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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 31, 2000
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EXCHANGE APPLICATIONS, INC.
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(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-24679 04-3338916
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
89 South Street, Boston, Massachusetts 02111
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(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code (617) 737-2244
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<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
------------------------------------
This Form 8-K/A amends the current report filed on Form 8-K
filed on April 17, 2000 to incorporate Item 7.
On March 31, 2000, Exchange Applications, Inc., a Delaware
corporation ("Exchange") and a leading provider of customer
optimization software products and services, acquired via a triangular
merger all of the issued and outstanding shares of capital stock of
Knowledge Stream Partners, Inc. ("KSP"), a software development company
incorporated under Delaware law, from all of the shareholders thereof.
The aggregate consideration paid by Exchange to the KSP
shareholders consisted of approximately $52 million of Exchange common
stock, par value $.001 per share. The March 31, 2000 closing price of
Exchange common stock used in calculating the consideration was $52.92.
The terms of the agreement were determined in arm's-length negotiations
between Exchange and KSP.
All other information required by Item 2 is set forth in the
merger agreement and press release filed, respectively, as Exhibit 2
and Exhibit 99.1 hereto, and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA CONSOLIDATED FINANCIAL
------------------------------------------------------
INFORMATION AND EXHIBITS.
-------------------------
Item 7 is hereby amended to state as follows:
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
1. Audited supplemental consolidated financial statements of Exchange
and Subsidiaries are set forth in Exchange's annual report on Form 10-K
for the year ended December 31, 1999 as filed with the Securities and
Exchange Commission on March 30, 2000 and are incorporated herein by
reference.
2. Audited supplemental consolidated financial statements of KSP which
include the following:
a. Independent Auditors' Report; F-1
b. Balance Sheets as of the end of December 31, 1999; F-2
c. Statement of Operations for the year ended
December 31, 1999 F-3
d. Statements of Stockholders' Equity for the year ended
December 31, 1999; F-4
e. Statements of Cash Flows for the years ended
December 31, 1999; F-5
f. Notes to Financial Statements for the year ended
December 31, 1999; F-6
<PAGE>
KNOWLEDGE STREAM PARTNERS, INC.
Financial Statements
as of December 31, 1999
Together with Auditors' Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Knowledge Stream Partners, Inc.:
We have audited the accompanying balance sheet of Knowledge Stream Partners,
Inc. (a Delaware corporation), formerly Geneve Consulting Group, Inc., as of
December 31, 1999 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
On March 31, 2000 all of the outstanding stock of Knowledge Stream Partners,
Inc. was acquired by Xchange, Inc. formerly Exchange Applications, Inc., as
discussed in Note 1.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Knowledge Stream Partners, Inc.
as of December 31, 1999 and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
Boston, Massachusetts
April 19, 2000
F-1
<PAGE>
KNOWLEDGE STREAM PARTNERS, INC.
Balance Sheet--December 31, 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 8,209
Accounts receivable, net of reserve of $107,000 731,904
Due from officer (Note 6(b)) 216,649
Prepaid expenses and other current assets 173,740
-----------
Total current assets 1,130,502
Property and Equipment, at cost:
Computer equipment 347,516
Furniture and fixtures 158,052
Leasehold improvements 246,451
-----------
752,019
Less--Accumulated depreciation and amortization 317,651
-----------
434,368
-----------
$ 1,564,870
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Line of credit (Note 4) $ 321,099
IBS loan payable (Note 6(a)) 287,517
Accounts payable 1,068,695
Accrued expenses 241,691
Accrued settlement costs (Note 9) 200,000
Deferred revenue 1,191,137
-----------
Total current liabilities 3,310,139
Commitments (Note 3)
Stockholders' Deficit:
Common stock, $0.01 par value-
Authorized--5,000,000 shares
Issued and outstanding--1,000,000 shares 10,000
Additional paid-in capital 359,109
Accumulated deficit (2,114,378)
-----------
Total stockholders' deficit (1,745,269)
-----------
$ 1,564,870
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-2
<PAGE>
KNOWLEDGE STREAM PARTNERS, INC.
Statement of Operations
for the Year Ended December 31, 1999
Revenues $ 4,162,311
Cost of Revenues (2,636,554)
-----------
Gross profit 1,525,757
Operating Expenses:
Research and development 524,234
Selling and marketing 1,026,275
General and administrative 2,041,257
-----------
Total operating expenses 3,591,766
-----------
Loss from operations (2,066,009)
Interest Expense, net (21,059)
Other Expenses (26,592)
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Net loss $(2,113,660)
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Net Loss per Share:
Basic and diluted net loss per share $ (2.11)
===========
Basic and diluted weighted average common shares outstanding 1,000,000
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
KNOWLEDGE STREAM PARTNERS, INC.
Statement of Stockholders' Equity (Deficit)
for the Year Ended December 31, 1999
<TABLE><CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
SHARES PAR VALUE CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 (unaudited) 1,000,000 $ 10,000 $ 359,109 $ (718) $ 368,391
Net loss -- -- -- (2,113,660) (2,113,660)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 1,000,000 $ 10,000 $ 359,109 $(2,114,378) $(1,745,269)
=========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
KNOWLEDGE STREAM PARTNERS, INC.
Statement of Cash Flows
for the Year Ended December 31, 1999
Cash Flows from Operating Activities:
Net loss $(2,113,660)
Adjustments to reconcile net loss to net cash used
in operating activities-
Loss on disposal of fixed assets 304
Depreciation and amortization 161,645
Changes in assets and liabilities-
Accounts receivable (540,373)
Due from officer (216,649)
Prepaid expenses and other current assets (94,479)
Accounts payable 947,381
Accrued expenses and settlement costs 429,726
Deferred revenue 1,191,137
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Net cash used in operating activities (234,968)
-----------
Cash Flows from Investing Activities:
Purchase of property and equipment (316,466)
Proceeds from the sale of property and equipment 1,000
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Net cash used in investing activities (315,466)
-----------
Cash Flows from Financing Activities:
Borrowings under line of credit 321,099
Increase in IBS loan payable 184,186
-----------
Net cash provided by financing activities 505,285
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Net Decrease in Cash and Cash Equivalents (45,149)
Cash and Cash Equivalents, beginning of year 53,358
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Cash and Cash Equivalents, end of year $ 8,209
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Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 21,059
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Cash paid for income taxes $ 22,250
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
(1) OPERATIONS
Knowledge Stream Partners, Inc. (the Company), formerly Geneve Consulting
Group, Inc., specializes in consulting and software development for
advanced data mining and online/offline analytics.
On March 31, 2000, all of the outstanding stock of the Company was
acquired by Xchange, Inc., formerly Exchange Applications, Inc. Under the
terms of the agreement, Xchange will issue shares of its common stock and
stock options to existing holders of the Company's common stock and
options. The value of the Xchange common stock to be issued in the
transaction, including shares issuable under assumed options, is
approximately $52 million, $17 million of which will be held in escrow to
cover certain indemnification obligations and purchase-price adjustments.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
significant accounting policies as described in this note and elsewhere
in the accompanying financial statements and notes.
(a) NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 128, EARNINGS PER SHARE, basic and diluted net loss per
common share is calculated by dividing the net loss applicable to
common stockholders by the weighted average of common shares
outstanding. Diluted net loss per share excludes the dilutive
effect of potential common shares, consisting of outstanding stock
options to purchase 136,454 shares of common stock, as their
inclusion would be antidilutive.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of 90 days or less to be cash equivalents.
(c) REVENUE RECOGNITION
The Company generates revenue from services provided to customers
in relation to build and deliver projects for customized software.
Revenues from services are recognized on either a
time-and-materials basis or, on fixed price contracts,
percentage-of-completion basis as the services are performed,
provided that amounts due are fixed or determinable and deemed
collectible by management. If conditions for acceptance are
required subsequent to delivery of services, revenues are
recognized upon customer acceptance. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are
reflected as deferred revenue.
The Company has not capitalized costs incurred relating to its
fixed-price contracts prior to recognition of revenue as
realizability of such assets is uncertain due to significant
customer acceptance conditions.
F-6
<PAGE>
(d) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization by charges
to operations on a straight-line basis in amounts estimated to
allocate the cost of the assets over their estimated useful lives,
as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Computer equipment 3 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of lease term
and useful life
Depreciation and amortization expense in 1999 was approximately
$162,000.
(e) LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, ACCOUNTING FOR
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, the Company evaluates the realizability of its
long-lived assets at each reporting period based on projected
future cash flows. As of December 31, 1999 the Company has
determined that no material adjustment to the carrying value of
its long-lived assets was required.
(f) 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 and 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.
(g) SOFTWARE DEVELOPMENT COSTS
All of the Company's research and development expenses have been
charged to operations as incurred. In accordance with SFAS No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED
OR OTHERWISE MARKETED, the Company will capitalize software
development costs incurred after the technological feasibility of
software development projects has been established. For the year
ended December 31, 1999, no software development costs met the
criteria for capitalization.
(h) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS
WITH CONCENTRATIONS OF CREDIT RISK, requires disclosure of any
significant off-balance-sheet risks and credit risk
concentrations. The Company has no significant off-balance-sheet
risks or credit risk such as foreign exchange contracts or other
foreign hedging arrangements.
F-7
<PAGE>
In 1999, 90% of total revenues were derived from three customers.
As of December 31, 1999, these three customers accounted for 93%
of the accounts receivable balance.
(i) ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which requires the measurement of the
fair value of stock options to be included in the statement of
income or disclosed in the notes to the financial statements. The
Company accounts for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and discloses the pro
forma effect of adopting SFAS No. 123 in the notes to the
financial statements.
(j) FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosure about the fair value of financial
instruments. Financial instruments consist of cash equivalents,
accounts receivable, accounts payable, bank overdraft, IBS loan
payable, and line of credit. The estimated fair value of these
financial instruments approximates their carrying value.
(k) NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standard, or SFAS, No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
This statement establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning
after June 15, 2000. SFAS No. 133 is not expected to have a
material impact on the Company's financial statements.
The Securities and Exchange Commission released Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, on December 3, 1999. This SAB provides additional
guidance on the accounting for revenue recognition, including both
broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective for the second quarter 2000.
The Company does not expect the adoption of SAB 101 to have a
material impact on the Company's results of operations.
In March 2000, the FASB issued Interpretation No. 44 ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AND
INTERPRETATION OF APB OPINION NO. 25. This interpretation
clarifies the application of Opinion No. 25, among others issued,
(a) the definition of employees for purposes of applying Opinion
No. 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Interpretation
is effective July 1, 2000 and the effects of applying the
Interpretation are recognized on a prospective basis. The Company
does not expect that the adoption of the Interpretation will have
a material impact on its financial condition or results of
operations.
(3) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the liability method specified by SFAS
No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by enacted tax rates.
F-8
<PAGE>
As of December 31, 1999, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $530,000.
These carryforwards expire through 2019 and are subject to review and
possible adjustment by the Internal Revenue Service. The Tax Reform Act
of 1986 contains provisions that may limit the amount of net operating
loss and credit carryforwards that the Company may utilize in any one
year in the event of certain cumulative changes in ownership over a
three-year period in excess of 50%, as defined.
The Company's deferred tax asset as of December 31, 1999 consists of the
following:
AMOUNT
Net operating loss carryforward $ 212,000
Deferred revenue 476,000
Nondeductible reserves and accruals 151,000
---------------
839,000
Valuation allowance (839,000)
$ -
===============
Due to the uncertainty surrounding the realization of the deferred tax
assets, the Company has provided a full valuation against these amounts
at December 31, 1999.
(4) COMMITMENTS
(a) LEASES
The Company conducts its operations in leased facilities and
leases equipment accounted for as operating leases. Future minimum
annual lease payments under these operating leases as of December
31, 1999 are as follows:
OPERATING
LEASES
For the year ending December 31,
2000 $ 334,000
2001 324,000
2002 308,000
2003 281,000
2004 94,000
---------------
$ 1,341,000
===============
Rent expense charged to operations in 1999 was approximately
$309,000.
(b) LITIGATION
The Company is currently involved in litigation with a former
employee. Although the outcome of this matter cannot be determined
at this time, the former employee has been offered a settlement.
The accrual of $200,000 represents management's estimate of the
legal and settlement costs to resolve this obligation.
F-9
<PAGE>
(5) CREDIT FACILITY
On August 27, 1999, the Company entered into a $400,000 credit facility
agreement with a bank that expires on August 31, 2000. The outstanding
borrowings bear interest at the bank's prime rate (8.5% at December 31,
1999) plus 0.25% and is repayable in full upon expiration. As of December
31, 1999, outstanding borrowings under this facility were $321,099. The
credit facility is secured by substantially all assets of the Company.
(6) STOCKHOLDERS' EQUITY
(a) COMMON STOCK
On July 31, 1999, the Company's sole stockholder resolved to
increase the number of authorized shares of common stock, $0.01
par value, from 1,000 shares to 5,000,000 shares.
On February 4, 2000, the Company effected a 1,000-for-one stock
split of its common stock. All share and per-share amounts
presented have been retroactively adjusted to reflect the stock
split.
(b) STOCK OPTION PLAN
On January 1, 1999, the Company adopted the Knowledge Stream
Partners, Inc. 1999 Stock Option Plan (the Plan) under which the
Company has reserved 200,000 shares of common stock. Options
granted under the Plan may be either incentive stock options
(ISOs) or nonstatutory stock options, at the discretion of the
Board of Directors.
ISO's may be granted to employees at an exercise price of at least
100% of fair market value, unless that employee owns more than 10%
of the voting power of all outstanding stock, in which case the
exercise price will be not less than 110% of fair market value.
Nonstatutory options may be granted to employees or nonemployees
at an exercise price of not less than 85% of fair market value.
Subject to the above conditions, the exercise price shall be
determined by the Board of Directors.
Each stock option agreement shall specify the date when the
options become exercisable. In general, options become exercisable
annually over three years.
During 1999, the Company granted options to purchase a total of
136,454 shares of stock at an exercise price of $1.06 per share.
None of the options were outstanding and none were exercisable as
of December 31, 1999.
F-10
<PAGE>
The Company has computed the pro forma disclosures required under
SFAS No. 123 for options granted during 1999 using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted average assumptions used were as follows:
Risk-free interest rate 5.54%
Expected dividend yield -
Expected lives 3 years
Expected volatility 70%
Weighted average grant date fair value $0.53
Weighted average remaining contractual
life of options outstanding 9.3 years
Had compensation expense for the Company's stock options been
determined consistent with SFAS No. 123, net loss would have
increased from $2,113,660 to $2,130,922 and net loss per share
would have increased from $2.11 to $2.13 per share.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective assumptions,
including expected stock price volatility. Because the Company's
employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
(7) RELATED PARTY TRANSACTIONS
(a) INTERNATIONAL BANKERS SCHOOL (IBS)
IBS is an entity owned and controlled by the Company's sole
stockholder. During 1999, funds were transferred between the two
entities with no effect on the statement of operations. At
December 31, 1999, an amount of $287,517 was due to IBS.
(b) DUE FROM OFFICER
The Company paid certain expenses on behalf of its stockholder,
which will be reimbursed. At December 31, 1999, a balance of
$216,649 was owed to the Company.
(8) EMPLOYEE BENEFIT PLAN
In January 1997, the Company adopted the Geneve Consulting Group, Inc.
Employees 401(k) Plan (the 401(k) Plan). The 401(k) Plan covers all
employees of the Company who have met certain requirements, as defined.
Under the terms of the 401(k) Plan, the employees may elect to make
tax-deferred contributions, as defined. In addition, the Company may
match employee contributions, as determined by the Board of Directors,
and may make a discretionary contribution to the 401(k) Plan. No matching
contributions or discretionary contributions were made in 1999.
(9) SEGMENT AND ENTERPRISE-WIDE REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual
basis of each reportable segment of an enterprise. SFAS No. 131 also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. Operating segments are
defined as components of an enterprise about which separate discreet
financial information
F-11
<PAGE>
is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and assess performance. The Company operates as
one reportable segment that operates entirely in the U.S. All revenues
were generated in the U.S.
F-12
<PAGE>
(b) PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma consolidated financial statements have been
prepared to give the effect to the acquisition of Knowledge Stream Partners,
Inc. (KSP) by Exchange Applications, Inc. (Exchange)
On March 31, 2000, Exchange acquired all of the outstanding stock of KSP. Under
the terms of the agreement Exchange will issue shares of its common stock and
stock options to existing holders of KSP common stock and options. The value of
the Exchange common stock to be issued in the transaction, including shares
issuable under assumed options, is approximately $52 million, $17 million of
which will be held in escrow to cover certain indemnification obligations and
purchase-price adjustments.
The unaudited pro forma consolidated balance sheet combines the audited balance
sheets of Exchange and KSP as of December 31, 1999 as if the acquisition had
occurred on December 31, 1999.
The unaudited pro forma consolidated statement of operations combines the
historical statements of operations of Exchange and KSP for the year ended
December 31, 1999 as if the acquisition had occurred at the beginning of that
period.
Such unaudited pro forma consolidated financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
acquisition occurred at the beginning of the period presented, nor is it
necessarily indicative of future financial position or results of operations.
These unaudited pro forma consolidated financial statements are based upon the
respective historical financial statements of Exchange and KSP and should be
read in conjunction with the respective historical financial statements and
notes thereto of Exchange, which have been incorporated by reference in this
document, and KSP, which have been included elsewhere in this document. The
unaudited pro forma consolidated financial statements do not incorporate, nor do
they assume, any benefits from cost savings or synergies of operations of the
enlarged group.
<PAGE>
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
PRO FORMA
EXCHANGE KSP ADJUSTMENTS TOTAL
-------- --- ----------- -----
Revenues:
<S> <C> <C> <C>
Software license fees................................. $ 26,344 $ -- $ 26,344
Services and maintenance.............................. 16,957 4,162 21,119
---------- ---------- ----------
Total revenues................................... 43,301 4,162 47,463
Cost of revenues:
Software license fees................................. 438 -- 438
Services and maintenance.............................. 10,255 2,637 12,892
---------- ---------- ----------
Total cost of revenues........................... 10,693 2,637 13,330
---------- ---------- ----------
Gross profit............................................... 32,608 1,525 34,133
Operating expenses:
Sales and marketing................................... 14,555 524 15,079
Research and development.............................. 9,829 1,026 10,855
General and administrative............................ 4,948 2,041 6,989
Cost of acquisition .................................. 1,388 -- 1,388
Amortization of goodwill ............................. -- -- 8,437 8,437
---------- ---------- ----------
Total operating expenses......................... 30,720 3,591 42,748
---------- ---------- ----------
Income (loss) from operations.............................. 1,888 (2,066) (8,615)
Other income (expense):
Interest income....................................... 1,440 -- 1,440
Other expenses........................................ -- (27) (27)
Interest expense...................................... (10) (21) (31)
---------- ---------- ----------
Total other income (expense)..................... 1,430 (48) 1,382
---------- ---------- ----------
Income (loss) before provision for income taxes............ 3,318 (2,114) (7,233)
Provision for income taxes................................. (2,220) -- 1,414 (806)
---------- ---------- ----------
Net income (loss) applicable to common stockholders........ $ 1,098 $ (2,114) $ (8,039)
========== ========== ==========
Net income (loss) per share:
Net income (loss) per share applicable to common $ (0.35)
stockholders......................................... ============
Weighted average common shares outstanding............. 22,937,466
==========
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE><CAPTION>
PRO FORMA PRO FORMA
EXCHANGE KSP ADJUSTMENTS CONSOLIDATED
-------- --- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,678 -- $ 14,678
Marketable securities 14,429 -- 14,429
Accounts receivable, less allowance for doubtful accounts 11,329 183 11,512
Prepaid expenses and other current assets 2,933 175 (600) 2,508
--------- ------- ------- --------
Total current assets 43,369 358 43,127
Property and equipment, net 4,570 252 4,822
Long term marketable securities 5,030 -- 5,030
Non current assets from MicroStrategy Incorporated transaction 62,030 -- 62,030
Other assets 66 -- 66
Goodwill -- -- 42,185 42,185
--------- ------- ------- --------
Total assets $ 115,065 $ 610 $41,585 $157,260
========= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 701 $ 583 $ 1,284
Accrued expenses 5,167 2,203 160 7,530
Current portion of MicroStrategy Incorporated obligation 15,377 -- 15,377
Deferred revenue 6,455 1,191 (1,191) 6,455
--------- ------- ------- --------
Total current liabilities 27,700 3,977 30,646
MicroStrategy Incorporated obligation, net of current portion 16,653 -- 16,653
Stockholders' equity (deficit):
Preferred stock; $.001 par value -- -- --
Common stock, $.001 par value 24 -- 1 25
Additional paid-in capital 56,869 369 38,879 96,117
Accumulated deficit (5,513) (3,525) 3,525 (5,513)
Owner distribution -- (211) 211
Due from officer (125) -- (125)
Deferred compensation (517) -- (517)
Cumulative translation adjustment 39 -- 39
Unrealized loss on marketable securities (65) -- (65)
Stock subscription 20,000 -- 20,000
Treasury stock, at cost -- -- --
--------- ------- --------
Total stockholders' equity 70,712 (3,367) 109,961
--------- ------- ------- --------
Total liabilities and stockholders' equity $ 115,065 $ 610 $41,585 $157,260
========= ======= ======= ========
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) These unaudited pro forma consolidated financial statements reflect the
issuance of 821,776 shares of Exchange common stock in exchange for all
of the outstanding shares of common stock of KSP (outstanding as of
March 31, 2000) in connection with the merger. This acquisition has
been accounted for as a purchase. The allocation of the purchase price
is based on an estimate of the fair market value of the net assets
acquired and is subject to adjustment, pending final determination of
certain acquired balances. The preliminary allocation has resulted in
acquired goodwill of approximately $42,185,000, which is being
amortized on a straight-line basis over five years.
(2) The unaudited pro forma consolidated financial statements do not
include adjustments to conform the accounting policies of KSP to those
followed by Exchange. The nature and extent of such adjustments, if
any, will be based upon further analysis and are not expected to be
material.
(3) The unaudited pro forma consolidated balance sheet reflects the
elimination of all intercompany balances between Exchange and KSP.
(4) The unaudited pro forma consolidated balance sheet includes an
adjustment to remove deferred revenue totaling $1,191,000 from the net
assets of KSP as such amounts will not be recognizable by Exchange
after the acquisition.
(5) The unaudited pro forma consolidated statement of operations includes
an adjustment to record amortization expense of the acquired goodwill
and assumes an effective tax rate of 67%, consistent with the effective
tax rate of Exchange for the year ended December 31, 1999.
(6) The pro forma consolidated net loss per share is based on the combined
weighted average number of common shares of Exchange common stock and
KSP common stock for the period. This is based on the exchange ratio of
0.82177608 shares of Exchange common stock for each share of KSP common
stock as described in the merger agreement. Common equivalent shares
have been excluded, as their effect would be antidilutive.
<PAGE>
(c) EXHIBITS.
Exhibit 2* Agreement and Plan of Merger and
Reorganization, dated as of March 20, 2000,
by and among Exchange, KSP Acquisition Corp.,
a Delaware corporation and a wholly owned
subsidiary of Exchange, KSP and certain
shareholders of KSP; includes Exhibit G, the
form of Escrow Agreement (does not include
other Exhibits or Schedules; Exchange will
furnish a copy of any such omitted exhibit or
schedule to the Commission upon request).
Exhibit 23.1 Consent of Arthur Andersen LLP regarding
Exchange
Exhibit 23.2 Consent of Arthur Andersen LLP regarding KSP
Exhibit 99.1* Press Release of Exchange, dated April 3,
2000, announcing the acquisition of KSP.
* Previously filed
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
--------------------------------
Andrew J. Frawley
Chairman of the Board, President and CEO
Dated: May 12, 2000
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2* Agreement and Plan of Merger and Reorganization,
dated as of March 20, 2000, by and among Exchange,
KSP Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Exchange, KSP and certain
shareholders of KSP; includes Exhibit G, the form of
Escrow Agreement (does not include other Exhibits or
Schedules; Exchange will furnish a copy of any such
omitted exhibit or schedule to the Commission upon
request).
23.1 Consent of Arthur Andersen LLP regarding Exchange
23.2 Consent of Arthur Andersen LLP regarding KSP
99.1* Press Release of Exchange, dated April 3, 2000,
announcing the acquisition of KSP
*Previously filed.
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 28, 2000
(except with respect to the matters discussed in Note 12(a), as to which the
date is February 29, 2000), included in Exchange Applications, Inc.'s Form 10-K
for the year ended December 31, 1999 and to all references to our Firm included
in this registration statement.
Arthur Andersen LLP
Boston, Massachusetts
May 12, 2000
EXHIBIT 23.2
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
registration statement.
Arthur Andersen LLP
Boston, Massachusetts
May 12, 2000
