SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: April 30, 1998.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File Number: 0-21793
VERSATILITY INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1214354
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, Virginia 22033
(703) 591-2900
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the closing sale price of the Common Stock on August
26, 1998, as reported on the Over-the-Counter market was approximately
$4,275,730. Shares of Common Stock held by each executive officer and director
and by each person who is known to own 5% or more of the outstanding Common
Stock have been excluded from this computation in that such persons may be
deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes. As of August 26, 1998, the
Registrant had 7,595,009 shares of Common Stock outstanding, par value $.01 per
share.
DOCUMENTS INCORPORATED BY REFERENCE
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None.
The undersigned registrant hereby amends the following items of its
Annual Report on Form 10-K as set forth on the pages attached hereto:
PART I
ITEM 1. BUSINESS
Recent Developments
On August 21, 1998, Versatility Inc., a Delaware corporation (the
"Company"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Oracle Corporation, a Delaware corporation ("Parent"), and AQX
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Parent (the "Purchaser"), which provides for the merger (the "Merger") of the
Purchaser with and into the Company with the Company continuing as the surviving
corporation (the "Surviving Corporation"). Pursuant to the terms of the Merger
Agreement, at the effective time of the Merger (the "Effective Time"), (i) each
share of Common Stock, par value $.01 per share, of the Company (the "Common
Stock") outstanding immediately prior to the Effective Time (other than shares
held by the Company, the Purchaser or Parent (which will be cancelled) and
shares for which appraisal rights under Delaware law are perfected) will be
converted into a right to receive a cash payment in the amount of $1.50 per
share and (ii) each share of Common Stock, par value $0.001 per share, of the
Purchaser outstanding prior to the Effective Time will be converted into the
right to receive one share of the common stock, par value $0.01 per share, of
the Surviving Corporation.
The closing of the Merger is subject to a number of conditions
precedent, including, without limitation, (i) the receipt of all required
government approvals, (ii) the approval of the Merger by the stockholders of the
Company, (iii) the retention of certain key employees of the Company, (iv) the
receipt of final court approval of the settlement of the putative securities
class actions filed in the United States District Court for the Southern
District of New York and the United States District Court for the Eastern
District of Virginia on terms consistent with the Memorandum of Understanding
Concerning Settlement Terms dated July 9, 1998 and the expiration of all rights
to appeal such settlement, and (v) absence of any instituted and continuing (or
in the case of (c) below, threatened) action, suit or proceeding against the
Company, Parent, the Purchaser or any officer, director, employee or other
person that the Company is obligated to indemnify, or by any governmental entity
or third party (a) directly relating to the Merger Agreement, the License
Agreement (defined below), any intellectual property of the Company, (b) who is
or was a stockholder of the Company or in a derivative action on behalf of the
Company, or (c) which could reasonably be expected to have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
In connection with the Merger Agreement, Edison Venture Fund, L.P.,
Noro-Moseley Partners III, L.P., Keith D. Roberts, Ronald R. Charnock and Marcus
W. Heth each entered into Support Agreements ("Support Agreements") with the
Company and Parent, whereby the stockholders (i) agreed to vote all shares of
Common Stock in favor of the Merger and against any action by the Company that
would breach the Merger Agreement or impair or delay the consummation of the
Merger and (ii) granted to designees of Parent an irrevocable proxy to vote
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such shares in favor of the Merger and as agreed in the Support Agreements. The
Support Agreements terminate upon the earlier of the Effective Time or the
termination of the Merger Agreement.
In connection with the Merger Agreement, the Company entered into a
Technology License Agreement (the "License Agreement") with Parent whereby the
Company agreed to grant to Parent a irrevocable, non-exclusive license of the
Company's computer software and related technology (the "Technology"). Parent
will pay the Company a sublicense fee equal to 30% of the net fees Parent
receives for sublicenses of the Technology, of which $2,000,000 will be prepaid
in three equal monthly installments commencing on September 1, 1998 (the
"Prepaid License Fee"). In the event that (i) Parent breaches the terms of the
Merger Agreement or failed to pay the sublicense fee when due, the Company may
terminate the License Agreement upon repayment of the Prepaid License Fee paid
to the Company in excess of $360,000, or (ii) the Merger Agreement is terminated
as a result of the Company accepting a superior offer than that presented in the
Merger Agreement upon repayment of the Prepaid License Fee paid to the Company
in excess of $360,000 and payment of the termination fee set forth in the Merger
Agreement.
As a condition precedent to the execution of the Merger Agreement,
Parent and each of Paul J. Zoukis, James J. Dellamore and Marcus W. Heth entered
into Non-Competition Agreements which have an initial term of two years from the
Effective Time and terminate upon the termination of the Merger Agreement. In
addition, Parent delivered to each of Messrs. Zoukis, Dellamore and Heth a
letter indicating its intent to offer employment to each at the Effective Time.
In connection with the Merger Agreement, the Company, Parent and
Silicon Valley Bank, a California chartered bank (the "Bank"), entered into a
Loan Modification and Extension of Forbearance Agreement (the "Loan Modification
Agreement") whereby, pursuant to the terms of the Loan Modification Agreement,
the Bank agreed to forebear from exercising remedies available to it as a result
of the Company's existing defaults under the loan agreements with the Bank until
the earlier of December 31, 1998 and the consummation of the Merger. The Bank's
continuing forbearance will terminate upon the termination of the Merger
Agreement. The Bank also agreed to allow the Company and Parent to enter into
the License Agreement, to waive the anti-dilution provisions applicable to its
warrant to purchase 100,000 shares of Common Stock during the period of
forbearance and to terminate its Warrant Agreement upon consummation of the
Merger. The Company agreed to deposit into an account at the Bank any refund
that the Company may receive from the Internal Revenue Service and/or the
Commonwealth of Virginia and agreed to withdraw such funds only pursuant to a
cash plan approved by the Bank.
On August 20, 1998, the Board of Directors of the Company approved the
Merger Agreement and the Merger and recommended that it be submitted to the
stockholders of the Company for their approval. The Company will file with the
Securities and Exchange Commission a proxy statement that will be mailed to the
stockholders in connection with a special stockholders meeting called to
consider and vote upon the Merger.
The foregoing descriptions of the Merger Agreement, the form of Support
Agreement, the License Agreement, and the Loan Modification Agreement are
qualified in their entirety by the text of the Merger Agreement, the form of
Support Agreement, the License Agreement, and the Loan Modification Agreement
which are set forth as Exhibits 2.1, 10.1, 10.2 and 10.3, respectively, and are
incorporated herein by reference.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Occupations of Directors and Executive Officers
The following table sets forth the directors and the executive officers
of the Company, their ages, and the positions currently held by each such person
with the Company.
Name Age Position
- ---- --- --------
Paul J. Zoukis 44 Director, President and Chief Executive
Officer
James J. Dellamore 41 Senior Vice President, Technology and
Operations
Kenneth T. Nelson 43 Senior Vice President - Finance &
Administration, Chief Financial Officer
and Secretary
Thomas A. Smith(1)(2) 36 Director
Charles A. Johnson(1)(2) 49 Director
Paul J. Palmer(1) 66 Director
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
PAUL J. ZOUKIS has served as President and Chief Executive Officer
since March 1998. Prior to joining the Company, Mr. Zoukis was CEO at Resolve
Services Corporation, a company specializing in human resource outsourcing and
which he co-founded in September 1997. Beginning in 1996, Mr. Zoukis was an
independent consultant to PSI International Inc. ("PSI") until November, 1996,
when he was named President and Chief Operating Officer at PSI. From 1991 to
1996, Mr. Zoukis held various positions at Hogan Systems, Inc., most recently as
Senior Vice President.
KENNETH T. NELSON has served as the Company's Chief Financial Officer
since February, 1998. Prior to joining the Company, Mr. Nelson was Vice
President-Finance and Administration and Chief Financial Officer of ROADSHOW
International, Inc., a software application company in the ERP marketplace, from
1993 to the end of 1997. From 1988 until 1993, Mr. Nelson was Vice President,
Treasurer of ICF Kaiser International, Inc., a diversified professional services
firm.
JAMES J. DELLAMORE has served as Senior Vice President, Technology and
Operations since February 24, 1998. Prior to joining the company, Mr. Dellamore
was Senior
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Vice President of Technology and Operations for Resolve Services Corporation , a
company specializing in human resource outsourcing. From June 1984 through
September 1997, Mr. Dellamore held various positions at Hogan Systems Inc., most
recently as Senior Vice President, Product Development and Services.
THOMAS A. SMITH has been a director of the Company since January 1996.
Mr. Smith is a partner in Mid-Atlantic Venture Fund, a venture capital fund. Mr.
Smith is a general partner of Edison Venture Fund III, L.P. ("Edison Venture
Fund"), and has been with Edison Venture Fund since 1990. Mr. Smith had
directed the Washington D.C. office of Edison Venture Fund since 1994. From
1990 to 1996, Mr. Smith was a senior associate in the risk capital investment
subsidiary of The Chase Manhattan Company.
CHARLES A. JOHNSON has been a director of the Company since January
1996. Since 1993, Mr. Johnson has been a general partner of Noro-Moseley
Partners III, L.P., an Atlanta-based venture capital firm. From 1992 to 1993,
Mr. Johnson was an independent consultant. In 1983, Mr. Johnson co-founded Sales
Technologies, Inc., a startup software company, and served as its President and
Chief Executive Officer until Sales Technologies, Inc. was acquired by Dun and
Bradstreet in January 1989. Mr. Johnson continued in his role as Chief Executive
Officer of that division of Dun and Bradstreet until February 1992. Prior to
founding Sales Technologies, Inc., Mr. Johnson was a management consultant with
McKinsey & Company and held a number of sales and marketing positions with
Procter & Gamble.
PAUL J. PALMER has been a director of the Company since September 1996.
Since January 1994, Mr. Palmer has been an executive consultant specializing in
the software industry. From 1957 until his retirement in December 1993, Mr.
Palmer held various positions in marketing and development with IBM, most
recently as Vice President.
Executive officers of the Company are elected by the Board of Directors
on an annual basis and serve until their successors have been duly elected and
qualified.
REPORTS ABOUT OWNERSHIP OF THE COMPANY'S COMMON STOCK
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and the
Nasdaq National Market. Officers, directors and greater than 10 percent
stockholders are required by Securities and Exchange Commission regulation to
furnish the Company with all Section 16(a) forms they file.
Based solely on its review of the copies of such forms and written
representations received from certain reporting persons that no Forms 5 were
required, the Company believes that during fiscal 1998 the Company's executive
officers, directors and greater than ten percent stockholders complied with all
applicable Section 16(a) filing requirements.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth the annual and long-term compensation
for each of the past three fiscal years of each of (i) the Company's Chief
Executive Officer; (ii) the Company's former Chief Executive Officer (through
March 1998); (iii) each of the Company's most highly compensated executive
officers who were serving as of April 30, 1998 and (iv) three former executive
officers who would have been among the Company's four most highly compensated
executive officers, but for the fact that they were not serving in that capacity
as of April 30, 1998 (collectively, with the Chief Executive Officer, the "Named
Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
------------------- ---------
(1) Compensation (2)
--- ----------------
Bonus Securities All Other
Name and Principal Position Year Salary ($) ($)(3) Underlying Options (#) Compensation (4)
- --------------------------- ---- ---------- ------ ---------------------- ----------------
Paul J. Zoukis(5) 1998 $ 46,712 $-- -- --
Director, President and Chief Executive
Officer
James J. 1998 $ 37,609 $-- -- --
Dellamore(5)
Senior Vice President, Technologies and
Operations
Kenneth T. Nelson(5) 1998 $ 48,134 $-- -- --
Senior Vice President - Finance &
Administration, Chief Financial Officer and
Secretary
Ronald R. Charnock
Former Chairman, President, Chief Executive 1998 $175,003 $14,860 -- --
Officer and Director
Marcus W. Heth
Senior Vice President, Technologies and 1998 $166,404 $12,634 -- $1,750
Former Secretary
Donald C. Yount
Former Senior Vice President, Finance and 1998 $110,550 $11,365 28,065 --
Chief Financial Officer
Stephen P. Winings
Former Senior Vice President, Sales 1998 $171,943 $47,207 39,097 $1,127
- --------------
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(1) Excludes certain personal benefits such as life insurance premiums paid
by the Company. These amounts, in the aggregate, did not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus for such
Named Executive Officer.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during
fiscal 1998.
(3) Includes bonuses earned with respect to services rendered in the fiscal
year indicated, whether or not such bonus was actually paid during such
fiscal year.
(4) Represents matching contributions made by the Company to the Named
Executive Officer under the Company's 401(k) plan.
(5) Messrs. Zoukis', Dellamore's and Nelson's employment began on February
24, 1998, February 24, 1998 and February 2, 1998, respectively, the
compensation set forth reflects amounts earned from such date until the
end of fiscal 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information concerning grants of
options to purchase the Company's Common Stock made during fiscal year ended
April 30, 1998, to each of the Named Executive Officers.
Individual Grants
------------------------------------------------------
Percent of Total
----------------
Number of Options Grant Date
-------- ------- ----------
Securities of Granted to Exercise or Present Value
------------- ---------- ----------- -------------
Underlying Employees in Base Price ($/ Expiration (2) ($)
----------- ------------- -------------- ---------- -------
Name Options Granted Fiscal Year (1) Share) Date 5% 10%
---- --------------- --------------- ---------- ---- -- ---
Paul J. Zoukis -- -- -- -- -- --
James J. Dellamore -- -- -- -- -- --
Kenneth T. Nelson -- -- -- -- -- --
Ronald R. Charnock -- -- -- -- -- --
Marcus W. Heth -- -- -- -- -- --
Donald C. Yount, Jr. 28,065 6.09% $11.50 5/21/07 $202,974 $514,376
Stephen P. Winings 39,097 8.48% $11.50 5/21/07 $282,761 $716,570
(1) Based on options to purchase an aggregate of 460,894 shares of Common
Stock granted to all employees of the Company in fiscal 1998, including
the Named Executive Officers.
(2) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the hypothetical gains or "option
spreads" that would exist for the respective options. These gains are
based on assumed rates of annual compounded stock price appreciation of
5% and 10% from the date the option was granted over the full option
term. The 5% and 10% assumed rates of appreciation are
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mandated by the rules of the Commission and do not represent the
Company's estimate or projection of future increases in the price of
its Common Stock. There can be no assurance that the actual stock price
appreciation over the five-year option term will be at the assumed 5%
and 10% levels or at any other defined level.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to options
exercised in fiscal 1998 by the Named Executive Officers, the value realized
upon such exercises and the value of options held by such officers at year-end
based on the closing price of the Company's Common Stock on April 30, 1998.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
Shares of Common Stock
----------------------
Underlying Unexercised Value of Unexercised In-The-
---------------------- ----------------------------
Options at Year-End Money Options at Year-End
------------------- -------------------------
Shares Acquired Value
--------------- -----
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Paul J. Zoukis -- -- -- -- -- --
James J. Dellamore -- -- -- -- -- --
Kenneth T. Nelson -- -- -- -- -- --
Ronald R. Charnock -- -- -- -- -- --
Marcus W. Heth -- -- -- -- -- --
Donald C. Yount, Jr. -- -- 5,613 22,452 -- --
Stephen P. Winings -- -- 7,819 31,278 -- --
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS
During fiscal 1998, the Company entered into Severance Agreements with
Paul J. Zoukis, James J. Dellamore and Kenneth T. Nelson, which were amended and
restated on April 15, 1998 (the "Severance Agreements"). The Severance
Agreements provide the following principal benefits: (i) assurances that the per
year base salary will not be less than $250,000, $200,000 and $200,000 for
Messrs. Zoukis, Dellamore and Nelson, respectively; (ii) agreements to provice
grants of options to purchase shares of the Company's common stock equal to
470,000, 280,000 and 280,000 shares for Messrs. Zoukis, Dellamore and Nelson,
respectively, at an exercise price of $1.89 per share (at which price was
determined on May 8, 1998); (iii) assurances that the executives will be
eligible to receive periodic bonuses equal to no less than 50% of their then
current base salary; and (iv) an allowance for automobile expenses. The
Severance Agreements provide for a lump sum severance payment if such executive
is terminated for reasons other than cause, death or continued disability, or if
such executive terminates his employment for Good Reason. "Good Reason" is
defined in the Severance Agreements as assignment of duties inconsistent with
the executive's position or
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authority, reduction in the executive's base salary, relocation of the Company's
principal executive offices to a location more than 35 miles away or requiring
the executive to be based in another location, failure to timely pay the
executive any portion of salary, bonus or other compensation, or the occurrence
of a Change in Control. A "Change in Control" is defined in the Severance
Agreements as (i) a third party becomes a beneficial owner of securities of the
Company controlling more than 30% of the voting power of the Company's then
outstanding shares, (ii) a change of a majority of the Board of Directors, (iii)
a merger or consolidation of the Company, (iv) an approval of a liquidation of
the Company or the sale or disposition of substantially all of the assets of the
Company or (v) the insolvency or general assignment for the benefit of creditors
or the commencement of bankruptcy, insolvency or reorganization for the Company
or for all or substantially all of the assets of the Company. The severance
payment would equal two times the executive's base salary and two times his
maximum bonus for such fiscal year, a payment equal to all bonuses awarded or
allocated to the executive for that portion of the fiscal year completed and a
payment equal to the bonus awarded to the executive pro rated to the portion of
the fiscal year not completed, and also provides for automatic vesting of all
unvested options and maintenance of all insurance benefits for a period of two
years.
The Company entered into Indemnification Agreements with
Messrs. Zoukis, Dellamore and Nelson on April 15, 1998 (the "Indemnification
Agreements"). Each Indemnification Agreement provides that the Company will
indemnify the indemnitee against expenses, including reasonable attorneys' fees,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of the performance of his duties. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company and with respect to any criminal action, had no reasonably cause to
believe that his conduct was unlawful. The Indemnification Agreement will also
require that the Company indemnify the party thereto in all cases to the fullest
extent permitted by applicable law. Each Indemnification Agreement requires the
Company to advance litigation expenses at the request of the party seeking
indemnification, whether prior to or after final resolution of a proceeding,
provided that he undertakes to repay such advances if it is ultimately
determined that he is not entitled to indemnification for his expenses. The
advance of litigation expenses will thereby be mandatory upon satisfaction of
certain conditions by the indemnitee. Each Indemnification Agreement permits the
party thereto to bring suit to seek recovery of amounts due under the
Indemnification Agreement and to recover the expenses of such a suit if he is
successful.
The foregoing description of the Severance Agreements and the
Indemnification Agreements is qualified in their entirety by the text of the
Severance Agreements and the Indemnification Agreements which are attached
hereto as Exhibits 10.4, 10.5, 10.6, 10.7, 10.8 and 10.9, respectively, and are
incorporated herein by reference.
COMPENSATION COMMITTEE'S REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee"),
which is composed of three non-employee Directors, has primary responsibility
for all compensation actions, affecting the Company's executive officers,
including base salaries, incentive awards, stock option awards and the terms and
conditions of their employment. The Committee administers the 1996 Stock Plan.
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COMPENSATION PHILOSOPHY
The Committee makes recommendations concerning appropriate executive
compensation and reports to the Board. Under the supervision, approval and
review of the Committee, the Company's compensation policies and programs are
designed to motivate, retain and attract management with incentives linked to
financial performance of the Company and the value that is delivered to its
shareholders. Specifically, the Company's policies and programs endeavor to: (i)
link executive compensation to sustainable increases in the financial
performance of the Company and preservation or realization of shareholder value;
(ii) differentiate compensation based upon individual contribution; (iv) promote
teamwork among executives and other Company employees; and (v) encourage the
retention of a sound management team. During each fiscal year, the Committee
reviews and recommends to the Board, with any modification it deems appropriate,
base salary levels for the Company's executive officers, including the Named
Executive Officers and certain other senior managers.
COMPONENTS OF EXECUTIVE OFFICER COMPENSATION
CASH COMPENSATION (BASE SALARY AND INCENTIVE BONUS). The Company
manages the total cash compensation to provide median levels of cash
compensation at average levels of corporate, business unit, and individual
performance. Cash compensation consists of two components; (i) a base salary
that is competitive with that of other companies paying at the median level of
the market, and (ii) an incentive opportunity that is variable and is reflective
of the financial performance of the Company and the individual performance of
the executive officer. When high levels of performance are achieved, the level
of cash compensation may exceed the median of the market. Conversely, when the
Company, business unit, or the individual falls short of the predetermined
goals, the level of cash compensation may be substantially below the market
median. The objective of this mix is to deliver total cash compensation
competitive with compensation offered at other companies facing similar
challenges for similar positions, while simultaneously linking the payment of
the cash incentive to the achievement of specific objectives in the Company's
annual operating plan as approved by the Board. The performance incentive, when
awarded, is paid quarterly, semiannually and annually with respect to the
preceding fiscal period. The award and size of the performance incentive are
based upon; (i) the executive officer's performance against individual goals;
(ii) the performance of the executive officer's unit within the Company against
that unit's goals; and (iii) the performance of the Company against Company
goals. Goals vary from year to year and from unit to unit and, with regard to
individual goals of executive officers, usually include both quantitative and
qualitative factors.
STOCK OPTION GRANTS. The Committee believes that stock option grants
serve as a desirable long-term method of compensation because they closely ally
the interests of management with the preservation and enhancement and
realization of stockholder value and serve as an additional incentive to promote
the success of the Company. Stock options are generally granted when an
executive joins the Company, with additional stock options granted from time to
time in connection with promotions and performance. The initial options granted
to an executive vest over four years. The Committee believes that stock option
participation provides a method of retention and motivation for the senior level
executives of the Company and aligns senior management's objectives with
long-term stock price appreciation. Executives, together with other employees of
the Company, are also eligible to participate in the Company's 1996 Employee
Stock Purchase Plan pursuant to which stock may be purchased at 85% of the
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average market price at the beginning or end of each six-month period (up to a
maximum stock value of $25,000 per calendar year or 10 percent of total
compensation, whichever is less). For purposes of the Employee Stock Purchase
Plan, the term "average market price" on any date means (i) the closing sale
price (on the applicable date) of the Common Stock on the Nasdaq National Market
or (ii) the average of the closing bid and asked prices last quoted (on the
applicable date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National Market.
In fiscal 1998, the Committee approved the grant of 67,162 stock options to the
Company's executive officers and 393,732 stock options to other employees.
TOTAL COMPENSATION PROGRAM. The Committee believes that the total
compensation program for executives of the Company (cash compensation,
incentives and stock option grants) is on a level with the compensation programs
provided by other companies facing similar challenges. The Committee believes
that any amounts paid under the incentive plan will be appropriately related to
corporate and individual performance, yielding awards that are directly linked
to the annual financial and operational results of the Company within the
framework of the challenges faced. The Committee also believes that the 1996
Stock Plan provides opportunities to participants that are consistent with the
returns that are generated on behalf of the Company's shareholders.
COMPENSATION OF CEO
Paul J. Zoukis has served as President and Chief Operating Officer
since February 1998. He was elected Chief Executive Officer in July, 1998. In
fixing Mr. Zoukis's salary and target incentive levels, as well as determining
the size of stock options, if any, the Committee and the Board reviewed
the strategic direction and financial performance of the Company, including
the material uncertainties surrounding the company as a result of the
proposed restatement and financial considerations. In addition, the
Committee reviewed Mr. Zoukis's performance as President and Chief Operating
Officer at PSI International, Inc. and his importance to the Company and his
leadership and strategic vision.
Messrs. Zoukis's and Charnock's compensation package in fiscal 1998
consisted of the same benefits program as other executive officers, as set forth
above, including base salary, cash incentive, stock options and other employee
benefit programs. Neither received any material compensation or benefits in
fiscal 1998 not provided to all executive officers.
INTERNAL REVENUE CODE SECTION 162 (m)
The Committee has considered the potential impact of Section 162(m)
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Section"). The Section disallows a tax deduction for any publicly-traded
corporation for individual compensation which is in excess of $1,000,000 in any
taxable year for any of the executive officers, unless such compensation is
performance-based. Since the cash compensation of each executive officer is
below the $1,000,000 threshold and the Committee believes that any of the
options granted under the 1996 Stock Plan will meet the requirements of being
performance-based, the Committee believes that the Section will not reduce the
tax deduction available to the Company. The Company's policy is to qualify, to
the extent reasonable, its executive officers' compensation for deductibility
under applicable tax laws. However, the Committee believes that its primary
responsibility is to provide a compensation program that will attract, retain
and reward the executive talent necessary to the Company's success.
Consequently, the Committee recognizes that the loss of a tax deduction could be
necessary in some circumstances.
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Other elements of executive compensation include participation in a
Company-wide life insurance program, including a long-term disability insurance
program. Executives are also eligible for Company-wide medical benefits and
participation in a 401(k) plan under which the Company currently provides a
percentage matching contribution.
Compensation Committee of the Board of Directors
Thomas A. Smith
Charles A. Johnson
Paul J. Palmer
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative
total stockholder return on the Company's Common Stock since December 12, 1996
(the date the Company first became subject to reporting requirements and the
Securities and Exchange Act of 1934, as amended) through March 12, 1998, with
the cumulative total return for the Nasdaq Stock Market Index and the Nasdaq
Combined Computer Composite Stock Index (the "Nasdaq Computer Index"). The
comparison assumes $100 was invested on December 12, 1996, the date of the
Company's initial public offering, in the Company's Common Stock at the $15.00
initial offering price and in each of the foregoing indices and assumes
reinvestment of dividends, if any. Nasdaq halted trading of the Company's Common
Stock on March 12, 1998. Trading resumed on May 5, 1998 contingent upon the
Company's attainment of net tangible assets of $10 million by June 30, 1998. On
July 20, 1998, the Nasdaq delisted the Company's Common Stock. On July 21, 1998,
the Company's Common Stock began trading on the OTC Bulletin Board. See
"Business -- Recent Developments." To date, the Company has paid no cash
dividends on its Common Stock. Historical stock price performance should not be
relied upon as indicative of future stock price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
VERSATILITY INC., NASDAQ STOCK MARKET INDEX
AND NASDAQ COMBINED COMPUTER INDEX (1) (2)
[Graph appears here -- see plot points below]
NASDAQ NASDAQ
U.S. COMBINED &
VERSATILITY COMPANIES COMPUTER
December 12, 1996 100 100 100
January 31, 1997 88.333 107.389 110.976
April 30, 1997 73.333 98.12 102.785
July 31, 1997 70.867 124.041 132.790
October 31, 1997 57.53 124.025 124.317
January 31, 1998 39.20 126.039 128.649
March 12, 1998(3) 16.667 136.669 139.827
- --------------
(1) Prior to December 12, 1996, the Company's Common Stock was not publicly
traded. Comparative data is provided only for the period since that date. This
chart is not "solicited material", is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference in any filings of
the Company under the Securities Act of 1933, as amended or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof
and irrespective of any general incorporation language in any such filing.
(2) The stock price performance shown on the graph is not necessarily indicative
of future price performance. Information used on this graph was obtained from
the Nasdaq Stock Market and the Nasdaq Stock Market and the Nasdaq Computer
indices were prepared for Nasdaq by the Center for Research in Security Prices
at the University of Chicago, a source believed to be
-13-
reliable, although the Company is not responsible for any errors or omissions in
such information.
(3) The Company's trading in Common Stock was halted on March 12,1998, and
trading resumed May 5, 1998.
Prior to January 1996, the Company had no separate Compensation
Committee or other board committee performing equivalent functions, and these
functions were performed by the Company's Board. In January 1996, the Company
established a Compensation Committee which consisted of Messrs., Smith and
Johnson. In September 1996, the Board established a new Compensation Committee
which consists of Messrs., Smith, Johnson and Palmer, each of whom are
non-employee directors. See "Certain Relationships and Related Transactions" for
information regarding certain relationships and transactions between the Company
and certain members of the Board.
COMPENSATION OF DIRECTORS
During fiscal 1998, one director who was not employed by the Company
received a annual retainer of $6,000, and a $750 stipend for each regular Board
meeting attended, and the reimbursement of certain expenses incurred with
attendance at Board meetings.
-14-
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information as to options exercised in fiscal 1998
by the Named Executive Officers, the value realized upon such exercise and the
value of options held by such officers and year-end based on the closing price
of the Company's Common Stock on May 5, 1998. (1)
Value of
Number of Unexercised Unexercised
Shares Options at In-the-Money Options at
Acquired on Value Year End April 30, 1998 ($)(2)
Name Exercise Realized Exercisable / Unexercisable Exercisable / Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
Paul J. Zoukis -- -- --/-- --/--
James Dellamore -- -- --/-- --/--
Kenneth T. Nelson -- -- --/-- --/--
Ronald R. Charnock* -- -- --/-- --/--
Marcus W. Heth* -- -- --/-- --/--
Donald C. Yount, Jr.* 4,040 $13,433 --/-- --/--
Stephen P. Winings* -- -- 15,819/27,459 --/--
- ----------------
*Individual was not an executive officer at the end of the last complete fiscal
year.
(1) Trading in the Company's Common Stock was halted on March 12, 1998 and
resumed trading on May 5, 1998.
(2) Value is based on the difference between the option exercise price and
$1.875, the fair market value at May 5, 1998, the date the Company's Common
Stock resumed trading on the Nasdaq National Market), multiplied by the
number of shares underlying the option.
-15-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth as of August 26, 1998: (i) the name of
each person who, to the knowledge of the Company, owned beneficially more than
5% of the Common Stock of the Company outstanding at such date; (ii) the name of
each director; (iii) the name of each executive officers identified in the
Summary Compensation Table set forth above under "Compensation and Other
Information Concerning Directors and Officers;" and (iv) the number of shares
owned by each of such persons and all officers, directors and nominees as a
group and the percentage of the outstanding shares represented thereby.
Amount and Nature of
Name and Address of Beneficial Owner Ownership (1) Percent of Class (2)
- ------------------------------------ ------------- --------------------
Edison Venture Fund III, L.P.(9)
997 Lenox Drive, #3 516,957 6.8%
Lawrenceville, NJ 08648
Noro-Moseley Partners III, L.P.(9)
4200 North Side Parkway, NW, Building 9 376,468 5.0%
Atlanta, GA 30327
Keith D. Roberts(9) 922,000 12.1%
Paul J. Zoukis (3) 94,000 1.2%
Kenneth T. Nelson (4) 56,000 *
James Dellamore(4) 56,000 *
Ronald R. Charnock(9) 1,359,000 17.9%
Thomas A. Smith (5)(9) 516,957 6.8%
Charles A. Johnson (6)(9) 376,468 5.0%
Paul J. Palmer (7) 14,000 *
Donald C. Yount -- *
Marcus W. Heth(9) 1,000,000 13.2%
Stephen P. Winnings(8) 15,819 *
Oracle Corporation(9)
500 Oracle Parkway
Redwood Shores, CA 94065 4,424,675 58.3%
All officers, directors and nominees as a group
(13 persons) (3)(4)(5)(6)(7)(8)(9)
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- ----------------
*Less than 1%
(1) Except as otherwise noted, each person or entity named in the table has
sole voting and investment power with respect to the shares. The
inclusion herein of any shares of Common Stock deemed beneficially
owned does not constitute an admission of beneficial ownership of those
shares.
(2) Applicable percentage of ownership as of August 26, 1998 is based upon
7,595,009 shares of Common Stock outstanding on such date. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission (the "Commission"), and includes voting and
investment power with respect to shares. Shares of Common Stock subject
to options currently exercisable or exercisable within 60 days of the
Record Date are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(3) Consists of 94,000 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days of August 26, 1998.
(4) Consists of 56,000 shares of Common Stock issuable pursuant to
outstanding stock options exercisable within 60 days of August 26,
1998.
(5) Consists of 516,957 shares of Common Stock held by Edison Venture Fund
III, L.P. of which Mr. Smith is a general partner. Mr. Smith may be
deemed to share voting and investment power with respect to these
shares. Mr. Smith disclaims beneficial ownership of such shares.
(6) Consists of 376,468 shares of Common Stock held by Noro-Moseley
Partners III, L.P. of which Mr. Johnson is a general partner. Mr.
Johnson may be deemed to share voting and investment power with respect
to these shares. Mr. Johnson disclaims beneficial ownership of such
shares.
(7) Consists of 14,000 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days of August 26, 1998.
(8) Consists of 15,819 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days of August 26, 1998.
(9) Edison Venture Fund III, L.P., Noro-Moseley Partners III, L.P. and
Messrs. Charnock, Heth, and Roberts each entered into Support
Agreements with the Company and Oracle Corporation whereby each gave
Oracle a proxy to vote the shares beneficially owned by them in favor
of a merger of the Company with a wholly-owned subsidiary of Oracle
pursuant to the Merger Agreement. See "Recent Developments."
-17-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
Prior to October 31, 1996, the Company was the 1% general partner of
Serenity Real Properties Limited Partnership (the "Partnership") of which Mr.
Ronald R. Charnock, the Company's former President and Chief Executive Officer,
Mr. Marcus W. Heth, the Company's Senior Vice President, Technologies, and Mr.
Keith D. Roberts, the Company's Director of Product Development, were the
limited partners holding the remaining 99% of the partnership interests (the
"Limited Partners"). The Partnership is the owner of an office building in
Alexandria, Virginia (the "Property"), which was the Company's headquarters
until October 1994 and which was leased by the Company under a lease expiring in
April 1997, and providing for monthly rental payments of $10,000. In addition,
the Company had guaranteed a mortgage loan made by a commercial bank to the
Partnership, which had an outstanding balance of $614,000 at September 30, 1996.
This loan was also guaranteed by each of the Limited Partners and was secured by
a mortgage on the Property.
On October 31, 1996, the Company sold its general partnership interest
in the Partnership, for consideration equal to its capital account of $3,131 to
Serenity L.L.C., whose members are the Limited Partners. In connection with the
sale of its general partnership interest in the Partnership, the Company made to
the Partnership a loan of $519,305 evidenced by a Deed of Trust Note which bears
interest at the prime rate and is payable upon the earliest of (i) the sale of
the Property, (ii) demand by the Company and each of its Limited Partners and
(iii) October 31, 1997. As of April 30, 1998, this loan has been paid in full.
In prior fiscal years, the Company had extended loans to Mr. Charnock,
the Company's former President and Chief Executive Officer, with principal and
accrued interest totaling $127,364 at April 30, 1998. Such loans are evidenced
by a promissory note, are payable on the earliest of (i) demand and (ii)
November 6, 1997, and bear interest at the prime rate. These loans have not been
repaid and as of July 31, 1998, the principal and accrued interest totals
$129,766.
The Company has adopted a policy whereby all future transactions
between the Company and its officers, directors and affiliates will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the disinterested members of the
Board.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
3. Exhibits
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Exhibit Number Description of Exhibit
-------------- ----------------------
2.1* Agreement and Plan of Merger
dated as of August 21, 1998,
by and among Versatility
Inc., Oracle Corporation and
AQX Acquisition Corporation
10.1* Form of Support Agreement
10.2* License Agreement dated as of
August 21, 1998, by and between
Versatility Inc. and Oracle
Corporation
10.3* Loan Modification and Extension of
Forbearance Agreement dated August
20, 1998 by and among Versatility
Inc., Oracle Corporation and Silicon
Valley Bank
10.4 Amended and Restated Severance
Agreement dated April 15, 1998 by and
between Versatility Inc. and Paul J.
Zoukis
10.5 Amended and Restated Severance
Agreement dated April 15, 1998 by and
between Versatility Inc. and James J.
Dellamore
10.6 Amended and Restated Severance
Agreement dated April 15, 1998 by and
between Versatility Inc. and Kenneth
T. Nelson
10.7 Indemnification Agreement dated
April 15, 1998 by and between
Versatility Inc. and Paul J. Zoukis
10.8 Indemnification Agreement dated
April 15, 1998 by and between
Versatility Inc. and James J.
Dellamore
10.9 Indemnification Agreement dated
April 15, 1998 by and between
Versatility Inc. and Kenneth T. Nelson
* Incorporated by reference from Form 8-K filed with the Commission on
August 25, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Amendment to the Annual Report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized, in the Town
of Framingham, Commonwealth of Massachusetts, on the 26th day of August, 1998.
VERSATILITY INC.
___________________________________
By:
Paul J. Zoukis
President and Chief
Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment to the Annual Report on Form 10-K report has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
____________________ Director, President and August 28, 1998
Paul J. Zoukis Chief Executive Officer
(Principal Executive
Officer)
____________________ Chief Financial Officer August 28, 1998
Kenneth T. Nelson (Principal Financial
and Accounting Officer)
____________________ Director August 28, 1998
Thomas A. Smith
____________________ Director August 28, 1998
Charles A. Johnson
____________________ Director August 28, 1998
Paul J. Palmer