================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
-------------
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) June 30, 2000.
EXCHANGE APPLICATIONS, INC.
---------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-24679 04-3338916
-------- ------- ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
89 South Street, Boston, Massachusetts 02111
--------------------------------------------
(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code (617) 737-2244
--------------
================================================================================
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
------------------------------------
This Form 8-K/A amends the current report filed on Form 8-K filed on July
14, 2000 to incorporate Item 7.
On June 8, 2000, Exchange Applications, Inc., a Delaware corporation
("Exchange") and a leading provider of customer optimization software products
and services, entered into a definitive merger agreement to acquire via a
triangular merger all of the issued and outstanding shares of capital stock of
Customer Analytics Holdings, Inc. ("CAH"), a software development company
incorporated under Delaware law, from all of the shareholders thereof. The
transaction was consumated on June 30, 2000.
The aggregate consideration paid by Exchange to the CAH shareholders
consisted of approximately $114 million of Exchange common stock and stock
options, par value $.001 per share. The price of Exchange common stock used in
calculating the consideration was $22.20. The terms of the agreement were
determined in arm's-length negotiations between Exchange and CAH.
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 FINANCIAL INFORMATION AND EXHIBITS
------------------------------------------------------------------
Item 7 is hereby amended to state as follows:
<PAGE>
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
-----------------------------------------
Customer Analytics Holdings, Inc. and Subsidiaries
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.................F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998................................................................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999 and 1998...................................................F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1999 and 1998................................................................F-6
Notes to Consolidated Financial Statements...................................F-7
Customer Analytics, Inc.
Report of Independent Public Accountants....................................F-21
Statement of Operations and Accumulated Deficit for the Ten Months
Ended October 31, 1999......................................................F-22
Statement of Cash Flows for the Ten Months Ended October 31, 1999...........F-23
Notes to Financial Statements...............................................F-24
Customer Analytics, Inc.
Report of Independent Public Accountants....................................F-27
Balance Sheet as of December 31, 1998.......................................F-28
Statements of Operations for the Period from Inception (April 16, 1998)
to December 31, 1998........................................................F-29
Statements of Redeemable Preferred Stock and Stockholders' Deficit
for the Period from inception (April 16, 1998) to December 31, 1998.........F-30
Statements of Cash Flows for the Period from Inception (April 16, 1998)
to December 31, 1998........................................................F-31
Notes to Financial Statements...............................................F-32
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
Customer Analytics Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Customer
Analytics Holdings, Inc. and subsidiaries (collectively, the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Customer Analytics Holdings, Inc.
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte and Touche, LLP
Dallas, Texas
May 18, 2000 (June 8, 2000,
as to Note 10)
F-2
<PAGE>
CUSTOMER ANALYTICS HOLDINGS, INC. AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1999 1998
CURRENT ASSETS:
Cash $ 2,647,053 $ 4,454,062
Accounts receivable - net (Note 3) 5,523,119 4,418,902
Inventories 85,388 59,809
Prepaid expenses and other 663,154 467,536
Income taxes receivable 1,462,578 312,539
Product development costs - net (Note 1) 208,162 560,963
Deferred income taxes (Note 7) -- 321,000
------------ ------------
Total current assets 10,589,454 10,594,811
ACCOUNTS RECEIVABLE - Long-term (Note 3) 265,000 --
PROPERTY AND EQUIPMENT - Net (Note 4) 1,176,129 779,868
GOODWILL - Net (Notes 1 and 2) 22,443,320 --
------------ ------------
TOTAL $ 34,473,903 $ 11,374,679
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 5,861,083 $ --
Accounts payable 2,182,093 1,057,450
Accrued compensation and other expenses 1,289,886 1,911,903
Deferred contract revenues 1,645,491 497,580
------------ ------------
Total current liabilities 10,978,553 3,466,933
DEFERRED INCOME TAXES (Note 7) 88,000 156,000
DEFERRED RENT LIABILITY 47,393 73,243
CAPITAL LEASE OBLIGATIONS - Less current portion (Note 5) 305,619 --
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Note 8):
Convertible, voting preferred stock, no par value; 20,000,000 shares authorized,
5,598,144 and 3,260,792 shares issued and outstanding, respectively 21,497,228 7,473,116
Common stock, $.0001 par value; 100,000,000 shares authorized,
10,788,720 and 9,842,376 shares issued and outstanding, respectively
(including 865,454 and 1,400,720 restricted shares, respectively) 1,078 984
Warrants for convertible preferred stock 871,887 --
Additional paid-in capital 8,593,515 75,270
Retained earnings (deficit) (7,728,301) 569,594
Unearned compensation - restricted common stock grants (181,069) (358,461)
Note receivable - shareholder -- (82,000)
------------ ------------
Total shareholders' equity 23,054,338 7,678,503
------------ ------------
TOTAL $ 34,473,903 $ 11,374,679
============ ============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
CUSTOMER ANALYTICS HOLDINGS, INC. AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
REVENUES (Note 3):
License fees $ 11,212,738 $ 16,428,484
Consulting and implementation services 4,634,053 4,789,838
Product sales 185,733 919,771
Other 837,990 247,183
------------ ------------
Total 16,870,514 22,385,276
COSTS AND EXPENSES (Notes 1, 6 and 9):
Costs of revenues 5,253,466 4,023,590
Selling, marketing and customer support 10,857,603 5,956,180
General and administrative 4,388,767 6,093,547
Product development 3,772,791 1,864,248
Depreciation and other amortization 430,181 340,345
Goodwill amortization 742,165
------------ ------------
Total 25,444,973 18,277,910
------------ ------------
OPERATING INCOME (LOSS) (8,574,459) 4,107,366
OTHER INCOME (EXPENSE):
Interest income 100,836 209,099
Interest expense (172,164)
Amortization of subordinated debt discount (209,741)
Other 24,023 331
------------ ------------
Total (257,046) 209,430
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX (8,831,505) 4,316,796
INCOME TAX EXPENSE (BENEFIT) (Note 7) (533,610) 1,637,736
------------ ------------
NET INCOME (LOSS) $ (8,297,895) $ 2,679,060
============ ============
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
CUSTOMER ANALYTICS HOLDINGS, INC. AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------------------------------------------------------
Convertible, Voting Warrants for
Preferred Stock Common Stock Convertible
--------------------------- ---------------------------- Preferred
Shares Amount Shares Amount Stock
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 3,260,792 $ 7,473,116 9,782,376 $ 978 $ --
Restricted common stock issuance (Note 8) -- -- 100,000 10 --
Retirement of restricted common stock (Note 8) -- -- (40,000) (4) --
Amortization of unearned compensation -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 3,260,792 7,473,116 9,842,376 984 --
Retirement of restricted common stock (Note 8) -- -- (68,360) (7) --
Collection of shareholder note -- -- -- -- --
Preferred and common stock issuance for
acquisition (Note 2) 2,337,352 14,024,112 1,013,704 101 --
Common stock options issued
for acquisition (Note 2) -- -- -- -- --
Issuance of warrants with subordinated debt -- -- -- -- 871,887
Issuance of common stock upon exercise
of stock options -- -- 1,000 -- --
Amortization of unearned compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 5,598,144 $ 21,497,228 10,788,720 $ 1,078 $ 871,887
============ ============ ============ ============ ============
</TABLE>
<PAGE>
CUSTOMER ANALYTICS HOLDINGS, INC. AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998(continued)
-------------------------------------------------------------------------------------------------------------------------------
Note
Additional Retained Receivable
Paid-In Earnings Unearned From
Capital (Deficit) Compensation Shareholder Total
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 $ -- $ (2,109,466) $ (540,469) $ -- $ 4,824,159
Restricted common stock issuance (Note 8) 81,990 -- -- (82,000) --
Retirement of restricted common stock (Note 8) (6,720) -- 6,724 --
Amortization of unearned compensation -- -- 175,284 -- 175,284
Net income -- 2,679,060 -- -- 2,679,060
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 75,270 569,594 (358,461) (82,000) 7,678,503
Retirement of restricted common stock (Note 8) (9,167) -- 9,174 -- --
Collection of shareholder note -- -- -- 82,000 82,000
Preferred and common stock issuance for
acquisition (Note 2) 6,082,123 -- -- -- 20,106,336
Common stock options issued
for acquisition (Note 2) 2,444,469 -- -- -- 2,444,469
Issuance of warrants with subordinated debt -- -- -- -- 871,887
Issuance of common stock upon exercise
of stock options 820 -- -- -- 820
Amortization of unearned compensation -- -- 168,218 -- 168,218
Net loss -- (8,297,895) -- -- (8,297,895)
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 $ 8,593,515 $ (7,728,301) $ (181,069) $ -- $ 23,054,338
============ ============ ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
CUSTOMER ANALYTICS HOLDINGS, INC. AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------------------------------------------------
1999 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (8,297,895) $ 2,679,060
Noncash items in net income (loss):
Depreciation 428,114 134,157
Amortization - product development costs 679,900 373,275
Amortization - goodwill and debt discount 951,906 --
Compensation expense for restricted common stock grants 168,218 175,284
Gain on sale of assets -- (31,221)
Deferred income taxes 253,000 (168,000)
Changes in operating working capital - net of acquisition:
Accounts receivable (470,477) (1,231,349)
Inventories (25,579) 29,463
Prepaid expenses and other (81,433) (88,915)
Income taxes receivable/payable (1,150,039) (69,652)
Product development costs (327,099) (747,129)
Accounts payable and accrued expenses (346,591) 1,109,442
Deferred rent liability (25,850) 73,243
Deferred contract revenues 145,596 (1,093,439)
------------ ------------
Net cash from (used for) operating activities (8,098,229) 1,144,219
------------ ------------
INVESTING ACTIVITIES:
Cash of business acquired 319,069 --
Additions to property and equipment (482,768) (564,545)
Proceeds from sale of property and equipment -- 305,398
------------ ------------
Net cash used for investing activities (163,699) (259,147)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from revolving line of credit 1,500,000 --
Proceeds from term note payable 1,887,000 --
Proceeds from subordinated debt 3,000,000 --
Payments on capital lease obligation (14,901) (7,218)
Issuance of common stock upon exercise of stock options 820 --
Proceeds from shareholder note 82,000 --
------------ ------------
Net cash used for financing activities 6,454,919 (7,218)
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,807,009) 877,854
CASH:
Beginning of year 4,454,062 3,576,208
------------ ------------
End of year $ 2,647,053 $ 4,454,062
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 97,791 $ --
============ ============
Income taxes paid $ 175,000 $ 1,350,000
============ ============
Noncash investing and financing activities:
Issuance (retirement) of restricted common stock $ (9,174) $ 75,276
============ ============
Issuance of capital stock and options for acquisition $ 22,550,805 $ --
============ ============
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
CUSTOMER ANALYTICS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - Customer Analytics Holdings, Inc. ("CAI"), a
Delaware corporation, formerly ActionSystems Holdings, Inc. ("ASHI"), a
Texas corporation, provides software, implementation methodologies and
directed learning to help its clients integrate strategy, technology and
learning to optimize market and customer profitability. CAI develops,
implements and licenses its intellectual properties in the form of software
and related courseware to corporate clients primarily in the banking,
travel and insurance industries in the United States, United Kingdom,
Canada, Latin America and South Africa. CAI began marketing its desktop
computer learning systems and web-enabled systems in fiscal 1998.
In October 1999, ASHI closed the Agreement and Plan of Merger with Customer
Analytics, Inc. ("Customer Analytics") (see Note 2), forming a new company
known as CAI, as described above. The companies were combined, using the
carryover historical cost basis of ASHI (the acquirer for accounting
purposes) at the time of the merger, and accounting for the acquisition of
Customer Analytics under the purchase method.
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of CAI and its
wholly owned subsidiaries, Customer Analytics, Inc.; ActionSystems, Inc.;
ActionSystems UK, Ltd.; and ActionSystems Canada, Inc. (collectively
referred to as the "Company"). Canadian and United Kingdom operations,
which are not significant, are recorded using the U.S. dollar as the
functional currency. Significant intercompany balances and transactions are
eliminated in consolidation. Preparation of financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingencies at the
date of the financial statements and the reported amounts of revenues and
expenses for the period. Differences from those estimates are recognized in
the period they become known.
REVENUES from license fees for software and related courseware not
requiring significant customization are generally recognized upon receipt
of an executed license agreement (contract) and shipment of software and
specified courseware, provided that the license fee is fixed and
determinable and collection is probable, and there are not significant
remaining service obligations or significant extended payment terms on
software license fees. Where license fee payment terms are closely linked
to significant service obligations, the license and service fees are
recognized as the services are performed. In certain cases, extended
payment terms are provided for the license fees on software and related
courseware agreements. If management concludes that the fees on these
F-7
<PAGE>
contracts are fixed or determinable and their collection is probable, the
unbilled contract amounts are accrued; otherwise, these fees are recognized
when they are billed and collection is probable. For the infrequent
contracts where software and related courseware require significant
customization or include significant services that are not priced
separately, license fees are recognized on the percentage-of-completion
method. Product sales are recognized as revenues when products are shipped
and title passes. Other revenues are recognized as services are provided.
Consulting and implementation services revenues are typically specified and
priced separately in the contract. These revenues are recognized as
services are performed under a time and material basis, or on the
percentage-of-completion method when under a fixed price basis. Percentage
of completion is determined by relating the actual hours of work performed,
to date, to the estimated total hours of each contract. Changes in contract
performance and conditions, including final contract settlements, may
result in revisions to costs. These revisions and any estimated losses on
contracts in progress are recognized in the period in which they are
determinable.
PRODUCT DEVELOPMENT COSTS relate to the Company's software and courseware.
Software development costs are expensed as incurred until technological
feasibility of the product is established as evidenced by a detail program
design. Capitalized software and courseware development costs are amortized
to expense upon product release using the straight-line method over 12
months. Total costs related to software development were 3,419,990 and
$2,238,102, of which $327,099 and $747,129 were capitalized in 1999 and
1998, respectively. Capitalized product development costs of $0 and $70,587
at 1999 and 1998, respectively, related to the costs of the Company's
courseware. Amortization of capitalized product development costs of
$679,900 and $373,275 in 1999 and 1998, respectively, is included in
product development expense. Capitalized product development costs of
$1,330,314 and $1,003,215 are stated net of accumulated amortization of
$1,122,152 and $442,252 at December 31, 1999 and 1998, respectively.
INVENTORIES consisting of printed training materials for courseware are
stated at the lower of average cost or market.
PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets of primarily three to five years or the related
lease terms if shorter.
GOODWILL is the excess of cost over the fair value of the net assets of
subsidiaries acquired and is being amortized on a straight-line basis over
five years (see Note 2). Goodwill is stated net of accumulated amortization
of $742,165 at December 31, 1999.
DEFERRED INCOME TAXES are provided under the asset and liability method for
temporary differences in the recognition of income and expense for tax and
financial reporting purposes.
F-8
<PAGE>
STOCK-BASED COMPENSATION arising from stock option grants is accounted for
by the intrinsic value method under APB Opinion No. 25. Statement of
Financial Accounting Standards ("SFAS") No. 123 encourages (but does not
require) the cost of stock options and other stock-based compensation
arrangements with employees to be measured based on the fair value of the
equity instrument awarded. As permitted by SFAS No. 123, the Company
applies APB No. 25 to its stock-based compensation awards to employees and
discloses in Note 8 the required pro forma effect on net income (loss).
RECLASSIFICATIONS of certain amounts have been made in the Company's
consolidated financial statements for consistency with the presentation of
Exchange Applications, Inc. (see Note 10).
2. ACQUISITION
In October 1999, ASHI acquired 100% of the capital stock of Customer
Analytics, a provider of industry-specific, enterprise relationship
management applications and solutions, targeting the financial services,
travel, pharmaceutical and high-technology industries. In this acquisition,
ASHI issued 2,337,352 shares of preferred stock, 1,013,704 shares of common
stock and 428,422 common stock options, which were fair valued at a total
of $22.5 million. The acquisition has been accounted for by the purchase
method, and goodwill of $23.2 million, including related acquisition costs,
was recorded for the cost in excess of the fair value of net assets
acquired of $0.1 million.
Unaudited pro forma results of operations of the Company as if the above
acquisition had occurred at the beginning of the years presented are as
follows:
1999 1998
Revenues $17,049,000 $ 22,385,000
Net loss (16,624,000) (3,912,000)
Unaudited pro forma results of operations are not necessarily indicative of
what the Company's actual results of operations would have been had the
acquisition occurred at the beginning of 1998, nor do they purport to be
indicative of the Company's future results of operations.
F-9
<PAGE>
3. ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
Accounts receivable at December 31, 1999 and 1998, consist of the
following:
<TABLE><CAPTION>
1999 1998
<S> <C> <C>
Current assets:
Total billed receivables $2,885,646 $1,632,143
Less allowance for doubtful accounts 93,349 75,989
---------- ----------
Net billed receivables 2,792,297 1,556,154
Accrued, unbilled contract receivables - due in 12 months 2,730,822 2,862,748
---------- ----------
Total accounts receivable - current $5,523,119 $4,418,902
========== ==========
Long-term assets - accrued, unbilled contract receivables -
due in 2001 $ 265,000 $ --
========== ==========
</TABLE>
Accounts receivable and revenues from significant customers represent the
following percentages of the Company's net accounts receivable and total
revenues:
Accounts
Revenues Receivable
------------------ ------------------
1999 1998 1999 1998
Customer A 17% 1% 19% 4%
Customer B 23 10
Customer C 9 15 7
Customer D 12 5
Customer E 1 12
Customer F 1 11
Customer G 2 2 3 11
F-10
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998, consist of the
following:
1999 1998
Furniture and fixtures $ 145,515 $ 145,193
Computer equipment 1,228,091 886,223
Equipment 127,652 110,376
Equipment under capital lease 452,279
Leasehold improvements 18,155 5,525
---------- ----------
Total 1,971,692 1,147,317
Less accumulated depreciation 795,563 367,449
---------- ----------
Property and equipment - net $1,176,129 $ 779,868
========== ==========
5. CREDIT FACILITY AND DEBT
The Company has an available bank line of credit of $3,000,000, which
expires September 30, 2000. The agreement requires maintenance of specified
levels of tangible net worth, current ratio limit, liabilities to tangible
net worth and minimum interest coverage. The Company was not in compliance
with certain bank debt covenants at December 31, 1999, and subsequently
obtained waivers. Borrowings under the line of credit are collateralized by
substantially all assets of the Company. At December 31, 1999 and 1998,
$1,500,000 and $0, respectively, were outstanding under the line of credit.
F-11
<PAGE>
Notes payable and debt at December 31, 1999, consist of the following:
<TABLE><CAPTION>
<S> <C>
Revolving note payable to bank to be paid down in full on or by
November 30, 2000, in one lump sum, including interest at prime plus
1% (9.5% at December 31, 1999) $1,500,000
Term note payable to bank in quarterly installments of $657,000 due
February 15, 2000, $477,000 due May 15, 2000, and $753,000 due
August 15, 2000, including interest at prime plus 1% (9.5% at
December 31, 1999), collateralized by certain receivables 1,887,000
Subordinated note payable to investor as entered into on November 9, 1999,
and convertible into Series B Preferred Stock; if not converted, will be due in
one lump sum on May 15, 2000 (see Note 10), including interest at 6%, less
unamortized debt discount of $662,146 arising from the related warrants
(see below) 2,337,854
Capital lease obligations, payable in variable monthly installments totaling
$136,229 in 2000, $162,616 in 2001 and $143,003 in 2002, net of $119,575
discount and collateralized by the leased equipment 441,848
----------
Total 6,166,702
Less current portion 5,861,083
----------
Long-term portion of capital lease obligation $ 305,619
==========
</TABLE>
The holders of the subordinated notes also received warrants to purchase,
for $.0001 per share, 250,000 shares of Series B Convertible Preferred
Stock of the Company. An initial value of $871,887 was allocated to the
warrants and recorded as debt discount. Unamortized debt discount of
$662,146 is deducted from the related debt at December 31, 1999.
F-12
<PAGE>
6. LEASE COMMITMENTS
The Company leases certain office space and equipment under noncancelable
operating leases. Certain operating leases contain renewal options. Rental
expense under operating leases totaled $906,876 and $604,231 for 1999 and
1998, respectively. Future minimum commitments for current leases at
December 31, 1999, are as follows:
2000 $1,172,881
2001 919,336
2002 378,477
2003 40,020
2004 40,020
Thereafter 18,420
----------
Total minimum lease payments $2,569,154
==========
F-13
<PAGE>
7. INCOME TAXES
The tax effects of significant items composing the Company's net deferred
tax assets and liabilities as of December 31, 1999 and 1998, are as
follows:
<TABLE><CAPTION>
1999 1998
<S> <C> <C>
Current asset (liability):
Accrued expenses not currently deductible $ 143,000 $ 433,000
Valuation allowance for receivables not currently deductible 35,000 28,000
Capitalized product development costs deducted for tax
purposes (77,000) (37,000)
Unearned compensation deducted for tax purposes (65,000) (65,000)
Prepaid expenses deducted for tax purposes (30,000) (33,000)
Other (6,000) (5,000)
----------- -----------
Total -- 321,000
Noncurrent asset (liability):
Net operating loss carryforwards, expiring in 2019 2,336,372
Valuation allowance (2,336,372)
Accelerated depreciation for tax purposes (86,000) (86,000)
Unearned compensation deducted for tax purposes (2,000) (70,000)
----------- -----------
Total (88,000) (156,000)
----------- -----------
Net deferred tax asset (liability) $ (88,000) $ 165,000
=========== ===========
</TABLE>
F-14
<PAGE>
The resulting components of income tax expense (benefit) are as follows:
1999 1998
Current:
U.S. federal $ (786,610) $ 1,546,118
U.S. state -- 135,063
----------- -----------
Total (786,610) 1,681,181
Deferred:
U.S. federal 232,486 (39,922)
U.S. state 20,514 (3,523)
----------- -----------
Total 253,000 (43,445)
----------- -----------
Income tax expense (benefit) $ (533,610) $ 1,637,736
=========== ===========
Income tax expense (benefit) varies from the amount determined by applying
the statutory federal income tax rate of 34% to income (loss) before income
tax as follows:
<TABLE><CAPTION>
1999 1998
<S> <C> <C>
Income tax (benefit) computed at federal statutory rate $(3,002,712) $ 1,467,711
Income-based state tax, net of federal income tax benefit 86,816
Goodwill amortization and other expenses not deductible
for tax purposes 291,793 38,143
Change in valuation allowance 2,336,372
Other (159,063) 45,066
----------- -----------
Income tax expense (benefit) $ (533,610) $ 1,637,736
=========== ===========
</TABLE>
8. CAPITAL STOCK
CONVERTIBLE, VOTING PREFERRED STOCK, SERIES A - The Company has authorized
20,000,000 shares and issued 5,598,144 shares of no par value convertible,
voting preferred stock at a stated price of $2.20 per share. Each share is
convertible to a share of common stock, subject to specified adjustments,
and has voting rights equal to the number of shares of common stock into
which such preferred shares are then convertible. Certain voting matters
require the approval of a majority of preferred shareholders. The preferred
shares have liquidation privileges based on specified formulas before any
distributions are made to holders of common stock and receive a pro rata
F-15
<PAGE>
share of any dividends declared for common stock based on the number of
shares of common stock into which such preferred shares are then
convertible. Prior to a defined corporate transaction such as a merger,
sale or qualified public offering, each holder of preferred stock may
demand the Company redeem all or a portion of shares for a cash amount per
share based on specified formulas of the initial price and a pro rata
portion of remaining proceeds from a corporate transaction plus all
declared but unpaid dividends, if any, with respect to each share of
preferred stock. Liquidation values are calculated in the same manner as
redemption price. Upon the consummation of a qualified public offering of
common stock, each share of Series A Preferred outstanding will be
automatically converted into common stock.
CONVERTIBLE, PREFERRED STOCK, SERIES B - The Company has reserved shares of
$.0001 par value convertible preferred stock series B for potential
issuance upon conversion of warrants related to subordinated notes payable
(see Note 5). Each share shall have rights, preferences and limitations
substantially identical to the Series A Preferred Stock.
RESTRICTED COMMON STOCK - The Company has outstanding 865,454 and 1,400,720
shares at December 31, 1999 and 1998, respectively, of restricted common
stock to certain employees. The restricted shares have no preferences and
vest 20% upon issuance and 20% each year over a period of four years, but
will vest automatically if there is a change in control of the majority of
the voting shares of the Company. The restricted shares are held in trust
by the Company. Based on a fair value at the grant date in 1997, the
Company recorded unearned compensation of $876,432 upon issuance, which is
amortized over the vesting period. Of the $876,432 in unearned
compensation, the Company recorded compensation expense of $168,218 and
$175,284 for 1999 and 1998, respectively, in general and administrative
expenses.
STOCK OPTION PLAN - The Board of Directors is authorized to grant up to
3,198,398 option shares under its Nonqualified Stock Option Plan (the
"Plan"), which is to remain in effect for ten years to 2007 or through
expiration of the latest option period, whichever is later. The Plan
contains provisions upon dissolution, liquidation or merger of the Company
to allow for immediate exercise of all issued and outstanding options.
F-16
<PAGE>
The following information summarizes the shares subject to option:
<TABLE><CAPTION>
Weighted Average
Exercise
Number of Shares Price per Share
------------------------- ------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 1,030,997 325,000 $ 2.75 $ 0.39
Assumed in acquisition (Note 2) 428,422 -- .54
Granted 333,693 705,997 6.50 3.83
Exercised (1,000) -- .82
Terminated (240,958) -- 4.89
--------- ---------
Options outstanding, end of year 1,551,154 1,030,997 2.61 2.75
========= =========
Options exercisable, end of year 567,581 271,199
========= =========
Reserved for future options 1,647,244
=========
</TABLE>
The following table summarizes additional information about stock options
outstanding and exercisable at December 31, 1999:
<TABLE><CAPTION>
Options Outstanding
-------------------------------------------------
Options Exercisable
Weighted ------------------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$.36 - $.54 753,422 8.34 years $ .47 308,265 $ .44
$.82 165,000 8.00 years .82 66,000 .82
$4 - $5 333,847 8.92 years 4.84 133,539 4.84
$6.50 298,885 9.42 years 6.50 59,777 6.50
--------- ------- -----
1,551,154 8.73 years 567,581 $2.16
========= ======= =====
</TABLE>
Shares issued upon exercise of the options are callable by the Company at
fair value on the date of call.
F-17
<PAGE>
The Company applies the provisions of APB No. 25 and related
Interpretations in accounting for its stock option plan. No compensation
cost has been recognized for its stock option plan because the estimated
fair value of the common stock at the date of option grant was not in
excess of the option price. SFAS No. 123 prescribes a method to record
compensation cost at the fair value of the options granted. Had
compensation cost been determined with the method prescribed by SFAS No.
123, the Company's pro forma net income would have been reduced by
approximately $247,000 and $183,000 for 1999 and 1998, respectively.
In the pro forma calculations, the weighted average fair value of options
granted during 1999 and 1998 was estimated at $2.10 and $1.23 per share,
respectively, on the grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions: risk-free interest
rate of 5.6% in 1999 and 1998; no dividend yield; expected lives of seven
years; and no expected volatility because the Company's stock is not
publicly traded.
COMMON STOCK RESERVED - Common shares reserved at December 31, 1999, for
possible future issuance are as follows:
Convertible preferred stock, Series A 5,598,144
Common stock options outstanding 1,551,154
Warrants for convertible preferred stock, Series B 250,000
---------
Common shares contingently issuable 7,399,298
Common stock options available for grant 1,647,244
---------
Common shares reserved for possible future issuance 9,046,542
=========
Also, the subordinated note payable (see Note 5) is convertible into Series
B preferred stock, which is convertible into common shares under specified
conditions.
9. BENEFIT PLAN
The Company maintains a 401(k) savings plan that covers substantially all
full-time employees. Participants may contribute a portion of their
compensation up to the maximum allowed by the federal government, the first
6% of which the Company matched 50% for fiscal 1999 and 1998. The matching
contribution expense was $206,383 and $135,317 for 1999 and 1998,
respectively, and is included in general and administrative expenses.
F-18
<PAGE>
10. SUBSEQUENT EVENTS
On June 8, 2000, the Company entered into an agreement of merger with
Exchange Applications, Inc. ("EAI"), after which the Company will become a
wholly owned subsidiary of EAI. In contemplation of this merger, the
Company's subordinated note payable due May 15, 2000 (see Note 5), was
extended to the merger date, at which time it will be exchanged as
specified in the agreement.
******
F-19
<PAGE>
CUSTOMER ANALYTICS, INC.
Statements of Operations and Accumulated Deficit and Cash Flows
For the period ended October 31, 1999
Together with Auditors' Report
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Customer Analytics, Inc.:
We have audited the accompanying statements of operations and accumulated
deficit and cash flows of Customer Analytics, Inc. for the ten month period
ended October 31, 1999. These 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 audits provide a reasonable basis for our
opinion.
The statements of operations and accumulated deficit and cash flows were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the Form 8-K of Exchange
Applications, Inc. in relation to the acquisition of Customer Analytics, Inc.)
and is not intended to be a complete presentation of Customer Analytics, Inc.
results for the period ended October 31, 1999.
In our opinion, the statements referred to above present fairly, in all material
respects, the results of operations and cash flows of Customer Analytics, Inc.
for the ten month period ended October 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen, LLP
Boston, Massachusetts
August, 28, 2000
F-21
<PAGE>
CUSTOMER ANALYTICS, INC.
Statement of Operations and Accumulated Deficit
for the Ten Month Period Ended October 31, 1999
1999
Revenues $ 178,941
Cost of Revenues 236,803
-----------
Gross loss (57,862)
-----------
Selling and Marketing Expenses 947,210
Research and Development Expenses 2,868,026
General and Administrative Expenses 473,605
-----------
Loss from operations (4,346,703)
Interest Expense, net 36,341
-----------
Net loss (4,310,362)
Accumulated deficit, beginning of period (2,086,274)
-----------
Accumulated deficit, end of period $(6,396,636)
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-22
<PAGE>
CUSTOMER ANALYTICS, INC.
Statement of Cash Flows
for the Period Ended October 31, 1999
<TABLE><CAPTION>
1999
<S> <C>
Cash Flows from Operating Activities:
Net loss $(4,310,362)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation 93,144
Changes in current assets and liabilities-
Accounts receivable (109,515)
Prepaid expenses and other current assets (105,229)
Contract costs in progress 170,814
Accounts payable 11,213
Accrued expenses 302,656
Deferred revenue 253,980
-----------
Net cash used in operating activities (3,693,299)
-----------
Cash Flows from Investing Activities:
Sale of marketable securities 1,979,840
Purchase of property and equipment (40,327)
Increase in other assets (97,793)
-----------
Net cash provided by investing activities 1,841,720
-----------
Cash Flows from Financing Activities:
Proceeds from sale of convertible debt 800,000
Proceeds from capitalized leases 129,218
Payments on capital lease obligations (108,187)
-----------
Net cash provided by financing activities 821,031
-----------
Net Decrease in Cash and Cash Equivalents (1,030,548)
Cash and Cash Equivalents, beginning of period 1,198,405
-----------
Cash and Cash Equivalents, end of period $ 167,857
===========
Supplemental Schedule of Cash Flow Information:
Cash paid for interest $ 7,728
===========
Supplemental Schedule of Noncash Investing and Financing Activities:
Property and equipment acquired under capital lease obligation $ 410,393
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
F-23
<PAGE>
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Customer Analytics, Inc. (the "Company") is a provider of
industry-specific, enterprise relationship management ("ERM") applications
and solutions. Target industries include financial services, travel,
pharmaceuticals, and high technology. ERM enables an enterprise to obtain a
consistent and comprehensive view of each current and prospective customer,
thus understanding the needs and associated value of each customer, in the
process of improving revenue growth, profit, and shareholder value.
The Company is subject to risks common to companies in the industry
including, but not limited to, new technological innovations, dependence on
key individuals, protection of proprietary technology, uncertainty of
market acceptance of products, and the need to obtain additional financing.
The accompanying financial statements reflect the application of certain
significant accounting policies as described in this note and elsewhere in
the accompanying notes to financial statements.
(a) 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 revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(b) REVENUE RECOGNITION
The Company provides system design, implementation and support services
under fixed price and time and materials contracts. For fixed price
contracts where reasonably dependable estimates are available, revenue
is recorded on the basis of the estimated percentage of completion of
services rendered. When reasonably dependable estimates are not
available, the Company uses the completed contract method of accounting
where costs are capitalized, to the extent they will be realized, as
incurred until the contract is completed. Losses, if any, on fixed
price contracts are recognized when the loss is determined. For time
and materials contracts, revenue is recorded at contractually agreed
upon rates as the costs are incurred.
Revenues for software application sales are recognized on the basis of
customer acceptance over the period of software implementation.
(c) DEPRECIATION
The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of equipment
over their estimated useful lives, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIVES
Computer equipment 5 years
Furniture and fixtures 7 years
Software 3 years
Office equipment 5 years
Depreciation expense recorded in the period ended October 31, 1999 was
$93,144.
F-24
<PAGE>
(d) RESEARCH AND DEVELOPMENT EXPENSES
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED. Under SFAS No. 86, capitalization of software development
costs begins upon the establishment of technological feasibility until
the point of general release of the product, subject to net realizable
value considerations. The Company may begin capitalization upon
completion of a working model. To date, no costs have been capitalized
as the costs incurred between the establishment of technological
feasibility and general release were immaterial. Accordingly, the
Company has charged all such costs to research and development
expenses.
(e) 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 has
determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative.
(f) NEW ACCOUNTING STANDARDS
The Securities and Exchange Commission released Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, on
December 3, 1999. This bulletin 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 No. 101 to have a material impact on the Company's
results of operations.
(2) INCOME TAXES
The Company follows the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Under SFAS No. 109, deferred tax assets or liabilities are computed
based on the differences between the financial statement and income tax
bases of assets and liabilities using the enacted marginal tax rate.
At October 31, 1999, the Company had available net operating loss
carryforwards of approximately $5,030,000. The carryforwards may be used to
offset future taxable income, if any, and expire through 2019. As of
October 31, 1999 the Company had a deferred tax asset of approximately
$2,500,000. The principal components of the deferred tax assets are
start-up expenditures that have been capitalized for income tax purposes,
net operating loss carryforwards and tax credits. The Company has recorded
full valuation allowances against its deferred tax assets due to
uncertainty regarding the realizability of this asset.
The Internal Revenue Code contains provisions that may limit the net
operating loss carryforwards available to be used in any given year in the
event of significant changes in ownership interests in the Company.
A reconciliation of the federal statutory rate to the Company's effective
rate for the ten month period ended October 31, 1999 is as follows:
Provision at federal statutory rate (34)%
State income taxes, net of federal (6)
Change in valuation allowance 40
--------
Effective tax rate 0%
========
(3) LEASE COMMITMENTS
The Company leases certain office space and equipment under noncancellable
operating leases. Rental expense under operating leases totaled $148,953
for the ten month period ended October 31, 1999.
F-25
<PAGE>
CUSTOMER ANALYTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 16, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Customer Analytics, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' deficit and cash flows present fairly, in all material
respects, the financial position of Customer Analytics, Inc. at December 31,
1998, and the results of its operations and its cash flows for the period from
April 16, 1998 (date of inception) to December 31, 1998 in conformity with
generally accepted accounting principles. 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
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and will require
additional financing which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PriceWaterhouseCoopers, LLP
Boston, Massachusetts
February 26, 1999, except for the information in Note 11 as to which the date is
August 17, 1999
F-27
<PAGE>
CUSTOMER ANALYTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 1,198,405
Short-term investments 1,979,840
Accounts receivable 29,426
Contract costs in process 170,814
Prepaid expenses and other current assets 73,840
-----------
Total current assets 3,452,325
Property and equipment, net 190,299
-----------
Total assets $ 3,642,624
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 248,212
Accrued expenses 70,209
Accrued compensation 37,184
Accrued contract loss 120,632
Current portion of capital lease obligation 8,392
-----------
Total current liabilities 484,629
Capital lease obligation 16,933
Commitments and contingencies (Note 6)
Series A redeemable convertible preferred stock, $.0001 par
value; 2,500,000 shares authorized, issued and outstanding
($5,000,000 liquidation preference) 5,231,233
Stockholders' deficit:
Common stock, $.0001 par value; 10,000,000 shares authorized;
1,025,000 share issued and 625,000 shares outstanding 103
Additional paid in capital --
Deficit accumulated during the development stage (2,086,274)
Less: common stock in treasury, 400,000 shares, at cost (4,000)
-----------
Total stockholders' deficit 2,090,171
-----------
Total liabilities and stockholder's deficit $ 3,642,624
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-28
<PAGE>
CUSTOMER ANALYTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 16, 1998 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1998
Operating expenses:
Selling and marketing $ 204,828
Research and development 1,190,408
General and administrative 520,148
-----------
Operating loss (1,915,384)
Interest income 84,164
Interest expense 1,156
Other expense, net 1,154
-----------
Net loss $(1,833,530)
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-29
<PAGE>
CUSTOMER ANALYTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM APRIL 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE><CAPTION>
SERIES A
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK | COMMON STOCK
------------------------- | -------------------------
CARRYING | PAR
SHARES VALUE | SHARES VALUE
<S> <C> <C> | <C> <C>
Initial issuance of common stock |
in connection with formation |
of the Company -- -- | 1,025,000 $ 103
|
Issuance of Series A redeemable |
convertible preferred stock, |
net of issuance costs of $31,658 2,500,000 $ 4,968,342 | -- --
|
Purchase of common stock -- -- | -- --
|
Accretion of Series A redeemable |
convertible preferred stock |
to redemption value -- 262,891 | -- --
|
Net loss -- -- | -- --
----------- ----------- | ----------- -----------
|
Balance, December 31, 1998 2,500,000 $ 5,231,233 | 1,025,000 $ 103
=========== =========== | =========== ===========
</TABLE>
<TABLE><CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TREASURY TOTAL
PAID-IN DEVELOPMENT STOCK STOCKHOLDERS'
CAPITAL STAGE AT COST EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Initial issuance of common stock
in connection with formation
of the Company $ 10,147 -- -- $ 10,250
Issuance of Series A redeemable
convertible preferred stock,
net of issuance costs of $31,658 -- -- -- --
Purchase of common stock -- -- $ (4,000) (4,000)
Accretion of Series A redeemable
convertible preferred stock
to redemption value (10,147) $ (252,744) -- (262,891)
Net loss (1,833,530) -- (1,833,530)
----------- ----------- ----------- -----------
Balance, December 31, 1998 -- $(2,086,274) $ (4,000) $(2,090,171)
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-30
<PAGE>
CUSTOMER ANALYTICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 16, 1998 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1998
Cash flows from operating activities:
Net loss $(1,833,530)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 11,506
Charge for technology rights 250,000
Increase in assets and liabilities:
Accounts receivable (29,426)
Contract costs in process (170,814)
Prepaid expenses and other current assets (73,840)
Accounts payable 248,212
Accrued expenses and compensation 107,393
Accrued contract loss 120,632
-----------
Net cash used for operating activities (1,369,867)
-----------
Cash flows from investing activities:
Purchases of property and equipment (174,158)
Purchases of short-term investments (1,979,840)
-----------
Net cash used for investing activities (2,153,998)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock 10,250
Proceeds from issuance of preferred stock, net 4,718,342
Acquisition of treasury stock (4,000)
Principal payments on capital lease obligation (2,322)
-----------
Net cash provided by financing activities 4,722,270
-----------
Net increase in cash and cash equivalents 1,198,405
Cash and cash equivalents, beginning of period --
-----------
Cash and cash equivalents, end of period $ 1,198,405
===========
Supplemental disclosures of cash flow information:
Interest paid 1,156
Supplemental disclosure of noncash financing activities:
250,000 shares of Series A Redeemable Convertible Preferred
Stock issued in exchange for technology rights $ 250,000
Acquisition of property and equipment under capital
lease obligations $ 27,647
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-31
<PAGE>
1. NATURE OF BUSINESS:
------------------
Customer Analytics, Inc. (the "Company"), which began operations on April
16, 1998, is a development stage enterprise. The Company is a provider of
industry-specific, enterprise relationship management ("ERM") applications
and solutions. Target industries include financial services, travel,
pharmaceuticals, and high technology. ERM enables an enterprise to obtain a
consistent and comprehensive view of each current and prospective customer,
thus understanding the needs and associated value of each customer, in the
process improving revenue growth, profit, and shareholder value.
Since its inception, the Company has devoted substantially all of its
efforts to raising capital, developing technologies, acquiring equipment
and recruiting new employees. Accordingly, the Company is considered a
development stage enterprise as defined in Statement of Financial
Accounting Standards No. 7 and the accompanying financial statements
represent those of a development stage enterprise.
The Company is still in the development stage and has not yet achieved
significant operations. In order for the Company to emerge out of the
development stage and to continue as a going concern, the Company plans to
raise additional capital through further equity offerings or debt
financing.
Ultimately, continuation of the Company as a going concern is dependent on
its ability to raise capital through equity placements and achieve a level
of operations sufficient to meet cash flow requirements and to recover the
development costs incurred. The Company's capital requirements may change
depending upon numerous factors, including progress of the Company's
research and development programs, resources the Company devotes to
self-funded projects, and demand for the Company's products. There can be
no assurance that management will be successful with either raising
additional capital or achieving a level of operations sufficient to meet
cash flow requirements. All operations since inception have been in the
United States.
The Company is subject to risks common to companies in the industry
including, but not limited to, new technological innovations, dependence on
key individuals, protection of proprietary technology, uncertainty of
market acceptance of products, and the need to obtain additional financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31,
1998, cash equivalents consisted of a money market account. Short-term
F-32
<PAGE>
investments consist of investments with maturity dates exceeding three
months but less than one year, and consisted of government obligations at
December 31, 1998.
REVENUE RECOGNITION
The Company provides system design, implementation and support services
under fixed price and time and materials contracts. For fixed price
contracts where reasonably dependable estimates are available, revenue is
recorded on the basis of the estimated percentage of completion of services
rendered. When reasonably dependable estimates are not available, the
Company uses the completed contract method of accounting where costs are
capitalized as incurred until the contract is completed. Losses, if any, on
fixed price contracts are recognized when the loss is determined. For time
and materials contracts, revenue is recorded at contractually agreed upon
rates as the costs are incurred. Revenues for software application sales
are recognized on the basis of customer acceptance over the period of
software implementation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
Computer equipment 5 years
Purchased software 3 years
Office equipment 5 years
Furniture and fixtures 7 years
Repair and maintenance costs are expensed as incurred. Costs of major
additions and betterments are capitalized. On disposal, the related cost
and accumulated depreciation are eliminated from the accounts and any
resulting gain or loss is included in the determination of income or loss.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs include $250,000 of expenses related to technology rights
received in exchange for Series A Redeemable Preferred Stock. The
technology was intended to be used in the initial development of the
Company's product.
INCOME TAXES
Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current enacted tax rates in effect for the year in which
the difference is expected to reverse. A valuation allowance is provided
for net deferred tax assets if, based upon the available evidence, it is
more likely than not that some or all of the deferred tax assets will not
be realized.
F-33
<PAGE>
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,
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentration of credit
risk consist principally of cash, cash equivalents, short-term investments
and accounts receivable which have fair values that approximate their
carrying amounts. Cash, cash equivalents and short-term investments are
primarily invested in government obligations and money market accounts
primarily through one financial institution. The Company has not
experienced significant losses on short-term investments.
3. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment at December 31, 1998 consists of:
Computer equipment $ 125,810
Purchased software 29,434
Office equipment 16,561
Furniture and fixtures 30,000
---------
201,805
---------
Less: accumulated depreciation and amortization (11,506)
---------
Property and equipment, net $ 190,299
=========
The carrying value of assets under capital leases which are included in
office equipment above is as follows:
Equipment held under capital lease $ 27,647
Accumulated amortization 1,686
Depreciation expense was $11,506 from April 16, 1998 (date of inception) to
December 31, 1998.
F-34
<PAGE>
4. STOCKHOLDERS' DEFICIT:
---------------------
COMMON STOCK
The Company has authorized 10,000,000 shares of $.0001 par value common
stock and 2,500,000 shares of $.0001 par value preferred stock. Dividend
and liquidation rights of common stock are subordinated to those of all
series of preferred stock. The Company has reserved 1,175,000 shares of
common stock for issuance under the 1998 stock option plan.
In May 1998, 1,025,000 shares of common stock which are subject to vesting
provisions based on employment were issued to the founders of the Company
for $.01 per share resulting in gross proceeds of $10,250. Subsequent to
issuance, 400,000 shares of the common stock were repurchased by the
Company, at cost, due to a founder's termination with the Company. The
remaining shares of common stock vest at 125,000 shares after one year and
31,250 shares per quarter thereafter.
TREASURY STOCK
In November 1998, the Company repurchased 400,000 shares of its common
stock at $.01 per share from a former employee of the Company for an
aggregate purchase price of $4,000.
STOCK OPTION PLAN
In June 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan is administered by the Board of Directors, and allows for the
granting of stock awards to eligible directors, employees, consultants, and
officers in the form of incentive stock options and nonqualified stock
options. The aggregate number of shares which may be issued pursuant to the
Plan is 1,175,000. Awards granted under the Plan are subject to terms and
conditions, as defined in the Plan and as determined by the Board of
Directors. Options typically vest over four years and the exercise price
per share is subject to certain pricing restrictions as defined in the
Plan. Options granted under the plan generally expire 10 years from the
date of grant or within three months of termination.
Information related to all stock options granted by the Company is as
follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
Outstanding at April 16, 1998
Granted 323,500 $0.50
Canceled
Exercised -- --
------- -----
Outstanding at December 31, 1998 323,500 $0.50
======= =====
Options exercisable -- --
Options available for future grants 851,500 --
F-35
<PAGE>
The following table summarizes information concerning currently
outstanding options:
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- --------------
$0.50 323,500 9.8 years $0.50
The exercise price for each of the above grants was determined by the
Board of Directors of the Company to be equal to the fair market value
of the common stock on the date of grant. In reaching this determination
at the time of each grant, the Board considered a broad range of factors
including the illiquid nature of an investment in the Company's common
stock, the Company's historical financial performance, and the Company's
future prospects.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for the Plan. Had compensation cost for the Plan been
determined on the fair value at the grant dates for awards under the
Plan using the minimum value method consistent with Statement of
Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation," the Company's net loss for the year ended
December 31, 1998 would have been increased by approximately $2,100. In
computing this pro forma amount for the year ended December 31, 1998,
the Company has assumed a weighted average risk free rate of return of
4.72%, an expected life of seven years, no volatility and no dividends.
The average fair value of the options granted during 1998 is estimated
as $.14 on the date of grant.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are
anticipated.
STOCK WARRANTS
In July 1998, the Company agreed to issue warrants to their bank to
purchase shares of common stock based on the outstanding principal
balance of their credit facility (Note 9). No warrants were issued or
outstanding at December 31, 1998.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
--------------------------------------
In June 1998, the Company issued 2,500,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Stock") at $2.00 per share resulting
in gross cash proceeds of $4,750,000 and of $250,000 for technology rights.
Series A Stock contains the following provisions:
F-36
<PAGE>
CONVERSION
Each share of Series A Stock is convertible into one share of common
stock at the option of the holder, adjustable for certain dilutive
events. Conversion is automatic upon the closing of an initial public
offering at $10 per share in which the Company receives at least
$13,500,000 of gross proceeds, or upon request of two-thirds of the
holders of Series A Stock.
VOTING RIGHTS
The holders of Series A Stock are entitled to voting rights equivalent
to the number of shares of common stock into which each share of
preferred stock is then convertible.
DIVIDENDS
The Board of Directors may, at its discretion, declare and pay dividends
at a rate of $.16 per share per annum for Series A Stock prior, and in
preference to, any dividends paid on common stock. Dividends are not
mandatory or cumulative. No dividends were declared or paid from April
16, 1998 (date of inception) to December 31, 1998.
LIQUIDATION
In the event of any liquidation of the Company, the holders of Series A
stock will be entitled to receive in preference to all common
stockholders, an amount equal to $2.00 per share, plus all declared but
unpaid dividends.
REDEMPTION
At any time on or before the fifth anniversary of the original issue
date, the Company will redeem the outstanding shares of Series A Stock
upon request from a majority of the holders of then outstanding Series A
Stock on the later of the date one month following the Company's receipt
of such notice, or the fifth anniversary of the original issue date, in
three equal, annual installments. The redemption price shall be $2.00
per share plus 8% of the original issue price, $2.00, per year
compounded annually less any dividends paid per share. The redemption
price is subject to increase if funds legally available to redeem such
shares are insufficient at the redemption date.
6. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company leases its facility and certain office equipment under
operating and capital lease agreements. These lease agreements expire at
dates through 2002.
F-37
<PAGE>
Future minimum lease payments are as follows:
OPERATING CAPITAL
--------- ---------
1999 $ 108,971 $ 11,403
2000 108,971 11,403
2001 107,249 6,866
2002 97,115 --
--------- ---------
Total minimum payments required $ 422,306 29,672
=========
Less: amount representing interest 4,347
---------
Present value of minimum lease payments 25,325
Less: current portion 8,392
---------
Long-term portion $ 16,933
=========
Rent expense on operating leases was approximately $36,000 for the period
from inception (April 16, 1998) to December 31, 1998.
7. INCOME TAXES:
------------
No provision for income taxes has been recorded due to the Company's net
losses. Components of the net deferred tax asset at December 31, 1998 are
as follows:
Net operating loss carryforwards $ 606,630
Start-up costs 131,005
Organization costs 751
Depreciation (1,293)
Research and development credits/carryforwards 65,404
---------
802,497
Valuation allowance (802,497)
---------
Net deferred tax asset --
=========
At December 31, 1998, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $1,500,000,
which expire in 2018. The Company also has available research and
development credits for federal and state income tax purposes of
approximately $43,000 and $33,000, respectively, which expire in 2018 and
2013, respectively.
At December 31, 1998, the Company has established a valuation allowance
equal to the value of the net deferred tax asset due to the Company's
history of net losses and the uncertainty surrounding the realization of
these assets. Under the Internal Revenue Code, certain substantial changes
in the Company's ownership could limit the amount of net operating loss
carryforwards and tax credits that could be utilized in any one year to
offset future taxable income or tax liabilities.
F-38
<PAGE>
8. SIGNIFICANT CUSTOMER:
--------------------
During 1998, the Company engaged in product development and had receivables
from one customer for a project which is being accounted for under the
completed contract method of accounting.
9. EMPLOYEE BENEFIT PLAN:
---------------------
In 1998, the Company established a savings plan with employer matching
provisions covering substantially all of its employees. Eligible employees
are permitted to contribute to the 401(k) plan through payroll deductions
within statutory and plan limits. The Company's matching contribution to
the 401(k) savings plan is subject to limitations as defined in the 401(k)
plan. For the period from April 16, 1998 (date of inception) to December
31, 1998 the Company contributed approximately $1,500 to the savings plan.
10. LINE OF CREDIT:
--------------
The Company has a line of credit agreement with its bank which bears
interest at the prime rate plus 1%. $250,000 is available for equipment
advances which expired on January 17, 1999, with an additional $500,000
available for working capital advances which expires on January 17, 2000.
As part of the agreement, the bank is entitled to receive warrants based on
the outstanding principal balance of the line. There have been no advances
under the line of credit for the period from April 16, 1998 (date of
inception) to December 31, 1998.
11. SUBSEQUENT EVENTS:
-----------------
In April 1999, the Company entered into a Master Equipment Lease Agreement
providing for a lease line of credit of $1,000,000 for the purpose of
purchasing capital equipment through December 1999. The interest rate is
equal to a monthly rate of approximately 3.2% of the equipment's original
purchase price. The lease shall be repaid in 36 equal monthly installments
of principal plus interest. At the end of the lease term the Company has
the option to purchase leased equipment for 15% of the original purchase
price or extend the lease for a period of six months.In August 1999, the
Company received gross proceeds of $400,000 from the sale of convertible
subordinated notes from investors. The notes bear interest at six percent
per annum and are due on the earlier of December 31, 1999 or when declared
due after an event of default. The notes are convertible at the election of
the holder into either shares of Series B Preferred Stock if $6,000,000
F-39
<PAGE>
worth of shares have been issued by the Company at the issuance price or
into shares of the common stock at $2.00 per share. In the event that the
Company does not issue the Series B Preferred Stock in the specified
timeframe, the Company will issue warrants to the investors to purchase
shares of Series B Preferred Stock based upon a formula which is defined in
the notes.
F-40
<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 Customer Analytics Holdings,
Inc. (CAH) by Exchange Applications, Inc. (Exchange) and the acquisition of
Customer Analytics, Inc. (CAI) by CAH.
On June 8, 2000, Exchange entered into a definitive merger agreement to acquire
all of the outstanding capital stock of CAH. Under the terms of the agreement,
Exchange issued shares of its common stock and stock options to existing holders
of CAH common stock and stock options. Exchange received Harte-Scott Redino
regulatory approval from the United States Justice Department on June 12, 2000
and took effective control of CAH on June 13, 2000. The value of the Exchange
common stock issued in the transaction, including shares issuable under assumed
options, was $113,944,000.
The unaudited pro forma consolidated statements of operations combine the
historical statements of operations of Exchange and CAH for the year ended
December 31, 1999 and the period ended June 30,2000 as if the acquisition had
occurred on January 1, 1999. On October 29, 1999, CAH (then known as Action
Systems Holdings, Inc). acquired CAI and adopted its name. The results of this
entity have also been included in the unaudited pro forma consolidated
statements of operations as if this acquisition also occurred on January 1,
1999.
The pro forma financial statements utilize the purchase method of accounting for
the merger of Exchange and CAH as well as the merger of Action Systems Holdings,
Inc. and CAI Under the purchase method of accounting, the purchase price is
allocated to assets acquired and liabilities assumed based on their estimated
fair value at the time of the merger. The pro forma condensed consolidated
financial statements reflect pro forma adjustments made to combine Exchange, CAH
and CAI using the purchase method of accounting.
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, CAH and CAI and should
be read in conjunction with the respective historical financial statements and
notes thereto of Exchange, CAH, and CAI, 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>
<TABLE><CAPTION>
Six Months Ended June 30, 2000
CUSTOMER
ANALYTICS
HOLDINGS, INC. PRO FORMA
EXCHANGE 1/1/00-6/12/00 ADJUSTMENTS REF TOTAL
<S> <C> <C> <C> <C>
Revenues:
License fees 23,613 8,668 32,281
Services and maintenance 11,187 5,058 16,245
------- ------- ----------
Total revenues 34,800 13,726 48,526
------- ------- ----------
Cost of revenues:
Software license fees 362 39 401
Services and maintenance 7,490 6,159 13,649
------- ------- ----------
Total cost of revenues 7,852 6,198 14,050
------- ------- ----------
Gross profit 26,948 7,528 34,476
Operating expenses:
Sales and marketing 11,029 4,339 15,368
Research and development 7,788 4,894 12,682
General and administrative 4,174 2,239 6,413
Amortization of MSI non current asset 10,010 - 10,010
Amortization of goodwill and intangibles 3,506 2,270 10,900 (b) 16,676
------- ------- ----------
Total operating expenses 36,507 13,742 61,149
------- ------- ----------
Loss from operations (9,559) (6,214) (26,673)
Other income (expense)
Interest income 848 40 888
Interest expense (1,321) (1,128) (43)(c) (2,492)
Amortization of debt discount -- (662) 662 (d) --
------- ------- ----------
Total other income (expense) (473) (1,750) (1,604)
Loss before provision for income taxes (10,032) (7,964) (28,277)
Provision for income taxes (21) 211 (190)(e) --
------- ------- ----------
Net loss applicable to common stockholders (10,053) (7,753) (28,277)
======= ======= ==========
Net loss per common and equivalent share (0.94)
==========
Weighted average number of common and common equivalent
shares outstanding (basic and diluted) 29,968,098
==========
See accompanying notes to unaudited pro forma combined condensed financial statements.
</TABLE>
<PAGE>
<TABLE><CAPTION>
Twelve Months Ended December 31, 1999
FORMER
CUSTOMER
CUSTOMER ANALYTICS ADJUSTED PRO
ANALYTICS (TEN MONTH CUSTOMER FORMA
HOLDINGS, PERIOD ENDED ANALYTICS ADJUSTMENTS REF
EXCHANGE INC. OCTOBER 31, ADJUSTMENTS REF HOLDINGS TOTAL
1999) INC.
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Software license fees 26,344 12,236 -- 12,236 38,580
Services and maintenance 16,957 4,634 179 4,813 21,770
------- ------- ------- ------- -------
Total revenues 43,301 16,870 179 17,049 60,350
Cost of revenues:
Software license fees 438 -- -- -- 438
Services and maintenance 10,255 5,352 237 5,589 15,844
------- ------- ------- ------- -------
Total cost of revenues 10,693 5,352 237 5,589 16,282
------- ------- ------- ------- -------
Gross profit 32,608 11,518 (58) 11,460 44,068
Operating expenses:
Sales and marketing 14,555 10,953 947 11,900 26,455
Research and development 9,829 3,893 2,868 6,761 16,590
General and administrative 4,948 4,481 473 4,954 9,902
Cost of acquisition 1,388 -- -- -- 1,388
Amortization of goodwill -- 742 -- 3,798 (a) 4,540 24,459 (b) 28,999
------- ------- ------- ------- -------
Total operating expenses 30,720 20,069 4,288 28,155 83,334
------- ------- ------- ------- -------
Income (loss) from operations 1,888 (8,551) (4,346) (16,695) (39,266)
Other income (expense)
Interest income 1,440 101 44 145 1,585
Interest expense (10) (172) (8) (158)(c) (338) (70)(c) (418)
Amortization of debt discount -- (210) -- (388)(d) (598) 598 --
------- ------- ------- ------- -------
Total other income (expense) 1,430 (281) 36 (791) 1,167
------- ------- ------- ------- -------
Income (loss) before
provision for income taxes 3,318 (8,832) (4,310) (4,344) (17,486) (38,099)
Provision for income taxes (2,220) 534 -- 534 1,686 (e) --
------- ------- ------- ------- -------
Net income (loss) applicable
to common stockholders 1,098 (8,298) (4,310) (16,952) (38,099)
======= ======= ======= ======= =======
Net loss per common and
equivalent share 1.43
=======
Weighted average number of common and common equivalent
shares outstanding (basic and diluted) 26,577,374
==========
See accompanying notes to unaudited pro forma combined condensed financial statements.
</TABLE>
<PAGE>
(1) Basis of Presentation
The unaudited proforma consolidated statements of operations for the year
ended December 31, 1999 and the six months ended June 30, 2000 give effect
to the acquisition of Customer Analytics Holdings, Inc (CAH) by Exchange
Applications, Inc (Exchange) as of the date of effective control by
Exchange on June 13, 2000 and CAH's (formerly Action Systems, Inc)
acquisition of Customer Analytics, Inc on October 29, 1999 as if these
acquisitions had occurred on January 1, 1999. Action Systems, Inc adopted
the name of Customer Analytics Holdings, Inc. post acquisition. The effects
of both acquisitions have been presented using the purchase method of
accounting and accordingly, the aggregate purchase price of these
acquisitions was allocated to the fair value of the assets assumed with any
excess purchase price being allocated to goodwill and other identifiable
intangible assets.
(2) The unaudited pro forma consolidated financial statements do not include
adjustments to conform the accounting policies of CAH 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 proforma condensed financial statements reflect certain
reclassifications to conform the the financial statements of CAH and
Customer Analytics, Inc. to those of Exchange.
(4) Pro Forma Income Statement Adjustments
(a) To record the amortization of $22,700,000 of goodwill related to the
October 29, 1999 Action Systems, Inc. acquisition of Customer
Analytics, Inc. for the year ended December 31, 1999. Action Systems,
Inc. adopted the name of the acquired company post acquisition.
(b) To record amortization of $95,914,000 of goodwill and $29,450,000 of
intangible assets related to the June 13, 2000 acquisition of CAH by
Exchange less the amortization previously recorded by CAH and the
additional amortization recorded in Note (a) above. The goodwill and
intangible assets are being amortized over a five and three year
period, respectively.
(c) To record additional interest expense for the year ended December 31,
1999 and the six months ended June 30, 2000 related to $3,000,000 of
subordinated notes payable issued in connection with the October 29,
1999 Action Systems, Inc. acquisition of Customer Analytics, Inc. These
notes were originally due on May 15, 2000 and earned interest at a rate
of 6% per annum. In connection with Exchange's acquisition of CAH, the
holders of the original notes were issued new notes totaling
$5,000,000. The new notes earn interest at 5% per annum. This
adjustment reflects the incremental interest that would have been due
if the notes had been issued on January 1, 1999 earning interest at 5%
per annum.
(d) To eliminate amortization of debt discount allocated to warrants issued
in connection with $3,000,000 of subordinated debt (see Note (c)).
These warrants were canceled in connection with the June 13, 2000
Exchange acquisition of CAH.
(e) The unaudited pro forma consolidated statements of operations includes
an adjustment which assumes an effective tax rate of 0%. The combined
pro-forma statements of operations show significant losses in both
periods, which, even after accounting for non deductible expenses,
would result in a tax loss.
******
<PAGE>
(c) EXHIBITS.
--------
Exhibit 2* Agreement and Plan of Merger and Reorganization, dated
as of June 6, 2000, by and among Exchange, CAH
Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Exchange, CAH and certain
shareholders of CAH; includes Annex A, 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
Applications, Inc
Exhibit 23.2 Consent of PriceWaterhouseCoopers, LLP regarding
Customer Analytics
Exhibit 23.3 Consent of Deloitte and Touche, LLP regarding Customer
Analytics Holdings, Inc
Exhibit 99.1* Press Release of Exchange, dated June 8, 2000,
announcing the acquisition of CA.
* 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: August 31, 2000
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit 2* Agreement and Plan of Merger and Reorganization, dated
as of June 6, 2000, by and among Exchange, CAH
Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Exchange, CAH and certain
shareholders of CAH; includes Annex A, 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
Applications, Inc
Exhibit 23.2 Consent of PriceWaterhouseCoopers, LLP regarding
Customer Analytics
Exhibit 23.3 Consent of Deloitte and Touche, LLP regarding Customer
Analytics Holdings, Inc
Exhibit 99.1* Press Release of Exchange, dated June 8, 2000,
announcing the acquisition of CA.
* Previously filed
