtful
accounts of $331 and $487 in 1995 and 1996,
respectively............................................ 9,203 11,860 11,860
Inventories............................................... 3,027 2,442 2,442
Deferred taxes............................................ 0 0 1,061
Prepaid expenses and other................................ 342 170 170
------- ------- -------
Total current assets............................... 18,531 24,321 15,533
------- ------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 1,341 1,361 1,361
Equipment................................................. 4,255 5,476 5,476
Leasehold improvements.................................... 166 343 343
------- ------- -------
Total property and equipment....................... 5,762 7,180 7,180
Less accumulated depreciation and amortization............ 3,423 4,456 4,456
------- ------- -------
Net property and equipment......................... 2,339 2,724 2,724
------- ------- -------
Other assets................................................ 58 24 24
------- ------- -------
$20,928 $27,069 $18,281
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 0 $ 0 $ 7,176
Accounts payable.......................................... 2,763 2,429 2,429
Accrued liabilities....................................... 3,416 4,210 4,398
Deferred revenue.......................................... 2,593 3,065 3,065
Customer deposits......................................... 2,432 3,849 3,849
Current maturities of note payable to shareholder (Note
2)...................................................... 375 2,625 0
Current maturities of capital lease obligations (Note
5)...................................................... 48 19 19
------- ------- -------
Total current liabilities.......................... 11,627 16,197 20,936
------- ------- -------
Note payable to shareholder, net of current maturities (Note
2)........................................................ 2,625 0 0
------- ------- -------
Capital lease obligations, net of current maturities (Note
5)........................................................ 19 0 0
------- ------- -------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock:
Melita International Corporation, no par value;
20,000,000 shares authorized, no shares issued and
outstanding in 1995, 1996 and 1996 pro forma.......... 0 0 0
Common stock:
Melita International Corporation, no par value;
100,000,000 shares authorized, 8,000,000 shares issued
and outstanding in 1995 and 1996, and 11,143,395
shares issued and outstanding 1996 pro forma.......... 2 2 69
Melita Europe Limited, L1 par value; 50,000 shares
authorized, 31,328 shares issued and outstanding in
1995 and 1996, no shares issued and outstanding pro
forma................................................. 46 46 0
Inventions, Inc., $5 par value; 100 shares authorized,
100 shares issued and outstanding in 1995 and 1996, no
shares issued and outstanding pro forma............... 1 1 0
Additional paid-in capital................................ 20 20 0
Cumulative foreign currency translation adjustment........ 5 35 35
Retained earnings (deficit)............................... 6,583 10,768 (2,759)
------- ------- -------
Total shareholders' equity (deficit)............... 6,657 10,872 (2,655)
------- ------- -------
$20,928 $27,069 $18,281
======= ======= =======
The accompanying notes are an integral part of these combined balance sheets.
F-4
62
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net revenues:
Product................................................... $18,186 $24,620 $32,077
Service................................................... 8,970 10,662 15,463
------- ------- -------
Total revenues.................................... 27,156 35,282 47,540
------- ------- -------
Cost of revenues:
Product................................................... 6,310 8,730 11,494
Service................................................... 3,254 5,282 6,863
------- ------- -------
Total cost of revenues............................ 9,564 14,012 18,357
------- ------- -------
Gross margin................................................ 17,592 21,270 29,183
------- ------- -------
Operating expenses:
Research and development.................................. 3,660 4,050 5,070
Selling, general, and administrative...................... 11,332 12,559 16,765
------- ------- -------
Total operating expenses.......................... 14,992 16,609 21,835
------- ------- -------
Income from operations...................................... 2,600 4,661 7,348
Other income (expense), net................................. 46 88 261
------- ------- -------
Income before income taxes.................................. 2,646 4,749 7,609
Income tax benefit.......................................... 26 0 0
------- ------- -------
Net income before pro forma income taxes.................... 2,672 4,749 7,609
Pro forma income taxes...................................... 1,164 1,794 2,827
------- ------- -------
Pro forma net income........................................ $ 1,508 $ 2,955 $ 4,782
======= ======= =======
Pro forma net income per common and common equivalent
share..................................................... $ 0.42
=======
Pro forma weighted average common and common equivalent
shares outstanding........................................ 11,395
=======
The accompanying notes are an integral part of these combined statements.
F-5
63
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
COMMON STOCK
--------------------------------------------------------
MELITA CUMULATIVE
INTERNATIONAL MELITA EUROPE FOREIGN
PREFERRED STOCK CORPORATION LIMITED INVENTIONS, INC. ADDITIONAL CURRENCY
--------------- ------------------ --------------- ----------------- PAID-IN TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT
------ ------ --------- ------ ------ ------ ------- ------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, December 31,
1993.................. 0 $0 8,000,000 $2 31,328 $46 100 $1 $20 $ 8
Net income before pro
forma income
taxes............... 0 0 0 0 0 0 0 0 0 0
Distributions to
shareholders........ 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment.......... 0 0 0 0 0 0 0 0 0 (3)
-- -- --------- -- ------ --- --- -- --- ---
Balance, December 31,
1994.................. 0 0 8,000,000 2 31,328 46 100 1 20 5
Net income before pro
forma income
taxes............... 0 0 0 0 0 0 0 0 0 0
Distributions to
shareholders........ 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment.......... 0 0 0 0 0 0 0 0 0 0
-- -- --------- -- ------ --- --- -- --- ---
Balance, December 31,
1995.................. 0 0 8,000,000 2 31,328 46 100 1 20 5
Net income before pro
forma income
taxes............... 0 0 0 0 0 0 0 0 0 0
Distributions to
shareholders........ 0 0 0 0 0 0 0 0 0 0
Foreign currency
translation
adjustment.......... 0 0 0 0 0 0 0 0 0 30
-- -- --------- -- ------ --- --- -- --- ---
Balance, December 31,
1996.................. 0 $0 8,000,000 $2 31,328 $46 100 $1 $20 $35
== == ========= == ====== === === == === ===
RETAINED
EARNINGS TOTAL
--------- -------
Balance, December 31,
1993.................. $ 7,282 $ 7,359
Net income before pro
forma income
taxes............... 2,672 2,672
Distributions to
shareholders........ (2,924) (2,924)
Foreign currency
translation
adjustment.......... 0 (3)
------- -------
Balance, December 31,
1994.................. 7,030 7,104
Net income before pro
forma income
taxes............... 4,749 4,749
Distributions to
shareholders........ (5,196) (5,196)
Foreign currency
translation
adjustment.......... 0 0
------- -------
Balance, December 31,
1995.................. 6,583 6,657
Net income before pro
forma income
taxes............... 7,609 7,609
Distributions to
shareholders........ (3,424) (3,424)
Foreign currency
translation
adjustment.......... 0 30
------- -------
Balance, December 31,
1996.................. $10,768 $10,872
======= =======
The accompanying notes are an integral part of these combined statements.
F-6
64
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Pro forma net income...................................... $ 1,508 $ 2,955 $ 4,782
------- ------- -------
Adjustments to reconcile pro forma net income to net cash
provided by operating activities:
Pro forma income taxes................................. 1,164 1,794 2,827
Depreciation and amortization.......................... 768 997 1,141
(Gain) loss on sale of property and equipment.......... 0 (51) 6
Changes in assets and liabilities:
Accounts receivable.................................. 130 (1,095) (2,657)
Inventories.......................................... (355) (990) 585
Prepaid expenses and other assets.................... (405) 165 172
Accounts payable..................................... 154 1,595 (334)
Accrued liabilities.................................. 178 161 794
Deferred revenue..................................... 996 607 472
Customer deposits.................................... 975 1,416 1,417
Other, net........................................... (51) (18) 63
------- ------- -------
Total adjustments................................. 3,554 4,581 4,486
------- ------- -------
Net cash provided by operating activities......... 5,062 7,536 9,268
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (783) (1,879) (1,531)
Proceeds from sale of property and equipment.............. 0 132 0
------- ------- -------
Net cash used in investing activities............. (783) (1,747) (1,531)
------- ------- -------
Cash flows from financing activities:
Repayment of capital lease obligations.................... (65) (40) (48)
Repayment of note payable to shareholder.................. 0 0 (375)
Distributions to shareholders............................. (2,924) (5,196) (3,424)
------- ------- -------
Net cash used in financing activities............. (2,989) (5,236) (3,847)
------- ------- -------
Net change in cash and cash equivalents..................... 1,290 553 3,890
Cash and cash equivalents, beginning of year................ 4,116 5,406 5,959
------- ------- -------
Cash and cash equivalents, end of year...................... $ 5,406 $ 5,959 $ 9,849
======= ======= =======
Cash paid for interest during the year...................... $ 265 $ 302 $ 279
======= ======= =======
Income taxes paid........................................... $ 0 $ 29 $ 0
======= ======= =======
The accompanying notes are an integral part of these combined statements.
F-7
65
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Melita International Corporation ("Melita"), Melita Europe Limited ("Melita
Europe"), and Inventions, Inc. ("Inventions") (collectively, the "Company") are
effectively owned and controlled by related individuals. The Company is a
provider of integrated call management systems that enable customers to operate
efficient call centers. The Company's principal product, PhoneFrame CS, is an
integrated system comprised of both hardware and software. Melita offers
periodic ongoing maintenance support of its products. The Company also offers
fee-based installation, training and consulting services. The Company markets
its products worldwide through direct sales forces and through distributors in
Europe, Latin America and Asia (Note 7).
The Company is planning an initial public offering (the "Offering") of its
common stock. In connection with the planned Offering, the Company will convert
from an S corporation to a C corporation and Melita Europe and Inventions will
be combined into Melita (Note 8).
BASIS OF COMBINATION
The policy of the Company is to present combined financial statements
including the accounts of Melita, Melita Europe and Inventions, since all are
under common control. All significant intercompany accounts and transactions
have been eliminated in combination.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash or cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes raw materials, labor and overhead. Market is defined as
replacement cost for work in progress and purchased parts and net realizable
value for finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated primarily
using an accelerated depreciation method over the following estimated useful
lives:
Furniture and fixtures Five to seven years
Equipment Three to five years
Leasehold improvements Remaining life of lease
INCOME TAXES
Melita and Inventions are organized as S corporations under the Internal
Revenue Code and, therefore, are not subject to federal income taxes. The income
or loss of Melita and Inventions is included in the shareholders' individual
federal and state tax returns, and as such, no provision for income taxes is
recorded in the accompanying combined statements of operations. The Company has
historically made distributions to cover the shareholders' anticipated tax
liability.
The accompanying combined financial statements reflect a provision for
income taxes on a pro forma basis as if the Company were liable for federal and
state income taxes as a taxable corporate entity throughout
F-8
66
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the years presented. The pro forma income tax provision has been computed by
applying the Company's anticipated statutory tax rate to pretax income, adjusted
for permanent tax differences (Note 3).
FOREIGN CURRENCY TRANSLATION
The financial statements of Melita Europe are translated into U.S. dollars
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation." Net assets of Melita Europe are translated at
the current rates of exchange. Income and expense items are translated at the
average exchange rate for the year. The resulting translation adjustments are
recorded in shareholders' equity. The Company has recognized foreign exchange
gains (losses) of approximately $31,000, $(2,000) and $162,000 in 1994, 1995 and
1996, respectively.
REVENUE RECOGNITION
The Company generates product revenues primarily from its principal
product, PhoneFrame CS, an integrated system comprised of both hardware and
software. The Company's service revenues are generated from maintenance
contracts which include support, parts and labor and software update rights.
Service revenues also include fee-based installation, training and consulting
services.
The Company recognizes product revenues upon shipment of the product and
when the Company has no significant obligations yet to be satisfied. The
Company's sales contracts provide for certain payment terms normally based upon
signing the contract, customer receipt of the product, and commencement of
operation of the customer's system.
Revenues from maintenance contracts are recognized ratably over the term of
the contractual support period which ranges up to 5 years. If maintenance is
included in the original integrated product contract, such amounts are unbundled
from the license fee based on the value established by independent sale of such
maintenance to customers. Consulting revenues are primarily related to
implementation services performed under separate service arrangements related to
the installation of the Company's hardware and software products. Revenues from
consulting, installation and training services are recognized as the services
are performed.
Deferred revenues primarily relate to products that have not yet been
delivered and maintenance services which have been paid by the customers prior
to the performance of those services. Deferred revenue amounted to $2,593,000
and $3,065,000 at December 31, 1995 and 1996, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expense as incurred.
The system software delivers the functionality and controls the hardware
components. Computer software development costs of the system software products
are charged to research and development expense until technological feasibility
is established, after which remaining software production costs are capitalized
in accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." The Company has defined technological
feasibility of its products as the point in time at which the Company has a
working model of the related product, which is when the product has achieved
"beta" status. Historically, the development costs incurred during the period
between the achievement of beta status by a product and the point at which the
product is available for general release to customers have not been material.
Accordingly, the Company has concluded that the amount of development costs
capitalizable under the provisions of SFAS No. 86 was not material to the
financial statements for the years ended December 31, 1994, 1995 and 1996.
Therefore, the Company has charged all software development costs to expense as
incurred for the years ended December 31, 1994, 1995 and 1996.
F-9
67
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTY COSTS
The Company generally warranties its products for 90 days and provides for
estimated warranty costs upon shipment of such products. Warranty costs have not
been and are not anticipated to be significant.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers and markets for which the Company's
services are provided as well as their dispersion across many different
geographic areas. As a result, as of December 31, 1995 and 1996, the Company did
not consider itself to have any significant concentrations of credit risk.
During 1996, the Company's five largest customers accounted for approximately
26.6% of the Company's total revenues. In 1995, the Company's five largest
customers accounted for approximately 25.0% of its total revenues. Although the
particular customers may change from period to period, the Company expects that
large sales to a limited number of customers will continue to account for a
significant percentage of its revenues in any particular period for the
foreseeable future.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Pro forma net income per common and common equivalent share is computed
using the weighted average number of shares of common stock and dilutive common
stock equivalent shares ("CSEs") from stock options using the treasury stock
method. Additionally, the weighted average common and common equivalent shares
outstanding reflect the shares issued as a result of the combination of Melita,
Melita Europe and Inventions and the effects of the stock recapitalization
discussed in Note 8 as if the events occurred at the beginning of the period.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock and CSEs issued at prices below the expected public offering price
during the 12-month period prior to filing of the registration statement in
connection with the Company's planned Offering have been included in the
calculation as if they were outstanding for all periods presented prior to the
Offering, regardless of whether they are dilutive.
Historical net income per share has not been presented in view of the S
corporation status in prior periods and the anticipated change in capital
structure upon closing of the planned Offering.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable and other
financial instruments approximate their fair values principally because of the
short-term maturities of these instruments. The fair value of the Company's
long-term debt is estimated based on the current rates offered to the Company
for debt of similar terms and maturities. Under this method, the Company's fair
value of long-term debt was not significantly different than the stated value at
December 31, 1995 and 1996.
F-10
68
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities include the following as of December 31, 1995 and 1996
(in thousands):
1995 1996
------ ------
Accrued salaries and wages.................................. $1,666 $2,437
Other current liabilities................................... 1,193 807
Accrued royalties........................................... 293 689
Accrued rent................................................ 264 277
------ ------
Total accrued liabilities......................... $3,416 $4,210
====== ======
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company's adoption of SFAS No. 121 in the first
quarter of 1996 did not have a significant impact on the Company's combined
financial statements.
The American Institute of Certified Public Accountants has issued an
exposure draft to amend the provisions of Statement of Position 91-1, "Software
Revenue Recognition." The adoption of the standards in the current version of
the exposure draft would not be expected to have a significant impact on the
Company's combined financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2. NOTE PAYABLE TO SHAREHOLDER
Note payable to shareholder is as follows as of December 31, 1995 and 1996
(in thousands):
1995 1996
------ ------
Note payable to shareholder; due in equal quarterly
installments of $187,500 beginning July 1, 1996, interest
payable monthly at the prime rate plus 1% (9.25% at
December 31, 1996)........................................ $3,000 $2,625
Less current maturities..................................... 375 2,625
------ ------
Note payable to shareholder, net of current maturities...... $2,625 $ 0
====== ======
Interest paid to shareholder was $251,000, $294,000 and $271,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
The note payable to shareholder contains an acceleration provision at the
option of the shareholder upon certain changes in capital structure, as defined.
As a result of the stock recapitalization discussed in Note 9, that right became
exercisable. The note has therefore been classified as current at December 31,
1996 as a result of the acceleration option.
3. INCOME TAXES
In connection with the planned Offering, the Company will convert from an S
corporation to a C corporation and, accordingly, will be subject to future
federal and state income taxes. Upon conversion to
F-11
69
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
C corporation status, the Company will record deferred taxes for which it will
be responsible following termination of S corporation status. The assets below
will be reflected on the balance sheet of the Company with a corresponding
non-recurring income amount in the statement of operations at the completion of
the Offering. The components of the pro forma total deferred tax assets as of
December 31, 1996 are as follows (in thousands):
Deferred tax assets:
Deferred revenue.......................................... $ 321
Other accrued liabilities................................. 198
Allowance for doubtful accounts........................... 171
Accrued commissions....................................... 115
Accrued rent.............................................. 105
Depreciation.............................................. 95
Inventory................................................. 56
------
Total deferred tax assets......................... $1,061
======
The following summarizes the components of the pro forma income tax
provision for the years ended December 31, 1994, 1995 and 1996 (in thousands):
1994 1995 1996
------ ------ ------
Current domestic taxes:
Federal................................................ $ 664 $1,572 $2,775
State.................................................. 78 185 326
Foreign taxes............................................ (9) 2 (75)
Deferred taxes........................................... 431 35 (199)
------ ------ ------
$1,164 $1,794 $2,827
====== ====== ======
A reconciliation from the federal statutory rate to the pro forma tax
provision for the years ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996
---- ---- ----
Statutory federal tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit............. 4.0 4.0 4.0
Foreign operations......................................... 4.0 (0.9) (1.3)
Other...................................................... 1.6 0.7 0.5
---- ---- ----
43.6% 37.8% 37.2%
==== ==== ====
The Company's effective tax rate is affected by the income or loss at
Melita Europe. Melita Europe incurred a loss in fiscal 1994 and had income in
1995 and 1996. This effect is included above as foreign operations. The
Company's net operating loss carryforwards are immaterial at December 31, 1996.
4. BENEFIT PLAN
Melita has a profit-sharing plan (the "Plan") for substantially all Melita
employees meeting the eligibility requirements as defined in the plan agreement.
The Plan provides for annual contributions by Melita at the discretion of the
board of directors. The Plan also contains a 401(k) feature which allows
participants to contribute up to 15% of their eligible compensation, as defined,
and provides for discretionary employer matching contributions. Total
contributions by Melita to the Plan were $92,000, $90,000 and $119,000 for
fiscal 1994, 1995 and 1996, respectively.
F-12
70
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1996, the present value of future minimum capital lease
payments and future minimum operating lease payments (including leases with
related parties) under noncancelable operating leases were as follows (in
thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
1997........................................................ $19 $ 659
1998........................................................ 0 628
1999........................................................ 0 624
2000........................................................ 0 581
2001........................................................ 0 589
Thereafter.................................................. 0 2,369
--- ------
Total future minimum lease payments............... 19 $5,450
======
Less amounts representing interest.......................... 0
---
Present value of future minimum lease payments.............. $19
===
The Company's capital and operating leases are primarily for equipment and
rental of facilities. Total rental expense for operating leases was $840,000,
$728,000 and $751,000 in fiscal 1994, 1995 and 1996, respectively.
In August 1994, the Company entered into a lease agreement with an
unrelated party to lease land and buildings commencing April 1995. The agreement
provides for annual rentals of approximately $542,000 to $636,000 per year over
a ten-year term. In November 1995, the Company's majority shareholder purchased
the land and buildings and now rents them to the Company under the terms of the
original lease. Rent expense paid to the shareholder was $60,000 and $543,000 in
fiscal 1995 and 1996, respectively.
LEGAL PROCEEDINGS
Many of the Company's installations involve products that are critical to
the operations of its clients' businesses. Any failure in a Company product
could result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. Although the Company attempts
to limit contractually its liability for damages arising from product failures
or negligent acts or omissions, there can be no assurance the limitations of
liability set forth in its contracts will be enforceable in all instances.
One of the Company's customers has filed suit in the Circuit Court for Knox
County, Tennessee asserting, among other things, that the Company misrepresented
the functionality of its products and breached its contract with the customer
for delivery of its products and claiming not less than $2.0 million in damages.
The Company intends to vigorously defend this action and, based upon information
currently available, believes that the action will not have a material impact on
the Company. However, because the proceedings are at a preliminary stage and
discovery has not yet begun, the Company cannot predict the ultimate outcome of
this suit and there can be no assurance that the Company will be successful in
the proceedings. In management's opinion, the ultimate resolution of this matter
will not have a material adverse effect on the Company's combined financial
position, liquidity or results of operations.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of business. In the opinion of management, the
amount of potential liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
F-13
71
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RELATED-PARTY TRANSACTIONS
During 1994, the Company incurred and paid $325,000 in research and
development fees to a related party (through family relationship). The Company
did not incur these fees in 1995 or 1996.
6. STOCK OPTION PLANS
During 1992, the Company approved a stock option plan for key employees for
which 640,000 shares of common stock were authorized for use in the plan. During
1995, the number of authorized shares was increased to 1,000,000 shares of
common stock. Options under the plan are granted at estimated fair market value
as determined by the board of directors and are exercisable 14 months after an
initial public offering or ratably over a three-year period beginning seven
years from the plan initiation date, but in no case can the exercise period
continue beyond 10 years. Options granted vest ratably over a four- or five-year
employment period. The Company reserves the right to purchase vested options at
the then-estimated fair market value, less the applicable exercise price prior
to the date of an initial public offering. During 1994, 1995 and 1996, the
Company purchased 22,311, 44,294 and 30,250, respectively, vested but
unexercisable options held by terminated employees for $3,570, $2,658 and
$39,774, respectively. Cash paid to repurchase options is expensed as incurred.
Activity for the stock option plan is as follows:
OPTION
OPTIONS PRICE
-------- -----------
Options outstanding at December 31, 1993.................... 303,848 $2.75-$2.96
Granted................................................... 36,375 2.91
Exercised................................................. 0
Forfeited/repurchased..................................... (58,098) 2.75- 2.96
--------
Outstanding at December 31, 1994............................ 282,125 2.75- 2.96
Granted................................................... 740,525 2.81- 3.00
Exercised................................................. 0
Forfeited/repurchased..................................... (161,200) 2.81
--------
Outstanding at December 31, 1995............................ 861,450 2.75- 3.00
Granted................................................... 133,785 4.07
Exercised................................................. 0
Forfeited/repurchased..................................... (57,463) 2.75- 4.07
--------
Outstanding at December 31, 1996............................ 937,772 2.75- 4.07
========
Exercisable at December 31, 1996............................ 0
========
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. On February 6, 1997, the Company
granted options to purchase an aggregate of 43,325 shares of common stock at
$5.50 per share under the 1992 stock option plan.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB
F-14
72
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
No. 25 must make pro forma disclosures of net income and, if presented, earnings
per share, as if the fair value-based method of accounting defined in the
statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 and 1996 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in 1995 and 1996:
Risk-free interest rate..................................... 5.4%-7.8%
Expected dividend yield..................................... 0
Expected lives.............................................. 4-5 years
Expected volatility......................................... 65%
The total value of the options granted during the years ended December 31,
1995 and 1996 were computed as approximately $996,000 and $264,000,
respectively, which would be amortized over the vesting period of the options.
If the Company had accounted for these plans in accordance with SFAS No. 123,
the Company's reported pro forma net income and pro forma net income per share
for the years ended December 31, 1995 and 1996 would have decreased to the
following pro forma amounts (in thousands):
1995 1996
------ ------
Pro forma net income:
As reported in the financial statements................... $2,955 $4,782
Pro forma in accordance with SFAS No. 123................. 2,867 4,581
Pro forma net income per common and common equivalent share
As reported in the financial statements................... -- .42
Pro forma in accordance with SFAS No. 123................. -- .40
1997 STOCK OPTION PLAN
On February 6, 1997, the Company approved the 1997 Stock Option Plan (the
"1997 Plan") for which 1,350,000 shares of common stock were authorized for
issuance less any options issued under the 1992 stock option plan. Options under
the 1997 Plan are granted at the estimated fair market value and are exercisable
based on the specific terms of the stock option grant, but in no case can extend
beyond ten years past the date of grant. The options vest primarily over a
four-year period subject to acceleration upon the achievement of certain
performance measures. On February 6, 1997, the Company issued options to
purchase an aggregate of 125,000 shares of common stock at $5.50 per share under
the 1997 Plan. As of February 28, 1997, 20,000 options were exercisable under
the 1997 Plan.
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is a multinational corporation with operations in the United
States and the United Kingdom.
F-15
73
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents total revenues, net income and total assets of the
following countries representing over 10% of the combined totals for the years
ended or as of December 31, 1994, 1995 and 1996 (in thousands):
1994 1995 1996
------- ------- -------
United States:
Total revenues............................................ $21,483 $27,356 $37,568
Net income................................................ 3,093 4,624 7,157
Total assets.............................................. 16,704 19,305 23,799
United Kingdom:
Total revenues............................................ $ 1,309 $ 3,252 $ 4,292
Net (loss) income......................................... (421) 125 452
Total assets.............................................. 931 1,623 3,270
Other:
Total revenues............................................ $ 4,364 $ 4,674 $ 5,680
8. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In the second quarter of 1997, the Company is planning an initial public
offering of its common stock. There can be no assurance that the Offering will
be completed. Prior to the Offering, the Company will pay a cash distribution to
shareholders equal to the amount of undistributed S corporation earnings for
both Melita and Inventions from September 1, 1988 through the date of the
Offering.
COMBINATION
Concurrent with the Offering, the shareholders of Melita Europe and
Inventions will contribute their respective shares in exchange for 3,143,395
shares of Melita. The combination will be treated similar to a pooling of
interest and no step-up in basis will be recorded as the entities involved are
under common control.
UNAUDITED PRO FORMA INFORMATION
The accompanying unaudited pro forma combined balance sheet as of December
31, 1996 is based on the Company's historical balance sheet as of December 31,
1996, as adjusted to reflect (i) the combination of Melita, Melita Europe and
Inventions through the issuance of 3,143,395 shares of Melita's no par value
common stock (post recapitalization and reverse stock split), (ii) the effects
on historical retained earnings of a planned cash distribution to shareholders
of the undistributed S corporation earnings at December 31, 1996 and accrued
interest thereon discussed below, (iii) the payment of the note payable to
shareholder of $2,625,000 and (iv) the recording of current deferred tax assets
of approximately $1,061,000 as a result of the change in corporate filing status
upon the consummation of the offering discussed in Note 3. The pro forma
information does not give effect to the proceeds to the Company of the Offering.
Using a portion of the proceeds of the Offering and other funds, the
Company intends to distribute to the pre-offering shareholders all undistributed
S corporation earnings from September 1, 1988 to the effective date of the
Offering. At December 31, 1996, the undistributed S corporation earnings of the
Company were estimated to be approximately $14,400,000. Subsequent to year end,
the Company distributed these amounts to the principal shareholders in the form
of approximately $1,500,000 in cash and two notes having an aggregate principal
amount of approximately $12,900,000. The notes carry an interest rate equal to
the applicable federal rate under the Internal Revenue Code, (approximately 7%
at February 7, 1997). The principal amount of the notes, together with the
accrued interest on the notes through the effective date of the
F-16
74
MELITA INTERNATIONAL CORPORATION,
MELITA EUROPE LIMITED AND INVENTIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Offering (estimated to be approximately $200,000), will be repaid using a
portion of the proceeds of the Offering. The Company expects to accumulate
additional earnings from January 1, 1997 to the effective date of the Offering
which will also be distributed to the pre-offering shareholders.
9. STOCK RECAPITALIZATION
On February 7, 1997, the Company and Inventions recapitalized their
authorized, issued, and outstanding common stock by declaring a stock dividend
of 99 shares of nonvoting common stock with respect to each outstanding share of
voting common stock. In connection with the stock dividend, the Company amended
its articles of incorporation to increase its authorized capital stock to
2,000,000,000 shares, consisting of 20,000,000 shares of voting common stock and
1,980,000,000 shares of nonvoting common stock and Inventions amended its
articles of incorporation to increase its authorized capital stock to 10,000
shares, consisting of 100 shares of voting common stock and 9,900 shares of
nonvoting common stock. Concurrently with the effective date of the Offering,
the Company will effect a 100 to 1 reverse stock split to return the number of
authorized, issued, and outstanding shares to the original number of shares.
Accordingly, the financial statements reflect the capitalization of the Company
as if the stock dividend and the reverse stock split occurred at the beginning
of each period presented.
Additionally, upon completion of this Offering, the Company's authorized
capital stock will consist of 100,000,000 shares of common stock, no par value
per share, and 20,000,000 shares of preferred stock, no par value per share.
F-17
75
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the shares of Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction in which such an offer
or solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company or that the
information contained herein is correct as of any time subsequent to the date
hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
Page
----
Prospectus Summary.................... 3
Risk Factors.......................... 6
Termination of S Corporation Status
and Related Distributions........... 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Combined Financial Data...... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 26
Management............................ 38
Principal Shareholders................ 45
Certain Transactions.................. 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 54
Index to Combined Financial
Statements.......................... F-1
----------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
3,500,000 SHARES
MELITA(R) INTERNATIONAL LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
, 1997
======================================================
76
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission registration fee......... $10,606
National Association of Securities Dealers, Inc. fee........ 4,000
Nasdaq National Market listing fee.......................... *
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
Transfer Agent's fees and expenses.......................... *
Printing and engraving expenses............................. *
Miscellaneous............................................... *
-------
Total Expenses.................................... *
=======
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify each of its officers, directors, employees and agents to the extent
that he or she is or was a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director, officer, employee or agent of the Company, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with such action, suit or proceeding; provided,
however, that no indemnification shall be made for (i) any appropriation, in
violation of his duties, of any business opportunity of the Company, (ii) acts
or omissions which involve intentional misconduct or a knowing violation of law,
(iii) any liability under Section 14-2-832 of the GBCC, which relates to
unlawful payments of dividends and unlawful stock repurchases and redemptions,
or (iv) any transaction from which he or she derived an improper personal
benefit.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
Underwriters named therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued the securities set
forth below which were not registered under the Securities Act.
In connection with the Company's acquisition of all of the outstanding
shares of Melita Europe and Inventions by share exchange, upon the effective
date of this offering the Company will issue a total of 3,143,395 shares of its
Common Stock to the former shareholders of Melita Europe and Inventions.
The Registrant has issued stock options for an aggregate of 1,659,485
shares of its Common Stock under the 1992 Stock Option Plan and the 1997 Stock
Option Plan. Options for an aggregate of 1,106,097 shares are currently
outstanding at a weighted average exercise price of $3.42 per share.
No underwriters were engaged in connection with any of the foregoing
issuances of securities. The sale and issuance of shares listed above were
exempt from registration under the Securities Act by virtue of Sections 3(a),
3(b) and 4(a) of the Securities Act and in reliance on Rule 701 and Regulation D
promulgated thereunder.
II-1
77
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of exhibits filed as part of the
Registration Statement.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* -- Form of Underwriting Agreement.
2.1* -- Share Exchange Agreement by and between the Registrant and
the shareholders of Melita Europe Limited.
2.2* -- Share Exchange Agreement by and between the Registrant and
the shareholders of Inventions, Inc.
3.1 -- Restated Articles of Incorporation of the Registrant dated
June 4, 1992, as amended February 7, 1997.
3.2 -- Bylaws of the Registrant.
3.3 -- Form of Amended and Restated Articles of Incorporation of
the Registrant, to be effective upon the effectiveness of
this offering.
3.4 -- Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the effectiveness of this offering.
4.1 -- See Exhibits 3.3 and 3.4 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Common Stock of the Registrant.
4.2 -- Specimen Stock Certificate.
5.1* -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1 -- Lease Agreement between the Registrant and 5051 Peachtree
Corners Circle, L.L.C.
10.2 -- 1992 Stock Option Plan effective June 4, 1992, as amended
March 1, 1997.
10.3 -- 1997 Stock Option Plan effective February 6, 1997.
10.4 -- Employee Stock Purchase Plan adopted March 1, 1997.
10.5 -- 401(k) Profit Sharing Plan as amended effective January 1,
1993.
10.6 -- Employment Agreement between the Registrant and Aleksander
Szlam dated March 5, 1997.
10.7 -- Employment Agreement between the Registrant and J. Neil
Smith dated March 5, 1997.
10.8 -- Form of Tax Indemnification Agreement between the Registrant
and certain shareholders of the Registrant.
10.9 -- Form of Tax Indemnification Agreement between Inventions,
Inc. and certain shareholders of Inventions, Inc.
10.10 -- $3,000,000 Note of the Registrant in favor of Aleksander
Szlam dated June 19, 1992.
11.1 -- Statement re: Computation of Per Share Earnings.
21.1 -- List of Subsidiaries.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of BDO Stoy Hayward.
23.3* -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
24.1 -- Powers of Attorney (included on signature page).
27.1 -- Financial Data Schedule. (For SEC use only)
99.1 -- Report of Independent Public Accountants on Financial
Statement Schedule.
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules: Schedule II -- Valuation and Qualifying
Accounts.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-2
78
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
79
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia
on the 6th day of March, 1997.
Melita International Corporation
By: /s/ ALEKSANDER SZLAM
------------------------------------
Aleksander Szlam
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Aleksander Szlam and J. Neil Smith, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any subsequent registration
statements pursuant to Rule 462 under the Securities Act and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALEKSANDER SZLAM Chairman of the Board and Chief March 6, 1997
- ----------------------------------------------------- Executive Officer (Principal
Aleksander Szlam Executive Officer)
/s/ J. NEIL SMITH Director March 6, 1997
- -----------------------------------------------------
J. Neil Smith
/s/ MARK B. ADAMS Vice President -- Finance and March 6, 1997
- ----------------------------------------------------- Chief Financial Officer
Mark B. Adams (Principal Financial and
Accounting Officer)
II-4
80
SCHEDULE II
MELITA INTERNATIONAL CORPORATION
MELITA EUROPE LIMITED AND INVENTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND AT END
CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
-------------- ---------- -------- ------------- --------
1994
Allowance for doubtful accounts............. $200,000 $146,000 116,000 $230,000
Allowance for inventory obsolescence........ 40,000 40,000 64,000 16,000
1995
Allowance for doubtful accounts............. 230,000 117,000 16,000 331,000
Allowance for inventory obsolescence........ 16,000 130,000 -- 146,000
1996
Allowance for doubtful accounts............. 331,000 260,000 104,000 487,000
Allowance for inventory obsolescence........ 146,000 831,000 492,000 485,000
- ---------------
(1) Represents amounts written off