1
EXHIBIT 99.1
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH
AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... 1
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... 2
Consolidated Statements of Operations for the three years in
the period ended December 31, 1998........................ 3
Consolidated Statements of Shareholders' Equity for the
three years in the period ended December 31, 1998......... 4
Consolidated Statements of Comprehensive Income for the
three years in the period ended December 31, 1998......... 5
Consolidated Statements of Cash Flows for the three years in
the period ended December 31, 1998........................ 6
Notes to Consolidated Financial Statements.................. 7
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Melita International Corporation:
We have audited the accompanying consolidated balance sheets of Melita
International Corporation (a Georgia corporation) and subsidiaries as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, shareholders' equity, comprehensive income and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have also made a similar audit of the supplemental information of Melita
International Corporation and subsidiaries for each of the two years in the
period ended December 31, 1998 contained in Note 10. The supplemental
information gives retroactive effect to the merger with eShare Technologies,
Inc. on September 1, 1999, which has been accounted for as a pooling of
interests as described in Note 10. This supplemental information is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this supplemental information based on our audits.
We did not audit the financial statements of eShare Technologies, Inc.
included in the supplemental information of Melita International Corporation and
subsidiaries, which statements reflect total revenues constituting 1 percent and
4 percent in 1997 and 1998, respectively, of the related supplemental totals.
These statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for eShare Technologies, Inc., is based solely upon 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Melita International
Corporation and subsidiaries as of December 31, 1997 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. In our opinion, based upon our audit and the report of the other
auditors, the supplemental information referred to above presents fairly, in all
material respects, the results of Melita International Corporation and
subsidiaries operations for each of the two years in the period ended December
31, 1997 and 1998 after giving retroactive effect to the merger with eShare
Technologies, Inc. as described in Note 10, all in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 30, 1999
(except with respect to
the matter discussed in Note 10
to which the date is September 1, 1999)
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3
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------
1997 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,845 $ 7,684
Marketable securities..................................... 23,969 22,756
Accounts receivable, net of allowance for doubtful
accounts of $876 and $2,450 at December 31, 1997 and
1998, respectively..................................... 15,796 32,287
Inventories............................................... 2,461 1,260
Deferred taxes............................................ 2,035 3,731
Prepaid expenses and other................................ 251 403
------- -------
Total current assets.............................. 51,357 68,121
------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 1,648 2,241
Equipment................................................. 8,195 11,618
Leasehold improvements.................................... 831 1,095
------- -------
Total property and equipment...................... 10,674 14,954
Less accumulated depreciation............................. 5,735 7,946
------- -------
Net property and equipment........................ 4,939 7,008
Other assets................................................ 99 179
------- -------
$56,395 $75,308
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,326 $ 6,624
Accrued liabilities....................................... 7,763 11,835
Deferred revenue.......................................... 4,029 5,965
Customer deposits......................................... 1,988 815
------- -------
Total current liabilities......................... 19,106 25,239
------- -------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1997 and 1998............................. -- --
Common stock, no par value; 100,000,000 shares authorized;
15,168,395 shares issued and outstanding at December
31, 1997, and 15,270,738 shares issued and outstanding
at December 31, 1998................................... 69 69
Additional paid-in capital................................ 36,046 37,075
Accumulated other comprehensive income.................... 30 96
Retained earnings......................................... 1,144 12,829
------- -------
Total shareholders' equity........................ 37,289 50,069
------- -------
$56,395 $75,308
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
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4
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net revenues:
Product................................................... $32,077 $46,065 $67,943
Service................................................... 15,463 19,725 25,467
------- ------- -------
Total revenues.................................... 47,540 65,790 93,410
------- ------- -------
Cost of revenues:
Product................................................... 11,494 15,531 21,336
Service................................................... 6,863 9,642 13,346
------- ------- -------
Total cost of revenues............................ 18,357 25,173 34,682
------- ------- -------
Gross margin................................................ 29,183 40,617 58,728
------- ------- -------
Operating expenses:
Engineering, research and development..................... 5,070 6,880 10,410
Selling, general and administrative....................... 16,765 22,320 31,253
------- ------- -------
Total operating expenses.......................... 21,835 29,200 41,663
------- ------- -------
Income from operations...................................... 7,348 11,417 17,065
Other income, net........................................... 261 662 1,193
------- ------- -------
Income before income taxes.................................. 7,609 12,079 18,258
Income tax provision (benefit):
Tax provision as C corporation............................ -- 3,023 6,573
Deferred tax adjustment................................... -- (1,473) --
------- ------- -------
Net income.................................................. $ 7,609 $10,529 $11,685
======= ======= =======
Pro forma net income:
Income before income taxes................................ $ 7,609 $12,079
Pro forma income taxes.................................... 2,827 4,469
------- -------
Pro forma net income.............................. $ 4,782 $ 7,610
======= =======
Earnings per share:
Basic earnings per share.................................. $ 0.63 $ 0.76 $ 0.77
Diluted earnings per share................................ $ 0.62 $ 0.73 $ 0.74
Pro forma basic earnings per share........................ $ 0.40 $ 0.55
Pro forma diluted earnings per share...................... $ 0.39 $ 0.53
Weighted average shares outstanding:
Basic..................................................... 12,088 13,832 15,193
Diluted................................................... 12,363 14,386 15,815
The accompanying notes are an integral part of these consolidated statements.
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MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
----------------------------------------------------------
MELITA
INTERNATIONAL MELITA EUROPE
CORPORATION LIMITED INVENTIONS, INC. ADDITIONAL
------------------- ---------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ------- ------ ------- ------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, December 31,
1995................... 8,000,000 $ 2 31,328 $46 100 $1 $ 20
Net income before pro
forma income taxes..... -- -- -- -- -- -- --
Distributions to
shareholders........... -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- --
---------- --- ------- --- ---- -- -------
Balance, December 31,
1996................... 8,000,000 2 31,328 46 100 1 20
Net income before pro
forma income taxes..... -- -- -- -- -- -- --
Proceeds from the
issuance of common
stock.................. 4,025,000 -- -- -- -- -- 36,046
Combination transaction
(Note 1)............... 3,143,395 67 (31,328) (46) (100) (1) (20)
Note and cash
distributions to
shareholders........... -- -- -- -- -- -- --
Unrealized gain on
marketable
securities............. -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- --
---------- --- ------- --- ---- -- -------
Balance, December 31,
1997................... 15,168,395 69 -- -- -- -- 36,046
Net income............... -- -- -- -- -- -- --
Proceeds from the
issuance of common
stock.................. 102,343 -- -- -- -- -- 1,029
Unrealized gain on
marketable
securities............. -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- --
---------- --- ------- --- ---- -- -------
Balance, December 31,
1998................... 15,270,738 $69 -- $-- -- $-- $37,075
========== === ======= === ==== == =======
OTHER
COMPREHENSIVE RETAINED
INCOME EARNINGS TOTAL
------------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, December 31,
1995................... $ 5 $ 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............. 30 -- 30
--- -------- --------
Balance, December 31,
1996................... 35 10,768 10,872
Net income before pro
forma income taxes..... -- 10,529 10,529
Proceeds from the
issuance of common
stock.................. -- -- 36,046
Combination transaction
(Note 1)............... -- -- --
Note and cash
distributions to
shareholders........... -- (20,153) (20,153)
Unrealized gain on
marketable
securities............. 15 -- 15
Foreign currency
translation
adjustment............. (20) -- (20)
--- -------- --------
Balance, December 31,
1997................... 30 1,144 37,289
Net income............... -- 11,685 11,685
Proceeds from the
issuance of common
stock.................. -- -- 1,029
Unrealized gain on
marketable
securities............. 89 -- 89
Foreign currency
translation
adjustment............. (23) -- (23)
--- -------- --------
Balance, December 31,
1998................... $96 $ 12,829 $ 50,069
=== ======== ========
The accompanying notes are an integral part of these consolidated statements.
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MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------- -------
(IN THOUSANDS)
Net income.................................................. $7,609 $10,529 $11,685
Other comprehensive income, net of tax:
Foreign currency translation adjustment................... 30 (20) (23)
Unrealized gain on marketable securities.................. -- 15 89
------ ------- -------
Other comprehensive income............................. 30 (5) 66
------ ------- -------
Comprehensive income........................................ $7,639 $10,524 $11,751
====== ======= =======
The accompanying notes are an integral part of these consolidated statements.
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MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------ -------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net income or pro forma net income........................ $4,782 $ 7,610 $11,685
Adjustments to reconcile net income or pro forma net
income to net cash provided by operating activities:
Pro forma income taxes................................. 2,827 1,446 --
Deferred taxes......................................... -- (562) (1,695)
Depreciation and amortization.......................... 1,141 1,279 2,212
Loss on sale of property and equipment................. 6 -- --
Changes in assets and liabilities:
Accounts receivable.................................. (2,657) (3,935) (16,492)
Inventories.......................................... 585 (19) 1,201
Prepaid expenses and other assets.................... 172 (81) (152)
Accounts payable..................................... (334) 2,897 1,298
Accrued liabilities.................................. 794 3,552 4,071
Deferred revenue..................................... 472 964 1,936
Customer deposits.................................... 1,417 (1,861) (1,173)
Other, net........................................... 63 (95) (103)
------ -------- -------
Total adjustments................................. 4,486 3,585 (8,897)
------ -------- -------
Net cash provided by operating activities......... 9,268 11,195 2,788
------ -------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,531) (3,494) (4,280)
Purchases of marketable securities........................ -- (23,954) 1,302
------ -------- -------
Net cash used in investing activities............. (1,531) (27,448) (2,978)
------ -------- -------
Cash flows from financing activities:
Repayment of capital lease obligations.................... (48) (19) --
Net proceeds from issuance of common stock................ -- 36,046 1,029
Repayment of notes payable to stockholder................. -- (2,625) --
Repayment of notes payable to stockholder representing
distributions.......................................... (375) (12,900) --
Distributions to stockholder.............................. (3,424) (7,253) --
------ -------- -------
Net cash provided by (used in) financing
activities...................................... (3,847) 13,249 1,029
------ -------- -------
Net change in cash and cash equivalents..................... 3,890 (3,004) 839
Cash and cash equivalents, beginning of year................ 5,959 9,849 6,845
------ -------- -------
Cash and cash equivalents, end of year...................... $9,849 $ 6,845 $ 7,684
====== ======== =======
Marketable securities....................................... $ -- $ 23,969 $22,756
====== ======== =======
Cash, cash equivalents and marketable securities............ $9,849 $ 30,814 $30,440
====== ======== =======
Supplemental cash flow information:
Cash paid for interest during the year...................... $ 279 $ 335 --
====== ======== =======
Income taxes paid........................................... $ -- $ 3,198 $ 6,392
====== ======== =======
The accompanying notes are an integral part of these consolidated statements.
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MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Melita International Corporation ("Melita" or the "Company") provides
customer contact and customer relationship management systems that enable its
customers to operate efficient call centers. The Company's principal product is
an integrated system comprised of both hardware and software. Melita offers
ongoing maintenance support for its products, as well as fee-based installation,
education and consulting services. The Company markets its products worldwide
through direct sales forces and through distributors in Europe, Latin America
and Asia (Note 7).
COMPLETION OF INITIAL PUBLIC OFFERING
On June 4, 1997, the Company completed an initial public offering (the
"Offering") of 4,025,000 shares of common stock at $10 per share resulting in
net proceeds of $36,046,000.
BASIS OF COMBINATION
Prior to June 4, 1997, the financial statements are presented on a combined
basis and include the accounts of Melita, Melita Europe Limited ("Melita
Europe") and Inventions, Inc. ("Inventions"), since all were under common
control. All significant intercompany accounts and transactions have been
eliminated in combination.
Concurrent with the Offering, the shareholders of Melita Europe and
Inventions contributed their respective shares in exchange for 3,143,395 shares
of Melita. The combination was treated similar to a pooling of interests and no
step-up basis was recorded as the entities involved were under common control.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements since June 4, 1997 include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash or cash equivalents.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by the Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized holding gains and losses are reflected as a net amount
in a separate component of shareholders' equity until realized. For the purpose
of computing realized gains and losses, cost is identified on a specific
identification basis.
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9
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes raw materials, labor, and overhead. Market is defined as
replacement cost for work in progress and raw materials and net realizable value
for finished goods. Inventories consist of the following at December 31, 1997
and 1998 (in thousands):
1997 1998
------ ------
Raw materials............................................... $1,251 $ 143
Work in process............................................. 457 37
Finished goods.............................................. 753 1,080
------ ------
Total inventories................................. $2,461 $1,260
====== ======
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The straight-line method of
depreciation was adopted for property placed in service after September 30,
1997. Prior to September 30, 1997, an accelerated method was used. The
difference between the accelerated method and the straight-line method was
immaterial. The estimated useful lives are as follows:
Furniture and fixtures............. Five to seven years
Equipment.......................... Three to seven years
Leasehold improvements............. Remaining life of lease
INCOME TAXES
Prior to June 4, 1997, Melita and Inventions were organized as S
corporations under the Internal Revenue Code and, therefore, were not subject to
federal income taxes. The income or loss of Melita and Inventions was included
in the shareholders' individual federal and state tax returns, and as such, no
provision for income taxes was recorded in the accompanying combined statements
of operations. The Company historically made distributions to cover the
shareholders' anticipated tax liability.
In connection with the Offering, the Company converted its U.S. taxable
status from an S corporation to a C corporation and, accordingly, became subject
to federal and state income taxes. Upon the conversion, the Company recognized a
one-time benefit by recording deferred tax assets of $1,473,000.
The accompanying financial statements prior to June 4, 1997 reflect a
provision for income taxes on a pro forma basis as if the Company were liable
for federal and state income taxes as a taxable corporate entity throughout the
years presented. The pro forma income tax provision has been computed by
applying the Company's anticipated statutory tax rate to pretax income, adjusted
for permanent tax differences (Note 3).
FOREIGN CURRENCY TRANSLATION
The financial statements of Melita Europe are translated into U.S. dollars
in accordance with SFAS No. 52, "Foreign Currency Translation." Net assets of
Melita Europe are translated at the current rates of exchange at December 31.
Income and expense items are translated at the average exchange rate for the
year. The resulting translation adjustments are recorded in shareholders'
equity. The Company has recognized foreign exchange gains (losses) of
approximately $162,000, ($20,000) and ($23,000) in 1996, 1997 and 1998,
respectively.
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10
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company generates product revenues primarily from its principal
product, 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 when a contract has been executed,
the product has been shipped and 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 $4,029,000
and $5,965,000 at December 31, 1997 and 1998, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expense as incurred.
Software development costs are charged to research and development expense until
technological feasibility is established, after which remaining software
production costs are capitalized in accordance with SFAS No. 86, "Accounting for
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The
Company has defined technological feasibility of its products as the point in
time at which the Company has a working model of the related product, which is
when the product has achieved "beta" status. Historically, the development costs
incurred during the period between the achievement of beta status by a product
and the point at which the product is available for general release to customers
have not been material. Accordingly, the Company has concluded that the amount
of development costs capitalizable under the provisions of SFAS No. 86 was not
material to the financial statements for the years ended December 31, 1996, 1997
and 1998. Therefore, the Company has charged all software development costs to
expense as incurred for the years ended December 31, 1996, 1997 and 1998.
WARRANTY COSTS
The Company generally warranties its products for 90 days and provides for
estimated warranty costs upon shipment of such products. Warranty costs have not
been and are not anticipated to be significant.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers and markets for which the Company's
services are provided as well as their dispersion across many different
geographic areas. As a result, as of December 31, 1997 and 1998, the Company did
not consider itself to have any significant concentrations of credit risk.
During 1997, only BankOne Services Corporation (now First USA Bank), at 11.8%,
accounted for greater than 10% of total revenues. During 1998, only CitiGroup,
at 13.1%, accounted for greater than 10% of total revenues. In 1996, 1997 and
1998, the Company's five largest customers accounted for approximately 24.5%,
27.9% and 23.2%, respectively, of total revenues. These sales
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MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were predominantly to customers in the financial services industry. Although the
particular customers may change from period to period, the Company expects that
large sales to a limited number of customers will continue to account for a
significant percentage of its revenues in any particular period for the
foreseeable future.
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.
BASIC AND DILUTED NET EARNINGS PER SHARE
Basic earnings per share and pro forma basic earnings per share are
computed using net income or pro forma net income divided by the sum of (i) the
weighted average number of shares of common stock outstanding ("Weighted
Shares") for the period presented including the number of shares issued in the
combination of Melita, Melita Europe and Inventions discussed in Note 1 and (ii)
for periods prior to the Offering, the number of shares pursuant to Staff
Accounting Bulletin 1B.3 that at the assumed public offering price would yield
proceeds in the amount necessary to pay the distribution to the majority
stockholder as a result of the Offering that are not covered by the earnings for
the year ("Distribution Shares").
The only difference between basic and diluted net earnings per share is the
result of the treasury stock method effect of common equivalent shares ("CESs").
Diluted earnings per share and pro forma diluted earnings per share is computed
using net income or pro forma net income divided by the sum of (i) Weighted
Shares, (ii) the Distribution Shares and (iii) the treasury stock method effect
of CESs outstanding of 275,000, 554,000 and 622,000 for the years ended December
31, 1996, 1997 and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable, and other
financial instruments approximate their fair values at December 31, 1997 and
1998 principally because of the short-term maturities of these instruments.
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1998 include the following (in
thousands):
1997 1998
------ -------
Accrued salaries and wages.................................. $3,279 $ 4,935
Other current liabilities................................... 4,169 6,608
Accrued rent................................................ 315 292
------ -------
Total accrued liabilities......................... $7,763 $11,835
====== =======
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for the year ending December 31, 2000. The adoption of
this statement is not expected to have a significant impact on the Company's
financial statements.
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12
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2. NOTES PAYABLE TO SHAREHOLDER
In 1997, the Company issued to the shareholder of the Company notes payable
in the amount of $12,900,000 representing undistributed earnings through
December 31, 1996. Additionally, the Company accumulated earnings of $7,253,000
through the closing date of the Offering. With the proceeds from the Offering,
the Company paid an original note of $2,625,000 and the $12,900,000 notes
payable and the $7,253,000 of additional accumulated earnings through the
closing date of the Offering.
Interest paid to shareholder was $271,000, $335,000, and $0 for the years
ended December 31, 1996, 1997 and 1998, respectively.
3. INCOME TAXES
In connection with the Offering, the Company converted from an S
corporation to a C corporation and, accordingly, became subject to federal and
state income taxes. The components of the total deferred tax assets as of
December 31, 1997 and 1998 are as follows (in thousands):
1997 1998
------ ------
Deferred tax assets and liabilities:
Deferred revenue.......................................... $1,207 $1,866
Accrued liabilities....................................... 230 623
Allowance for doubtful accounts........................... 263 784
Depreciation.............................................. (70) 64
Inventory................................................. 405 394
------ ------
Total net deferred tax assets..................... $2,035 $3,731
====== ======
The following summarizes the components of the income tax provision for the
years ended December 31, 1996, 1997 and 1998 (in thousands):
PRO FORMA ACTUAL
--------------- -------
1996 1997 1998
------ ------ -------
Current domestic taxes:
Federal................................................... $2,775 $4,405 $ 6,546
State..................................................... 326 517 580
Foreign taxes............................................... (75) 109 1,143
Deferred taxes.............................................. (199) (562) (1,696)
------ ------ -------
Tax provision..................................... $2,827 $4,469 $ 6,573
====== ====== =======
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MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation from the federal statutory rate to the tax provision for
the years ended December 31, 1996, 1997 and 1998 is as follows:
PRO FORMA ACTUAL
----------- ------
1996 1997 1998
---- ---- ------
Statutory federal tax rate.................................. 34.0% 34.0% 35.0%
State income taxes, net of federal tax benefit.............. 4.0 4.0 2.4
Foreign operations.......................................... (1.3) (1.2) (0.8)
Other....................................................... 0.5 0.2 (0.6)
---- ---- ----
Effective tax rate.......................................... 37.2% 37.0% 36.0%
==== ==== ====
4. BENEFIT PLAN
Melita has a defined contribution profit-sharing plan (the "Plan") for
substantially all Melita employees meeting the eligibility requirements as
defined in the plan agreement. The Plan provides for annual contributions by
Melita at the discretion of the board of directors. The Plan also contains a
401(k) feature which allows participants to contribute up to 15% of their
eligible compensation, as defined, and provides for discretionary employer
matching contributions. Total contributions by Melita to the Plan were $119,000,
$429,000 and $391,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1998, the future minimum operating lease payments
(including leases with related parties) under noncancelable operating leases
were as follows (in thousands):
1999........................................................ $ 810
2000........................................................ 723
2001........................................................ 668
2002........................................................ 607
Thereafter.................................................. 1,768
------
Total future minimum lease payments............... $4,576
======
The Company's leases are primarily for equipment and facilities. Total
rental expense for operating leases was $751,000, $714,000 and $866,000 in 1996,
1997 and 1998, 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 $543,000, $544,000 and
$555,000 in 1996, 1997 and 1998, respectively.
LEGAL MATTERS
Many of the Company's installations involve products that are critical to
the operations of its clients' businesses. Any failure in a Company product
could result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. Although the Company attempts
to limit contractually its liability for damages arising from product failures
or negligent acts or omissions, there can be no assurance the limitations of
liability set forth in its contracts will be enforceable in all instances.
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14
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of business. In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
6. STOCK OPTION PLANS
During 1992, the Company approved a stock option plan (the "1992 Plan") for
key employees for which 640,000 shares of common stock were authorized for use
in the plan. During 1995, the number of authorized shares was increased to
1,000,000 shares of common stock. Options are granted at the fair market value
and are exercisable based on the specific terms of the grant up to ten years
from the grant date. Options granted primarily vest ratably over a four- or
five-year employment period. The Company reserved the right to purchase vested
options at the then-estimated fair market value prior to the date of an IPO.
During 1996, the Company purchased 30,250 vested but unexercisable options held
by terminated employees for $39,774. No options were purchased during 1997 or
1998. Cash paid to repurchase options is expensed as incurred.
On February 6, 1997, the Company approved the 1997 Stock Option Plan (the
"1997 Plan") for which 1,350,000 shares of common stock were authorized for
issuance, less any options issued under the 1992 Plan. In October of 1997, the
Company increased the number of shares available under the 1997 Plan to
1,850,000. On May 11, 1998, the shareholders approved an amendment to the 1997
Plan whereby the number of shares of common stock available for issuance under
the 1997 Plan will automatically be adjusted on the first day of each fiscal
year, beginning with 1998, by a number of shares such that the total number of
shares reserved for issuance under the 1997 Plan equals the sum of (i) the
aggregate number of shares previously issued under the 1997 Plan and the 1992
Plan; (ii) the aggregate number of shares subject to then outstanding options
granted under the 1997 Plan and the 1992 Plan; and (iii) 5% of the number of
shares of common stock outstanding on the last day of the preceding fiscal year.
Options are granted at the fair market value and are exercisable based on the
specific terms of the grant up to ten years from the grant date. The options
vest primarily over a four-year period subject to acceleration upon the
achievement of certain performance measures.
14
15
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity for the 1992 Plan and 1997 Plan is as follows:
OPTION
OPTIONS PRICE
--------- -----------
Outstanding at December 31, 1995............................ 861,450 $2.75-$3.00
Granted................................................... 133,785 4.07
Exercised................................................. --
Forfeited/repurchased..................................... (57,463) 2.75- 4.07
---------
Outstanding at December 31, 1996............................ 937,772 2.75- 4.07
Granted................................................... 457,325 5.50-10.00
Exercised................................................. --
Forfeited/repurchased..................................... (120,309) 2.91-10.00
---------
Outstanding at December 31, 1997............................ 1,274,788 2.75-10.00
Granted................................................... 1,072,125 5.50-10.00
Exercised................................................. (80,245)
Forfeited/repurchased..................................... (498,487) 2.75-14.50
---------
Outstanding at December 31, 1998............................ 1,768,181 2.75-14.50
=========
At December 31, 1998, options to purchase 747,559 shares were available for
future grant and options were exercisable to purchase 698,999 shares, as
discussed in the following table:
NUMBER OF
SHARES NUMBER WEIGHTED
OUTSTANDING AT WEIGHTED EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, AVERAGE DECEMBER 31, EXERCISE
PRICES 1998 EXERCISE PRICE 1998 PRICE
-------- -------------- -------------- -------------- --------
$ 2.75-$ 3.00 621,054 $ 2.89 529,273 $ 2.88
4.07- 7.94 215,242 5.30 98,926 4.71
8.38- 10.00 552,400 9.11 64,000 9.30
10.25- 14.50 379,485 11.31 6,800 10.25
--------- -------
$ 2.75-$14.50 1,768,181 $ 6.93 698,999 $ 3.80
========= =======
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which defines a fair value-based method of accounting for an employee stock
option plan or similar equity instrument. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value-based method of accounting
defined in the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1997 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in 1996, 1997 and 1998:
1996 1997 1998
--------- --------- ---------
Risk-free interest rate...................... 5.4%-6.5% 5.7%-6.5% 4.0%-5.5%
Expected dividend yield...................... -- -- --
Expected lives............................... 5 years 5 years 5 years
Expected volatility.......................... 65% 65% 65%
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16
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total value of the options granted during the years ended December 31,
1996, 1997 and 1998 were computed as approximately $264,000, $1,716,000 and
$6,613,000, 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 earnings and pro forma earnings and net
income per share and pro forma net income per share for the years ended December
31, 1996, 1997 and 1998 would have decreased to the following amounts (in
thousands, except per share amounts):
PRO FORMA ACTUAL
--------------- -------
1996 1997 1998
------ ------ -------
Net income or pro forma net income:
As reported in the financial statements................... $4,782 $7,610 $11,685
Pro forma in accordance with SFAS No. 123................. 4,581 7,288 10,861
Basic earnings per share:
As reported in the financial statements................... $ 0.40 $ 0.55 $ 0.77
Pro forma in accordance with SFAS No. 123................. 0.38 0.53 0.71
Diluted earnings per share:
As reported in the financial statements................... $ 0.39 $ 0.53 $ 0.74
Pro forma in accordance with SFAS No. 123................. 0.37 0.51 0.69
7. GEOGRAPHIC INFORMATION
Melita is a multinational corporation operating in a single segment as
defined by statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information." The following
represents total revenues, net income and total assets of the following
geographic segments representing over 10% of the combined totals for the years
ended December 31, 1996, 1997 and 1998 (in thousands):
1996 1997 1998
------- ------- -------
United States:
Total revenues.......................................... $37,568 $53,694 $70,289
Net income.............................................. 6,217 8,682 9,569
Total assets............................................ 23,799 51,612 66,812
Europe:
Total revenues.......................................... $ 4,292 $ 7,347 $ 9,939
Net income.............................................. 452 1,680 1,733
Total assets............................................ 3,270 4,594 6,830
Other:
Total revenues.......................................... $ 5,680 $ 4,749 $13,182
Net income.............................................. 940 167 383
Total assets............................................ -- 189 1,666
8. STOCK RECAPITALIZATION
On February 7, 1997, the Company and Inventions recapitalized their
authorized, issued, and outstanding common stock by declaring a stock dividend
of 99 shares of nonvoting common stock with respect to each outstanding share of
voting common stock. In connection with the stock dividend, the Company amended
its articles of incorporation to increase its authorized capital stock to
2,000,000,000 shares, consisting of 20,000,000 shares of voting common stock and
1,980,000,000 shares of nonvoting common stock and Inventions amended its
articles of incorporation to increase its authorized capital stock to 10,000
shares, consisting of 100 shares of voting common stock and 9,900 shares of
nonvoting common stock. Concurrently on the effective date of the Offering, the
Company effected a 100 to 1 reverse stock split to return the number
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17
MELITA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of authorized shares to 20,000,000 shares and issued and outstanding shares to
8,000,000 shares. Accordingly, the financial statements reflect the
capitalization of the Company as if the stock dividend and the reverse stock
split occurred at the beginning of each period presented.
Additionally, following completion of the Offering, the Company's
authorized capital stock consists of 100,000,000 shares of common stock, no par
value per share, and 20,000,000 shares of preferred stock, no par value per
share.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of the quarterly results of operations for the years
ended December 31, 1996, 1997 and 1998 (in thousands except per share amounts):
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
1996
Total revenues........................... $11,021 $11,886 $11,589 $13,044 $47,540
Gross margin............................. 7,133 7,163 7,027 7,860 29,183
Pro forma net income..................... 1,278 1,299 909 1,296 4,782
Pro forma diluted earnings per share..... 0.10 0.11 0.07 0.10 0.39
1997
Total revenues........................... $14,669 $15,530 $16,928 $18,663 $65,790
Gross margin............................. 8,902 9,532 10,488 11,695 40,617
Pro forma net income..................... 1,425 1,665 2,083 2,437 7,610
Pro forma diluted earnings per share..... 0.11 0.13 0.13 0.15 0.53
1998
Total revenues........................... $20,372 $22,204 $24,252 $26,582 $93,410
Gross margin............................. 12,825 13,915 15,235 16,753 58,728
Net income............................... 2,548 2,733 3,071 3,333 11,685
Diluted earnings per share............... 0.16 0.17 0.19 0.21 0.74
10. SUBSEQUENT EVENT
On September 1, 1999, the Company completed a business combination
transaction with eShare Technologies, Inc. The merger was accounted for as a
pooling of interests. Melita issued 6,050,000 shares of common stock to the
shareholders and option holders of eShare Technologies, Inc. to complete the
merger. The following information reflects the operations of Melita
International Corporation and subsidiaries restated to reflect the pooling of
interests transaction with eShare Technologies, Inc., in thousands:
1996 1997 1998
----------- ------- -------
(UNAUDITED)
Net revenue............................................. $48,021 $66,520 $97,081
Net income.............................................. 4,333 7,559 9,671
Earnings per share -- basic............................. 0.24 0.39 0.47
Earnings per share -- diluted........................... 0.24 0.37 0.44
The merger transaction resulted in the incurrence of approximately
$4,500,000 in transaction fees that will be recorded as an expense in the third
quarter of 1999. Also, the Company will realize a non-recurring, non-cash charge
of approximately $2,200,000 of deferred compensation expense associated with the
conversion of eShare Technologies Inc.'s Employee Stock Option Plan in the third
quarter of 1999. These expenses are not included in the above mentioned
information.
17