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RULE NO. 424(b)(3)
REGISTRATION NO. 333-37780
PROSPECTUS
[LOGO OF BROKAT]
BROKAT AG
Offer to Exchange
(Euro)125,000,000
11 1/2% Senior Notes Due 2010
Terms of the Exchange Offer
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. We are offering to exchange all . We will exchange all outstanding
of your original 11 1/2% senior original notes that are validly
notes due 2010 for registered 11 tendered and not withdrawn before
1/2% senior notes due 2010. the expiration of the exchange
offer.
. If you decide to participate in
the exchange offer, the exchange . You may withdraw tenders of
notes will be issued to you in original notes at any time before
the same principal amount as the the expiration of the exchange
original notes. offer.
. The terms of the exchange notes . We believe that the exchange of
are substantially identical to original notes for exchange notes
the outstanding original notes, will not be a taxable exchange
except that the exchange notes for U.S. federal income tax
have been registered under the purposes, but you should consult
Securities Act and transfer your tax advisor.
restrictions and registration
rights relating to the original . We will not receive any proceeds
notes do not apply to the from the exchange offer.
exchange notes.
. We intend to list the exchange
. Any original notes not exchanged notes on the Luxembourg Stock
will continue to have Exchange.
restrictions on their transfers.
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The exchange offer will expire at 5:00 p.m., London time, on October 11,
2000, unless extended.
See "Risk Factors" beginning on page 12 for a discussion of risks involved
before tendering your original notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
September 11, 2000.
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TABLE OF CONTENTS
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Prospectus Summary.................... 1
Summary Financial Data................ 10
Risk Factors.......................... 12
Important Information About This
Prospectus........................... 22
Trademarks and Service Marks.......... 22
Where You Can Find More Information... 23
Enforceability of Civil Liabilities... 23
Currency And Financial Statement
Presentation......................... 24
Exchange Rate Information............. 25
Disclosure About Forward Looking
Statements........................... 26
The Exchange Offer.................... 27
The Company........................... 34
Recent Acquisitions And Other
Strategic Initiatives................ 35
Use of Proceeds....................... 37
Capitalization........................ 38
Unaudited Pro Forma Financial Data.... 39
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Selected Historical Consolidated
Financial Data....................... 48
Selected Financial Data............... 49
Management's Discussion And Analysis
of Financial Condition And Results of
Operations........................... 51
Business.............................. 65
Management............................ 79
Material Relationships and Related
Transactions......................... 84
Principal Shareholders................ 86
Description of the Notes.............. 87
Form of the Notes, Clearance and
Settlement........................... 129
Taxation.............................. 133
Plan of Distribution.................. 138
Legal Matters......................... 139
Experts............................... 139
General Information................... 139
Index to Financial Statements......... F-1
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PROSPECTUS SUMMARY
Because this is a summary, it does not contain all of the information that
may be important to you. To understand this exchange offer fully, you should
read the entire prospectus, including the "Risk Factors" and the financial
statements. The terms "we", "our", and "BROKAT" refer to BROKAT AG and its
subsidiaries.
BROKAT AG
Who We Are
We are a leading provider of software for the rapidly expanding market for
electronic, or e-banking services and the leading provider of this software to
European banks. We design, develop, market and support e-business software for
the conduct of business over the Internet and other electronic media.
Our Markets
We have concentrated on providing e-banking solutions to banks in Germany,
Austria, the United Kingdom, the United States, the Asia-Pacific region,
Switzerland and the Benelux countries. We estimate that, at December 31, 1999,
more than 2,000 financial institutions and more than 2 million end-users
worldwide--principally in Germany and Austria--conducted e-business activities
using our products. We believe our market share of the e-banking sector is
approximately 80-90% in Germany and Austria, and approximately 40% in the rest
of Europe based on a study in 1999 by Meridian Research, Inc.
Our Products and Services
Our core product, Twister, is an open architecture software platform that
integrates the information technology systems of a business with a variety of
electronic communications channels. This software enables consumers to interact
with the business over the Internet through a range of secure electronic
communication channels, such as personal computers, mobile telephones, call
centers, personal digital assistants and WebTV, while permitting the business
to offer its products and services regardless of the types of computer systems
in use and regardless of the language in which its software applications are
written.
We also offer industry-specific software application packages, allowing a
business to establish electronic front offices through which consumers can
access its products or services. These software packages, with our Twister
platform, provide a business with both customer relationship management and
back office integration functions. We also provide a range of professional
services such as consulting, customization, installation, training, and
maintenance and support for the sales of our products.
We distribute, implement and support our products worldwide through our
subsidiaries and sales offices and through distribution partners, such as
consulting firms and value added resellers, and through joint ventures.
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Our Strategy
Our principal objective is to establish our core product, Twister, as the
standard worldwide software platform for the delivery of e-finance, e-commerce
and other e-services over the Internet through all significant electronic
distribution channels. To achieve this objective, we intend to:
. Continue to enhance the functionality of the Twister platform;
. Expand our range of standardized software applications and enhance our
existing software applications based on our Twister platform;
. Expand our presence throughout Europe, North America and the Asia-
Pacific region, through internal growth, joint ventures and strategic
acquisitions;
. Continue to emphasize indirect sales of our products through joint
ventures and through the strengthening and expansion of our network of
business partners, including value added resellers, consultants, system
integrators and solution providers; and
. Use our leading market position in the European e-banking services
sector and our technological leadership, to position ourselves to take
advantage of the development of other e-business opportunities.
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The Exchange Offer
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Notes Offered..................... We are offering (Euro)125,000,000 principal amount of
our 11 1/2% senior notes due 2010 in exchange for an
equal aggregate principal amount of our original 11
1/2% senior notes due 2010 on a one for one basis.
In this document, we refer to the notes originally
offered in March 2000 as the original notes and to the
notes which we are offering through this prospectus in
exchange for original notes as exchange notes. The
exchange notes have substantially the same terms as the
original notes you hold, except that these exchange
notes have been registered under the Securities Act and
will be freely tradeable.
Registration Rights Agreement..... At the time we sold investors the original notes, we
entered into a registration rights agreement requiring
us to make this exchange offer.
After the exchange offer is complete, you will no
longer be entitled to exchange your original notes for
registered exchange notes. We may be required to file a
shelf registration statement under the Securities Act
for your original notes. We do not expect to have to
file a shelf registration statement.
The Exchange Offer................ We are offering to exchange (Euro)1,000 principal
amount of exchange notes for each (Euro)1,000 principal
amount of our outstanding original notes.
To be exchanged, your original notes must be properly
tendered and accepted. All original notes that are
validly tendered and not withdrawn will be exchanged.
Ability to Resell Exchange Notes.. We believe that the exchange notes issued in this
exchange offer may be offered for resale, resold and
otherwise transferred by you without compliance with
the registration and prospectus delivery provisions of
the Securities Act if:
. the exchange notes issued in the exchange offer are
being acquired in the ordinary course of your
business;
. you are not participating, do not intend to
participate and have no arrangement or understanding
with any person to participate in the distribution
of the exchange notes issued to you in the exchange
offer; and
. you are not an affiliate of ours.
If this belief is inaccurate and you transfer any
exchange notes issued to you in the exchange offer
without delivering a prospectus which meets the
requirements of the Securities Act or without an
exemption from these requirements, you may incur
liability under the Securities Act. We do not assume
any liability if you do and will not indemnify you.
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If you are a broker-dealer and wish to exchange the
original notes that you received through market-making
or other trading activities, you must agree to deliver
this prospectus to offer the exchange notes that you
receive in this exchange offer.
Persons Excluded from the Exchange
Offer............................ You may not participate in the exchange offer if you
are:
. a holder of the original notes in any jurisdiction
in which the exchange offer or your acceptance is
not legal under the applicable securities or blue
sky laws of that jurisdiction; or
. a holder of the original notes who is our affiliate.
Consequence of Failure to Exchange
Your Original Notes.............. If you do not exchange your original notes for exchange
notes in the exchange offer, your original notes will
continue to have restrictions on transfer contained on
the legend. In general, you may not offer or sale your
original notes unless there is an exemption from, or
the transaction is not governed by, the Securities Act
and applicable state securities laws. We have no plans
to register your original notes under the Securities
Act unless we are required to file a shelf registration
statement.
Expiration Date................... The exchange offer expires at 5:00 p.m., London time,
on October 11, 2000, the expiration date, unless we
extend the exchange offer.
Accrued Interest on the Exchange
Notes............................ The exchange notes will bear interest from March 28,
2000. Holders of original notes whose original notes
are accepted for exchange will not receive any payment
of interest on their original notes that has accrued
from March 28, 2000 to the date of the issuance of the
exchange notes. They will receive the same interest
payment on September 30, 2000 that they would have
received had they not accepted the exchange offer. This
is the first interest payment date for either the
original notes or the exchange notes.
Conditions to the Exchange Offer.. The exchange offer has customary conditions that may be
waived by us. There is no minimum amount of original
notes that must be tendered to complete the exchange
offer.
Procedures for Tendering Your
Original Notes................... Tenders of original notes may be made only in book-
entry form. To tender your original notes, you must:
. comply with the relevant procedures established by
Euroclear or Clearstream, as applicable; and
. deliver to our exchange agent through Euroclear or
Clearstream system a computer generated confirmation
of book-entry transfer before 5:00 p.m., London
time, on the expiration date.
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If you accept our offer through Euroclear or
Clearstream, you will make the representations
described under "The Exchange Offer--Purpose and
Effect--Representations We Need From You Before You
Participate in the Exchange Offer."
Termination of the Exchange We reserve the right to terminate the exchange offer.
Offer......................... If we fail to complete the exchange offer, holders of
the original notes will have rights against us under
the registration rights agreement.
Withdrawal Rights.............. You may withdraw the tender of your original notes at
any time before 5:00 p.m., London time, on the
expiration date.
U.S. Tax Considerations........ The exchange of your original notes for exchange notes
generally will not result in any income, gain or loss
to you for U.S. federal income tax purposes.
Use of Proceeds................ We will not receive any proceeds from the issuance of
the exchange notes in the exchange offer. We will pay
all expenses incident to the exchange offer.
Exchange Agent................. The Bank of New York, London Branch, is serving as the
exchange agent. Its address, telephone number and
facsimile number are:
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The Bank of New York, London Branch
One Canada Square
London E14 5AL
United Kingdom
Attention: Emma Wilkes
Corporate Trust
Fax: 44 20 7964 6369
Telephone: 44 20 7964 7235
Please review the information contained in "The Exchange Offer" for more
detailed information concerning the exchange offer.
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The Notes
The summary below describes the principal terms of the notes. Many of the
terms and conditions described below are subject to important limitations and
exceptions. The "Description of the Notes" section of this prospectus contains
a more detailed description of the terms and conditions of the notes.
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Issuer................................. BROKAT AG
Notes Offered.......................... (Euro) 125,000,000 aggregate principal amount of 11
1/2% senior notes due 2010.
Maturity............................... March 31, 2010.
Interest............................... Interest on the notes will accrue from March 28, 2000
and be payable in cash at a rate of 11 1/2% per year
semiannually in arrears on March 31 and September 30 of
each year, beginning September 30, 2000, to holders of
record on the immediately preceding March 15 and
September 15.
Sinking Fund........................... None.
Optional Redemption.................... We may, at our option, redeem some or all of the notes
at any time on or after March 31, 2005 at the
redemption prices listed in "Description of the Notes--
Optional Redemption," plus accrued and unpaid interest,
if any, to the redemption date.
Optional Redemption After Public Equity
Offerings............................. On any one or more occasions before March 31, 2003, we
may, on not less than 30 nor more than 60 days' notice,
at our option use the net cash proceeds of one or more
qualified equity offerings to redeem up to 35% of the
aggregate principal amount of the notes originally
issued at a redemption price in cash of 111.50% of the
principal amount of these notes, plus accrued and
unpaid interest and liquidated damages and additional
amounts, if any, on these notes to the redemption date,
as long as:
. we redeem the notes within 60 days of completing the
public equity offering; and
. at least 65% of the aggregate principal amount of
the notes originally issued, excluding notes held by
us or our affiliates and subsidiaries, remains
outstanding immediately after the redemption.
Optional Redemption for Taxation
Reasons............................... If deduction or withholding for or on account of taxes
in the Federal Republic of Germany or any jurisdiction
in which we are organized or otherwise resident for tax
purposes or any jurisdiction from or through which
payment is made shall be required on any payments made
by us on the notes the notes may be redeemed, at our
option, in whole but not in part, at any time upon not
less than 30 nor more than 60 days' notice at a
redemption price equal to the principal amount of the
notes, plus any accrued and unpaid interest and
liquidated damages and additional amounts, if any, to
the redemption date.
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Ranking... The notes will be our senior unsecured obligations. The
notes will:
. rank equally with all of our existing and future
senior indebtedness; and
. rank senior to all of our existing and future
subordinated indebtedness.
As of December 31, 1999, on a pro forma basis after
giving effect to this offering and the application of
the proceeds of this offering, there would have been:
. no secured indebtedness to which the notes would
have been effectively subordinated;
. no amounts available for additional borrowing under
secured credit facilities to which the notes would
have been effectively subordinated;
. approximately (Euro) 1.8 million of additional
indebtedness ranking equally with the notes; and
. no additional indebtedness ranking junior to the
notes.
Because the notes are unsecured, they will be
effectively subordinated in right of payment to any of
our or our subsidiaries' secured indebtedness as long
as any assets serve as security for the secured
indebtedness.
The notes will also be effectively subordinated to all
liabilities of our subsidiaries, including trade
payables of these subsidiaries.
The indenture governing the notes will permit us and
our subsidiaries to incur substantial additional
indebtedness, subject to limitations.
Change of If a change of control occurs, we must give holders of
Control.. the notes the opportunity to sell us their notes at a
price of 101% of the principal amount of these notes,
plus accrued and unpaid interest and liquidated damages
and additional amounts, if any, on these notes to the
date of the repurchase.
We might not be able to pay you the required price for
the notes you present to us at the time of a change of
control offer because:
. we might not have enough funds at that time; or
. the terms of our debt or other agreements may
prevent us from making a change of control offer or
payment.
Asset Sale If we engage in asset sales, we generally must either
Proceeds.. invest the net proceeds from these sales in our
business or repay our indebtedness within a period of
time, or make an offer to purchase notes at a price of
100% of their principal amount, plus accrued and unpaid
interest and liquidated damages and additional amounts,
if any.
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Significant Covenants... The indenture governing the notes includes covenants
limiting our ability and the ability of our
subsidiaries to:
. incur or refinance debt;
. pay dividends or make distributions on, or
repurchase, our capital stock;
. make investments, loans or advances;
. create liens on our or our subsidiaries' assets;
. merge, consolidate or sell substantially all of our
assets;
. issue or sell stock of our subsidiaries;
. enter into sale-leaseback transactions; and
. enter into transactions with our affiliates.
These covenants are subject to a number of important
limitations and exceptions.
Trustee, Registrar,
Principal Paying and
Transfer Agent......... The Bank of New York.
Luxembourg Listing,
Paying and Transfer
Agent.................. Kredietbank S.A. Luxembourgeoise.
Listing................. We listed the original notes and we expect to make an
application to list the exchange notes on the
Luxembourg Stock Exchange.
Security Numbers for the
Original Notes......... ISIN: Regulation S Note XS0109534643
144A Note XS0109534999
Common Code: Regulation S Note 010953464
144A 010953499
Security Numbers for the
Exchange Notes......... ISIN: XS0117755438
Common Code: 011775543
Governing Law........... The notes and the indenture governing the notes will be
governed by the laws of the State of New York.
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We are a stock corporation organized under the laws of Germany. Our
headquarters are located at Industriestrasse 3, D-70565 Stuttgart, Germany. Our
telephone number is +49 711 788 44-0. Our Internet address is www.brokat.com.
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Summary Historical and Pro Forma Financial Data
The following table presents some of our historical and pro forma financial
data for the periods indicated in compliance with U.S. generally accepted
accounting principles. We derived the summary financial data from our
consolidated financial statements.
Our consolidated financial statements:
. for the years ended June 30, 1997, 1998 and 1999 and
. for the six months ended December 31, 1999
have been audited by Arthur Andersen Wirtschaftspruefungsgesellschaft
Steuerberatungsgesellschaft mbH, independent auditors and are included
elsewhere in this prospectus.
Through the fiscal year ended June 30, 1999, our fiscal year ended on June
30. We changed our fiscal year in 1999 to end on December 31. Our results of
operations for the six months ended December 31, 1999 and for the six months
ending June 30, 1999 and 2000 are not necessarily indicative of results that
may be expected for the full year.
The following summary unaudited pro forma statement of operations data gives
effect to the acquisitions of MeTechnology AG and Transaction Software
Technologies, Inc., the offering of the notes and the application of the net
proceeds of the offering, and the proposed acquisitions of Blaze Software, Inc.
and GemStone Systems, Inc. as if they had occurred on July 1, 1998.
The summary unaudited pro forma balance sheet data as of June 30, 2000 gives
effect to the offering of the notes and the application of the net proceeds of
the offering and to the proposed acquisitions of Blaze Software, Inc. and
GemStone Systems, Inc. as if they had occurred on June 30, 2000.
The pro forma adjustments are based on available information and assumptions
that we believe are reasonable. The unaudited pro forma data are not
necessarily indicative of our financial position or results of operations had
the transactions occurred on the indicated dates, nor do the unaudited pro
forma data claim to represent our financial position or results of operations
for any future date or period.
You should carefully review our consolidated financial statements included
elsewhere in this prospectus and the information provided in "Capitalization,"
"Unaudited Pro Forma Financial Data," "Selected Historical Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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SUMMARY FINANCIAL DATA
(Deutsche marks and dollars in thousands)
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Six Months Ended Six Months Ended
Fiscal Years Ended June 30 December 31 June 30
---------------------------------- ------------------------- --------------------------
1997(1) 1998 1999 1999 1998 1999 1999 1999 2000 2000
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
DM DM DM $ DM DM $ DM DM $
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Statement of
Operations
Data:
Revenue......... 12,101 29,571 62,487 30,495 19,671 51,287 25,029 42,816 81,729 39,887
Cost of Sales... (7,971) (15,493) (31,325) (15,287) (10,371) (22,937) (11,194) (20,954) (32,870) (16,042)
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Gross profit.... 4,130 14,078 31,162 15,208 9,300 28,350 13,835 21,862 48,859 23,845
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Selling
expenses....... (3,118) (16,636) (38,848) (18,959) (15,535) (27,714) (13,525) (23,313) (36,283) (17,708)
General and
administrative
expenses....... (1,332) (4,305) (10,639) (5,192) (4,092) (12,643) (6,170) (6,547) (15,725) (7,674)
Research and
development
expenses....... (1,450) (4,917) (8,733) (4,262) (3,896) (12,769) (6,232) (4,837) (21,437) (10,462)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions... -- -- (3,686) (1,799) -- (15,797) (7,709) (4,020) (15,184) (7,410)
Non-cash charges
associated with
stock option
grants......... -- -- (16,340) (7,974) -- (12,240) (5,973) (10,280) (30,735) (15,000)
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Total operating
expenses....... (5,900) (25,858) (78,246) (38,186) (23,523) (81,163) (39,609) (48,997) (119,364) (58,255)
Operating loss.. (1,770) (11,780) (47,084) (22,978) (14,223) (52,813) (25,774) (27,135) (70,505) (34,409)
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Interest
income......... 5 150 1,528 746 726 35 17 802 1,857 906
Interest
expense........ (157) (454) (960) (468) (209) (867) (423) (749) (8,267) (4,035)
Other income,
net............ 198 239 2,565 1,252 1,261 2,298 (1,121) 1,711 460 224
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Loss before
income taxes
and
extraordinary
items.......... (1,724) (11,845) (43,951) (21,448) (12,445) (51,347) (25,058) (25,371) (76,455) (37,313)
Income tax
benefit
(expense)...... 10 -- (113) (55) -- (104) (51) (113) (227) (111)
Minority
interest....... -- -- 90 44 -- (26) (13) 90 99 48
Other taxes..... -- -- -- -- -- -- -- -- (103) (50)
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Loss before
extraordinary
item........... (1,714) (11,845) (43,974) (21,459) (12,445) (51,477) (25,122) (26,394) (76,686) (37,426)
Extraordinary
loss on early
extinguishment
of debt, net of
taxes.......... -- -- (64) (31) (64) -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
Net loss from
continuing
operations..... (1,714) (11,845) (44,038) (21,490) (12,509) (51,477) (25,122) (25,394) (76,686) (37,426)
====== ======= ======= ======= ======= ======= ======= ======= ======== =======
Other Financial
Data:
EBITDA(2)....... (838) (10,167) (37,725) (18,410) (11,977) (31,649) (15,445) (19,614) (50,715) (24,751)
Adjusted
EBITDA(2)...... (838) (10,167) (21,385) (10,436) (11,977) (19,409) (9,472) (9,334) (19,980) (9,751)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions
and
depreciation... 734 1,374 6,705 3,272 985 18,892 9,219 5,720 19,231 9,386
Capital
expenditures... 1,748 3,869 10,835 5,288 3,396 4,334 2,115 7,439 7,731 3,773
Ratio of
earnings to
fixed
charges(3)..... -- -- -- -- -- -- -- -- -- --
Pro forma ratio
of earnings to
fixed
charges(4)..... -- -- -- -- -- -- -- -- -- --
Reconciliation
between reported
net loss and the
amounts shown as
EBITDA and
Adjusted EBITDA:
Net loss before
extraordinary
items.......... (1,714) (11,845) (43,974) (21,459) (12,445) (51,477) (25,122) (25,394) (76,686) (37,426)
Net taxes....... (10) 0 113 55 0 104 51 113 330 161
Interest
expense........ 157 454 960 468 209 867 423 749 8,267 4,035
Interest
income......... (5) (150) (1,528) (746) (726) (35) (17) (802) (1,857) (906)
Depreciation.... 734 1,374 3,018 1,473 985 3,095 1,510 1,700 4,047 1,975
Amortization.... 0 0 3,686 1,799 0 15,797 7,709 4,020 15,184 7,410
------ ------- ------- ------- ------- ------- ------- ------- -------- -------
EBITDA.......... (838) (10,167) (37,725) (18,410) (11,977) (31,649) (15,445) (19,614) (50,715) (24,751)
Non-cash charges
associated with
stock option
grants......... 0 0 16,340 7,974 0 12,240 5,973 10,280 30,735 15,000
Adjusted
EBITDA......... (838) (10,167) (21,385) (10,436) (11,977) (19,409) (9,472) (9,334) (19,980) (9,751)
<CAPTION>
Adjusted Pro Forma for
Pro Forma for the Offering Offering, TST, ME and the
and Acquisitions of Pro Forma for the Offering, Proposed Acquisitions of
MeTechnology and TST TST, ME and GemStone Blaze and GemStone
-------------------------------- -------------------------------- --------------------------------
Fiscal Six Fiscal Six Fiscal Six
Year Six Months Year Six Months Year Six Months
Ended Months Ended Ended Ended Months Ended Ended Ended Months Ended Ended
June 30, December 31, June 30, June 30, December 31, June 30, June 30, December 31, June 30,
1999 1999 2000 1999 1999 2000 1999 1999 2000
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
DM DM DM DM DM DM DM DM DM
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Statement of
Operations
Data:
Revenue......... 71,653 51,287 81,729 113,595 72,538 106,368 133,349 87,331 121,118
Cost of Sales... (36,933) (22,937) (32,870) (49,448) (29,429) (41,980) (55,988) (35,020) (48,513)
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Gross profit.... 34,720 28,350 48,859 64,147 43,109 64,388 77,361 52,311 72,605
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Selling
expenses....... (44,670) (27,714) (36,283) (61,687) (37,493) (49,345) (72,637) (45,641) (61,495)
General and
administrative
expenses....... (17,922) (12,643) (15,725) (28,067) (16,915) (21,869) (32,401) (19,669) (25,617)
Research and
development
expenses....... (15,119) (12,769) (21,437) (25,263) (18,013) (29,049) (32,932) (21,923) (32,927)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions... (31,488) (15,797) (15,184) (106,455) (53,281) (52,668) (230,975) (115,541) (114,928)
Non-cash charges
associated with
stock option
grants......... (16,340) (12,240) (30,735) (24,708) (16,424) (34,919) (50,150) (50,293) (56,469)
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Total operating
expenses....... (125,539) (81,163) (119,364) (246,180) (142,126) (187,850) (419,095) (253,067) (291,436)
Operating loss.. (90,819) (52,813) (70,505) (182,033) (99,017) (123,462) (341,734) (200,756) (218,831)
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Interest
income......... -- -- -- -- -- --
Interest
expense........ (28,487) (14,609) (20,187) (28,487) (14,609) (20,833) (29,110) (14,811) (20,890)
Other income,
net............ 2,565 2,298 460 2,379 1,977 460 2,379 1,977 2,601
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Loss before
income taxes
and
extraordinary
items.......... (116,741) (65,124) (90,232) (208,141) (111,649) (143,835) (368,465) (213,590) (237,120)
Income tax
benefit
(expense)...... (210) (104) (330) (445) (274) (589) (614) (442) (601)
Minority
interest....... 90 (26) 99 90 (26) 99 90 (26) 99
Other taxes..... -- -- -- -- -- -- -- --
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Loss before
extraordinary
item........... (116,861) (65,254) (90,463) (208,496) (111,949) (144,325) (368,989) (214,058) (237,622)
Extraordinary
loss on early
extinguishment
of debt, net of
taxes.......... (64) -- -- (64) -- -- (64) -- --
--------- ------------ --------- --------- ------------ --------- --------- ------------ ---------
Net loss from
continuing
operations..... (116,925) (65,254) (90,463) (208,560) (111,949) (144,325) (369,053) (214,058) (237,622)
========= ============ ========= ========= ============ ========= ========= ============ =========
Other Financial
Data:
EBITDA(2).......
Adjusted
EBITDA(2)......
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions
and
depreciation...
Capital
expenditures...
Ratio of
earnings to
fixed
charges(3).....
Pro forma ratio
of earnings to
fixed
charges(4)..... (3.94) (4.10) (4.21) (7.02) (7.04) (6.51) (12.17) (13.29) (10.71)
Reconciliation
between reported
net loss and the
amounts shown as
EBITDA and
Adjusted EBITDA:
Net loss before
extraordinary
items..........
Net taxes.......
Interest
expense........
Interest
income.........
Depreciation....
Amortization....
EBITDA..........
Non-cash charges
associated with
stock option
grants.........
Adjusted
EBITDA.........
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of June 30, As of December 31, As of June 30, As of June 30, 2000
----------------------------- ---------------------- --------------- ---------------------
Pro Forma for the Pro Forma for the
Proposed Acquisition Proposed Acquisitions
1997 1998 1999 1999 1998 1999 1999 2000 2000 of Gemstone of Blaze and GemStone
----- ------ ------- ------- ------ ------- ------- ------- ------- -------------------- ---------------------
DM DM DM $ DM DM $ DM $ DM DM
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.... 7,222 19,680 275,070 134,239 94,246 248,685 121,363 496,167 242,151 1,033,969 2,068,799
Total long-term
debt........... 2,730 10,308 24,356 11,886 6,000 3,850 1,879 248,596 121,326 248,733 249,235
Total
liabilities.... 8,208 19,219 56,731 27,686 18,354 78,313 38,218 301,750 147,267 331,043 356,693
Total
shareholders'
equity......... (986) 461 217,939 106,358 75,892 169,946 82,937 194,091 94,725 702,600 1,711,780
</TABLE>
-------
(1) Our financial statements contained in this prospectus have been prepared to
comply with SEC requirements, as well as U.S. GAAP requirements. To
maintain a consistent presentation, the balance sheet data at June 30, 1997
differs from the balance sheet data at that date included in our published
accounts, which comply with German GAAP.
(2) We have presented EBITDA and Adjusted EBITDA to allow for greater
comparability between periods as well as an indication of our results on an
ongoing basis.
We define EBITDA as:
. net loss, plus
. extraordinary losses, income tax expense, interest expense, and
depreciation and amortization, less
. interest income and income tax benefit.
We define Adjusted EBITDA as:
. EBITDA, plus
. non-cash charges related to stock option grants.
Because all companies do not calculate EBITDA or similarly titled financial
measures in the same manner, other companies' disclosures of EBITDA may not be
comparable with EBITDA as used here.
EBITDA and Adjusted EBITDA as used here should not be considered as an
alternative to net income or loss (as an indicator of operating performance) or
as an alternative to cash flow (as a measure of liquidity or ability to service
debt obligations) and they are not a measure of performance or financial
condition under U.S. GAAP. EBITDA and Adjusted EBITDA are intended to provide
additional information for evaluating the ability of an entity to meet its
obligations.
Cash flows under U.S. GAAP consist of cash flows from operating, investing
and financing activities. Cash flows from operating activities reflect net
income or loss, including charges for interest and income taxes not reflected
in EBITDA as used here, adjusted for:
. all non-cash charges or credits which include, for example, depreciation
and amortization and
. changes in operating assets and liabilities, not reflected in EBITDA.
EBITDA as used here differs from consolidated cash flow as defined in the
indenture governing the notes.
(3) Ratio of earnings to fixed charges is computed by dividing our earnings
from continuing operations before income taxes, minority interest and fixed
charges by our fixed charges. Our fixed charges consist of interest expense
plus one-third of rental expense (the portion that has been considered by
management to be representative of the interest factor). Earnings were
insufficient to cover fixed charges by DM (1,724), DM (11,845), DM
(43,951), DM (12,445), DM (51,347), DM (25,371) and DM (76,455) for the
years ended June 30, 1997, 1998 and 1999, six months ended December 31,
1998 and 1999 and six months ended June 30, 1999 and 2000.
(4) Pro forma ratio of earnings to fixed charges gives pro forma effect to the
offering of the notes and the application of the proceeds of the offering
as if they had occurred at the beginning of each indicated period. Earnings
plus pro forma fixed charges would have been insufficient to cover pro
forma fixed charges by DM (146,395) for the year ended June 30, 1999, DM
(80,993) for the six months ended December 31, 1999 and DM (111,679) for
the six months ended June 30, 2000. After giving pro forma effect to the
proposed acquisition of GemStone, earnings plus pro forma fixed charges
would have been insufficient to cover pro forma fixed charges by DM
(300,993) for the year ended June 30, 1999, DM (159,116) for the six months
ended December 31, 1998 and DM (197,526) for the six months ended June 30,
2000. After also giving total pro forma effect to the proposed acquisitions
of Gemstone and Blaze, earnings plus pro forma fixed charges would have
been insufficient to cover pro forma fixed charges by DM (683,130) for the
year ended June 30, 1999. DM (371,855) for the six months ended December
31, 1999, and DM (401,464) for the six months ended June 30, 2000.
11
<PAGE>
RISK FACTORS
Risks Related to Our Business
We have a history of losses, we expect future losses and we may never achieve
sufficient profitability or positive cash flow to meet our obligations
We experienced net losses of approximately DM 76.7 million for the six
months ended June 30, 2000, DM 51.5 million for the six months ended December
31, 1999 and net losses of approximately DM 47.3 million, approximately DM 8.6
million and approximately DM 1.7 million for the fiscal years ended June 30,
1999, 1998 and 1997, respectively. Our accumulated deficit through June 30,
2000 was approximately DM 185.7 million. We have also experienced negative
earnings before interest expense and interest income, taxes, depreciation and
amortization during each of these periods. On a pro forma basis after giving
effect to the proposed acquisitions of Blaze and GemStone, we would have
experienced losses of approximately DM 653.4 million, DM 356.3 million and DM
379.8 million for the six months ended June 30, 2000, six months ended December
31, 1999 and for the fiscal year ended June 30, 1999. The development of new
versions and adaptations of our Twister platform, the entry into new e-business
sectors, the increased penetration of the e-finance sector and the geographic
expansion of our business through internal growth or acquisitions will require
a significant amount of cash resources.
From October 1998 through June 2000 we have invested approximately DM 163.8
million in our expansion. We used about 80% of this investment to finance our
internal growth and 20% for the external growth through the acquisition of TST.
We expect that we will continue to invest in our business in similar amounts
and proportions, but since we, like other companies operating in our market,
require high degree of flexibility, these amounts and proportions may change.
We expect to continue to operate at a net loss and experience negative cash
flow as we continue our development program and expand our business. Continuing
net losses and future cash shortfalls will require additional debt or equity
financing, which may not be available to us on a timely basis, at acceptable
terms, or at all. If we cannot obtain the financing on acceptable terms, we may
not be able to continue our development programs or expand our business.
The market for our products and services is in its early stage of development
and, if a viable market for them does not develop, our business may not
succeed
We develop and market software which serves as an interface between
businesses' traditional information processing systems and electronic
distribution channels for the sale of products and services. The market for our
products and services is in its early stages of development and is rapidly
evolving. A viable market for our products and services may not emerge or be
sustainable. As is typical for new and rapidly evolving industries, demand and
market acceptance for recently introduced products and services are subject to
a high level of uncertainty, especially where, as is true of us, acquisition of
the product often requires a large capital commitment or other significant
commitment of resources. This uncertainty is compounded by the risks that
consumers and businesses will not adopt e-business commerce and that an
appropriate infrastructure necessary to support increased e-commerce and
communication will fail to develop to a sufficient extent and within an
adequate time frame to permit us to succeed.
Adoption of e-business and knowledge management, particularly by those
individuals and businesses that have relied upon traditional means of commerce
and communication, will require a broad acceptance of new and substantially
different methods of conducting business and exchanging information. Our
products and services involve a new approach to the conduct of e-business which
may make intensive marketing and sales efforts necessary to educate prospective
customers about the uses and benefits of our products and services. For
example, businesses that have already invested substantial resources in other
methods of conducting e-business may be reluctant or slow to adopt a new
approach that may replace, limit, or compete with their existing systems. The
security concerns of existing and potential users of our products and services
may inhibit the growth of e-business generally and the market's acceptance of
our products and services in particular.
12
<PAGE>
If the Internet and the related electronic communication channels fail to
gain acceptance as widely used media for banking transactions and other
commerce, our business will be adversely affected
Sales of most of our products and services will depend upon the adoption of
the Internet and the related electronic communication channels as widely used
media for banking transactions and other commerce. If these channels do not
develop as we anticipate, we may not be able to grow our business and become
profitable.
The Internet and the related electronic communication channels have
experienced, and are expected to continue to experience, significant growth in
the number of users and amount of traffic. There can be no assurance that the
electronic communication infrastructure will continue to be able to support
the demands placed on it by this continued growth. Electronic communication
channels could lose their viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of online
business activity or due to increased governmental regulation.
Because global commerce and online exchange of information over the
Internet through various electronic communication channels are relatively new
and evolving, there can be no assurance that they will prove to be viable for
commercial transactions. Issues concerning the commercial use of the Internet
and the related electronic communication channels--such as, security,
reliability, cost, ease of use, accessibility, and quality of service--and the
subsequent outcomes of these issues may negatively affect their growth or the
attractiveness of e-business. If the necessary infrastructure and
complementary products are not developed, or if they do not become viable for
commercial transactions, our business, financial condition and results of
operations will be materially and adversely affected.
We increasingly rely on third party consultants, distributors and customizers
for sales of our products, and, if these relationships fail, our business
could be adversely affected
For most of our history, we engaged primarily in the direct sales of our
products to banks and other business customers and provided services to these
customers to adapt and customize our products to their existing informational
systems and their specific requirements. We are increasingly emphasizing
indirect sales through third parties, including joint ventures to which we may
license our software, as part of our business strategy to increase sales and
market penetration of our products and to enter into new e-commerce sectors
and geographic regions. If these relationships fail, we will have to devote
substantially more resources to the distribution, sales and marketing,
implementation and support of our products than we would otherwise, and our
efforts may not be as effective as those of our partners.
For these indirect sales, we rely on system integrators, value added
resellers, consultants and joint ventures that perform or contract with others
for the installation and customization services that a particular business
customer may require. Because of our increasing emphasis on indirect sales,
the proportion of our revenues derived from license fees has increased from
24% of revenue for the fiscal year ended June 30, 1998 to 26% of revenue for
the six months ended June 30, 2000 and the proportion of our revenue derived
from the provision of services has decreased from 56% to 38% of revenue for
the same periods. We have relationships with only a limited number of third
party distribution partners, and we intend to further increase our reliance on
these partners in the future.
The continued success of this strategy will depend on our ability to enter
into and expand profitable relationships with third parties, including joint
ventures to which we may license our software, who are willing and able to
distribute our products under license and perform or contract for the
necessary services to install and customize our products. Our agreements with
these third parties may not restrict them from distributing products that
compete with our products.
If we are unable to compete successfully in the highly competitive markets
for e-business software, our business will not become profitable and we will
not be able to preserve our market position
The e-business software industry and the markets for our products are
generally highly competitive. We may not be able to compete successfully with
current or future competitors. We expect that competition in the market for e-
business software will increase from both existing suppliers and new suppliers
entering the
13
<PAGE>
market, especially in light of the expansion of e-business opportunities and
the receptivity of the capital markets to companies in this industry. When
marketing our products, we compete in particular with providers of software
platforms for e-business and providers of software applications for e-
business. Potential customers could also develop their own solutions for
accessing electronic distribution channels.
Some of our competitors have longer operating histories, and significantly
greater financial, technical, marketing, and other resources than we do and
thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, current and potential
competitors may have greater name recognition and more extensive customer
bases that could be used to gain market share to our detriment. These
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, and offer more attractive terms to
purchasers than we can. Some of our current and potential competitors may also
bundle their products in a manner that may discourage users from purchasing
products offered by us. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to enhance their products. It is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
The principal competitive factors affecting the market for our products are
depth and breadth of functionality offered, ease of application development,
time required for application development, reliance on industry standards,
reliability, scalability, maintainability, personalization, product quality,
price, and customer support.
If we are unable to timely respond to rapid technological advances and
emerging industry standards and practices, we will not be able to maintain or
expand our market position
The information services, software and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new product and service introductions and enhancements, and emerging
industry standards. Our future success will depend, in part, on our ability to
develop leading technologies, enhance our existing products and services,
develop new products and services that address the increasingly sophisticated
and varied needs of our prospective customers, and respond to technological
advances and emerging industry standards and practices on a timely and cost-
effective basis. The introduction of products and services embodying new
technologies and the emergence of new industry standards and practices can
render existing products and services obsolete and unmarketable.
We may not be successful in effectively using new technologies, adapting
our products to emerging industry standards, developing, introducing, and
marketing product and service enhancements, or new products and services. We
may also experience difficulties that could delay or prevent the successful
development, introduction, or marketing of these products and services. Our
new product and service enhancements may not adequately meet the requirements
of the marketplace and achieve market acceptance.
If we are unable to develop and introduce new products and services or
enhancements of existing products and services in a timely manner in response
to changing market conditions or customer requirements, or if new products and
services do not achieve market acceptance, our business, financial condition
and results of operations will be materially and adversely affected.
We may be unable to successfully manage any future growth, which could harm
our ability to serve our customers, disrupt our operations and delay our
ability to pursue our business strategy
The rapid growth of our business and sales has created significant demands
on our personnel and on our administrative and financial resources. If we are
unable to manage this growth successfully, our ability to take advantage of
and grow our business could be severely impeded. Our ability to manage growth
will depend in part on our administrative, financial and operational controls
and our continued ability to create the infrastructure necessary to exploit
market opportunities for our products and services. Our senior management has
generally had limited experience in managing large and rapidly growing
business organizations. Our ability to compete effectively and to profitably
grow our business will require us to continually improve our financial and
management controls, reporting systems and procedures on a timely basis,
implement new systems as
14
<PAGE>
necessary, and expand, train and manage our workforce. The failure of our
management to respond effectively to these challenges and to changes in
business conditions could significantly affect our business, results of
operations and financial condition.
During 1999, we implemented a new integrated operational system for
accounting and control functions related to our German operations. We have no
integrated system for operations outside of Germany. If we are unable to
implement an integrated system for our worldwide operations on a timely basis,
our ability to manage our business effectively on a global basis could be
materially and adversely affected.
If we are unable to obtain additional capital as needed in the future, we may
not be able to develop and expand our business
As we continue to develop and expand our business, we may require
significant additional capital to fund our capital expenditures, research and
development and working capital needs, as well as our debt service requirements
and anticipated cash flow deficits. The actual amounts and timing of our future
capital requirements may vary significantly from our estimates. We continually
reevaluate our business plan in our rapidly changing industry. Our business
plan may change in material respects. The change could result in unforeseen
needs for additional financing. Our revenues and costs are dependent on factors
that are largely beyond our control, such as changes in technology, increased
competition, regulatory developments, fluctuation in interest or currency
exchange rates and various other factors. Due to the uncertainty of these
factors, our actual revenues and costs may vary significantly from our
forecasts. The significant variation will affect our future capital
requirements.
If we fail to make successful acquisitions and integrate acquired businesses,
our growth and the future viability of our business could be adversely
affected
In the last twelve months, we made several strategic acquisitions, we have
entered into definitive agreements to acquire Blaze and GemStone, and we will
continue to explore acquisitions of related businesses as an important element
of our growth strategy as a means of enhancing our existing products and
expanding the geographic and industry scope of our business.
Our ability to implement this strategy will depend on our ability to
identify appropriate acquisition targets, to complete acquisitions, including
the proposed acquisitions of Blaze and GemStone and to integrate the
operations, technologies, products and personnel of acquired businesses,
including our recent acquisitions and the proposed acquisitions of Blaze and
GemStone. Our ability to make acquisitions will be limited by our financial
resources, including available cash and borrowing capacity and the market value
and liquidity of our shares. Acquisitions could also divert management
attention from our other operations. We could also lose key employees of
acquired businesses. If we use available cash resources or borrow money to
finance an acquisition, our ability to make payments on the notes may be
further reduced. We could also incur substantial expenses following any
acquisition, including expenses of integrating an acquired business.
We expect that competition for appropriate acquisition targets may be
significant. We may compete with other software companies with similar
acquisition strategies, many of which may be larger and have greater financial
and other resources than we have. We believe that competition for acquisition
targets in our industry is based on a number of factors, including price,
terms, size and access to capital, ability to offer cash, stock or other forms
of consideration. We cannot assure you that we will be able to identify and
acquire suitable companies on acceptable terms.
If Twister fails to gain the continued and growing market acceptance or we
fail to adapt Twister and related products to meet changes in technology and
customer needs, our business could fail
All of our revenue is derived from the sale of products and services derived
from our core product platform, Twister. Our success depends on the continued
and growing acceptance of products based on Twister and our continuing ability
to introduce new versions of Twister and to adapt the Twister platform for
changes in computer and communications hardware, informational system software,
channels for electronic access, communication and distribution, and evolving
customer needs. If demand for products based on Twister does
15
<PAGE>
not continue to grow, or pricing or demand is otherwise adversely affected by
competition or technological change, our business could fail.
If we fail to retain and attract the services of our management, key
employees, and qualified personnel, our business could be adversely affected
Our success depends to a large extent on the efforts and ability of our
management and other key employees. Our ability to retain and attract
qualified management, technical and sales personnel is critical to the success
of our business. The loss of management or key employees, in particular in the
area of research and development, or our inability to hire additional
qualified personnel as required, could have a detrimental effect on our
business, financial condition and results of operations. There is intense
employment competition among companies in our industry because of a shortage
of qualified personnel. Because of this shortage, we could suffer losses of
key personnel whom we may not be able to replace.
Defects in our products could diminish demand for our products and result in
large remedial expenditures or claims against us
Our software products could contain latent defects. Any latent defects
could
. adversely affect the performance of our software and significantly
reduce the demand for our products,
. generate negative publicity,
. result in the loss of existing orders or a delay in the receipt of new
orders,
. delay the introduction of new products or new versions of our existing
products,
. divert development resources and
. result in additional warranty and service costs and product liability
claims.
Since our products are critical to the functioning of electronic
distribution and sales channels, any failure of our products could result in
substantial financial losses for businesses using our products. It is possible
that contractual conditions limiting our liability will not be valid in all
cases and under all legal systems, and that sufficient insurance coverage will
not be available to us on reasonable terms. We are subject to the risk that
product claims may be made against us in the future.
We have taken the year 2000 date recognition problem of certain computer
software and hardware into account in designing our software products. We
warrant the year 2000 compatibility of our software to our customers. We
cannot exclude the possibility that claims for year 2000 non-compliance may
arise in the future.
Our failure to protect our intellectual property rights could reduce our
revenues or result in costly litigation
To maintain the benefits of our technology, we need to protect our
intellectual property rights, and we also need to invest in research and
development. Our success as an enterprise depends to a large extent on the
protection of intellectual property rights for the software we develop. We
generally do not rely on patents to protect our intellectual property
interests. We seek to protect our intellectual property rights through
confidentiality covenants with management, employees and third parties as well
as through copyright and trademark protection. However, we cannot guarantee
that we will be able to protect, or to continue to develop, proprietary
information. No assurance can be made that existing measures or intellectual
property laws will be sufficient to prevent the independent development of
similar technologies by competitors. We also cannot assure you that we can
sustain the level of capital expenditure necessary to protect our
technological position.
Others may make claims that we infringe their intellectual property and these
claims could be costly to defend and result in the loss of significant rights
We are subject to the risks of claims alleging infringement of third party
intellectual property rights. These claims could require us to
. spend significant sums in litigation;
16
<PAGE>
. pay damages;
. divert significant management resources;
. cause delays in the marketing and sale of our products;
. enter into royalty or licensing arrangements;
. cause us to discontinue the use of challenged technology or trademarks;
or
. develop non-infringing intellectual property.
The risks of infringement claims may increase in the future because of
increasing competition and because the functions of various products being
offered in the market can overlap. Claims based on alleged or actual
infringement of intellectual property rights could have a significantly
detrimental effect on our business, financial condition and results of
operations.
Regulation of commercial transactions over the Internet or of encryption
technology by different governmental agencies in a variety of jurisdictions
could impair the development of e-business and decrease demand for our
products or increase our costs
Access to and commercial transactions on the Internet are subject to few
specific legal regulations. As the market matures, regulation of the access to
and the transaction of business on the Internet will likely increase because of
rising usage or abuse. The adoption of regulations could deter the growth of
electronic distribution and sales of products which would have a detrimental
effect upon our business.
The Twister application, X.PRESSO security package, is equipped with a 128-
bit encryption technology, to provide secure data transfer in the case of
electronic settlement of financial services through electronic distribution
channels. This encryption technology is important for marketing our products to
businesses offering e-finance and e-commerce services. The export of encryption
technology has been subject to strict export controls, which have been
liberalized in recent years. The export and use of this encryption technology
is not subject to either German or European Union prohibitions or limitations
for the geographic markets that are relevant to us. Under U.S. laws, the export
of 128-bit encryption technology from the United States is prohibited without
an export license. Export licenses can be obtained, however, for software used
by financial service companies as end users to secure their electronic
distribution channels. We have received a license from the U.S. Department of
Commerce, Bureau of Export Administration. The license expires July 31, 2001.
This enables U.S. banks to use the X.PRESSO Security Package for electronic
distribution outside the United States as well. On December 2, 1998, the French
governmental body Service Central de la Securite des Systemes d'Information, or
SCSSI, authorized the so-called "collective" use of the X.PRESSO security
package 1.3 by French financial institutions. This authorization will expire on
November 27, 2003 unless renewed or extended.
There can be no assurance that Germany, the European Union, the United
States or other jurisdictions will not further restrict distribution of 128-bit
encryption technology. The U.S. Department of Commerce could cancel the license
issued to us, refuse to extend the license beyond July 31, 2001 or delay
granting an extension. These actions could have detrimental effect on the
marketing of the X.PRESSO Security Package application and on our business as a
whole. Also, if existing export license requirements in the United States were
rescinded, we could be exposed to additional competition.
New developments may compromise or breach encryption technology used by us to
protect customer transaction data and reduce demand for our products
A significant barrier to online commerce and communication is the secure
exchange of value and confidential information over public networks. We rely on
encryption and authentication technology, including licensed public key
cryptography technology, to provide the security and authentication necessary
to accomplish the secure exchange of value and confidential information. We
cannot assure you that advances in computer capabilities, new discoveries in
the field of cryptography or new developments will not result in a compromise
or breach of licensors' or other algorithms used by us to protect customer
transaction data. If a compromise of our security were to occur, it could
significantly reduce demand for our products.
17
<PAGE>
Our results of operations are subject to strong volatility that could affect
our ability to make regular payments on the notes
Our results are and will continue to be subject to strong volatility which
could affect our ability to make payments on the notes as due. A wide range of
factors may precipitate variations in results which could hurt our ability to
make payments on the notes as scheduled. These factors include the
introduction by us, or our competitors, of new or improved products, the
market acceptance of our products, the timing of revenue recognition related
to large orders, accounting rules applicable to the recognition of license
revenues, changes in operational costs, pricing, third party distributor
relationships, and the introduction or rescission of governmental regulation.
Our geographic market expansion involves significant risks and we may not be
successful in increasing and meeting demand for our products outside of
Europe
In recent years, we have sought to expand the geographic scope of our
markets outside Germany and Europe, particularly in Asia and the United
States. We have made, and expect to continue to make, significant expenditures
to expand our geographic presence, including the acquisition of related
businesses in other geographic regions. Our ability to be successful in this
strategy has been, and will continue to be, affected by differences in the
technological and competitive environment in these markets and in the market
acceptance of our products. For example, we do not expect that electronic
retail banking applications on which we have based our growth in parts of
Europe will play a significant role in our expansion efforts in the United
States. Our success in the United States and some markets outside of Europe
will depend on the development and marketing of new applications for our
software. Geographic expansion generally increases the risks of doing business
on an international basis. These risks can include variance in protection of
intellectual property, trade barriers, differing payment cycles, differing tax
consequences, variance in local laws and regulations, compliance with a range
of laws, regulations and treaties and the need to staff and manage foreign
operations.
Changes in foreign exchange rates or interest rates could have adverse
effects on our euro revenues and cash flows, which may reduce our ability to
satisfy our euro denominated obligations, including the notes
During the six months ended June 30, 2000, approximately 30% of our
revenues came from sources outside the euro currency zone, and we expect that
the percentage of our revenues derived from these countries may increase in
the future. Changes in foreign currency exchange rates can affect our ability
to sell our products at satisfactory prices, can reduce the value of our
assets and revenues and increase our liabilities and costs and may reduce our
ability to satisfy our obligations denominated in euros, including the notes.
Even if foreign currency expenses substantially offset revenues in the same
currency, our profits may be diminished when reported in Deutsche marks or
euro. We have not sought to reduce our exposure to exchange rate risks through
hedging transactions. We may suffer losses solely because of exchange rate
fluctuations.
Our management board which owns a substantial portion of our outstanding
shares, is likely to have a controlling influence over all business
decisions, may be difficult to remove and may enter into transactions that
involve risks to noteholders
As of August 31, 2000, the members of our management board as a group
beneficially owned approximately 29% of our outstanding common shares. They
are likely to continue to have a controlling influence over all material
decisions concerning our business and over the future composition of the
supervisory board and, indirectly, the management board. They may be in a
position to prevent any change to the composition of our management board and
may take actions or enter into transactions that involve risks to holders of
the notes.
We rely on the financial services sector for a significant proportion of our
revenues, and a decline in the demand for our products by banks could
significantly impair our business
We have relied on the sale of our products and services to European banks
for most of our revenue. During the six months ended June 30, 2000 and fiscal
year ended December 31, 1999, revenues related to our European e-banking
products and services accounted for 66% of our revenues. Although we are
seeking to expand into other e-business sectors, there can be no assurance
that we will be able to duplicate our success
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with e-banking products in these other sectors. If we were unable successfully
to expand into other sectors, we would be adversely affected by a decline in
demand for our e-banking products and services or greater competition in
providing these products and services.
Our results depend on a small number of large orders and our revenue could
decline significantly during a period by our failure to complete one or more
sales
We derive a significant portion of our revenues from a small number of
relatively large orders. In the six months ended December 31, 1999,
approximately 11.3% of total revenue was derived from one customer. In the six
months ended June 30, 2000, approximately 9.8% of total revenue was derived
from one customer and approximately 7.6% from another customer. Our operating
results for a particular period could be materially and adversely affected if
we are unable to complete one or more substantial license sales or
implementations planned for that period.
Risks Related to the Notes
We may not be able to meet our payment obligations on the notes if we cannot
implement our strategy successfully and grow our business
Our ability to meet our obligations under the notes will depend on the
future performance of our business and whether we can successfully implement
our business strategy. Our future performance will be subject to the further
development of the market for our products and services, competition, general
economic conditions and legal, regulatory and technological factors. We may
not generate sufficient cash flow to enable us to meet our payment obligations
under the notes or other indebtedness or be able to fund our other cash
requirements. If we are unable to generate sufficient cash flow to meet these
requirements, we will have to explore other alternatives such as delaying or
reducing capital expenditures, including research and development, refinancing
our debt, or the sale of additional equity. Our ability to obtain additional
financing or equity capital will depend on our financial condition, our
prospects and market conditions at that time. We cannot predict whether any
debt financing or equity issuance could be accomplished on a timely basis, on
satisfactory terms, or at all, or whether these actions would enable us to
continue to satisfy our obligations under the notes.
Our substantial amount of debt could impair our financial health and prevent
us from meeting our obligations under the notes
Following the completion of the offering, the notes will constitute
substantially all of our indebtedness. The indenture governing the notes
permits us to incur substantial additional indebtedness, which we may incur as
we pursue our expansion strategy.
Our large amount of debt and our obligations to make principal and interest
payments on the notes, and on any additional indebtedness, could have
important consequences for you as a holder of the notes, including that:
. we will need to use proceeds from the sale of the notes to meet our
payment obligations;
. we may have more debt than our competitors, which could put us at a
competitive disadvantage;
. it may reduce our flexibility in responding to changing economic and
industry conditions;
. it may make us more vulnerable to general economic and industry specific
downturns; and
. it may limit our ability to pursue business opportunities, to borrow
more money, to compete effectively and to implement our business
strategy.
The indenture and our credit agreements restrict our ability to operate our
business, which could impede our growth
The indenture and existing credit agreements to which we are, or may in the
future become, a party limit our flexibility in operating our business, which
could impede our growth. In particular, these agreements limit our ability and
the ability of our subsidiaries to:
. borrow more money;
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. pay dividends;
. make investments or buy assets;
. use our assets as security for a loan or other transaction;
. enter into transactions with our affiliates;
. sell our assets;
. merge or consolidate with other companies; and
. engage in joint ventures.
Also, one of our strategies is to consider and take advantage of selected
opportunities to grow by acquiring other businesses whose operations or product
lines fit well with our existing business or whose geographic location or
market position enables us to expand into new markets. Our ability to implement
this expansion strategy may depend on our ability to finance an expansion
within the constraints of our various debt covenants, as well as on the
availability of suitable businesses at suitable valuations.
We depend in part on our subsidiaries to repay our debts, including the notes,
their assets may not be available to meet our note obligations, and creditors
of our subsidiaries will have a superior claim to their assets, which may
impair your ability to receive amounts due under the notes
A portion of our cash flow and consequently our ability to service our debt
obligations is partially dependent upon our ability to receive cash from our
subsidiaries. Assets of our subsidiaries may not be available to meet our note
obligations because of restrictions on their ability to make payments to us.
Our subsidiaries are separate legal entities. They have no legal obligation to
pay amounts due under the notes or to make funds available for payments.
Applicable law of the jurisdictions in which our subsidiaries are organized or
contractual or other obligations to which they are subject may limit their
ability to pay dividends to us or make payments to us on inter-company loans.
In general, our subsidiaries are restricted from paying dividends unless they
meet the statutory financial requirements applicable to them. Although the
indenture governing the notes limits the ability of our subsidiaries to enter
into consensual restrictions on their ability to pay dividends and make other
payments, these limitations are subject to a number of significant
qualifications and exceptions. Our subsidiaries may agree to these restrictions
in limited circumstances. The payment of interest and principal on inter-
company loans and advances as well as the payment of dividends by our
subsidiaries may be subject to taxes.
Creditors of our subsidiaries will have a prior claim to the assets of these
subsidiaries before claims of holders of our indebtedness, including the notes.
Because of this, the notes will effectively be subordinated to the existing and
future indebtedness and other liabilities, including trade payables, of our
subsidiaries, except if we are recognized as a creditor because of loans we may
have made to a subsidiary. If we are recognized as a creditor, our claim may
still be subordinated to any assets of our subsidiary pledged to secure other
indebtedness and any indebtedness of the subsidiary senior to that held by us.
If any of our subsidiaries becomes bankrupt, inter-company loans from us to our
subsidiary may not be respected under applicable bankruptcy law. The indenture
governing the notes limits the ability of our subsidiaries to incur
indebtedness and to issue preferred stock, but there are significant
qualifications and exceptions to this limitation. Our subsidiaries may continue
to incur a substantial amount of indebtedness and issue preferred stock under
certain circumstances.
Our secured debt will have priority over the notes and there may not be
sufficient assets to satisfy our obligations under the notes after meeting our
secured debt obligations
The notes will be unsecured. The indenture governing the notes permits us to
incur additional indebtedness. We and our subsidiaries will in some cases be
permitted to secure this indebtedness. Our subsidiaries' obligations under any
senior secured credit facility may be secured by pledges or charges over the
stock of our subsidiaries and by security interests over all or substantially
all of the assets and undertakings of our subsidiaries. Our subsidiaries may
guarantee our obligations under a senior secured credit facility. If we
20
<PAGE>
default on the notes or enter bankruptcy, liquidation or reorganization, then
all of our assets that secure our debts will be used to satisfy the obligations
under senior secured debt before we could make any payment on the notes. For
that reason, there may only be limited assets available to make payments on the
notes if there is an acceleration of the notes. If there is not enough
collateral to satisfy the obligations of the senior secured debt, the remaining
amounts of senior secured debt would share equally with unsecured senior
debtholders, such as the notes.
You may not be able to sell your notes unless a liquid active trading market
for the notes develops and is maintained
There may not be any liquid trading market for the notes when you want to
sell them. We listed the original notes and expect to make an application to
list the exchange notes on the Luxembourg Stock Exchange, but we do not intend
to apply to list the notes on any U.S. securities exchange or market. West LB
Panmure Limited, the initial purchaser, has informed us that it intends to make
a market in the notes. However, it is not obligated to do so, and may
discontinue the market making at any time without notice. We cannot assure you
that an active trading market for the notes will develop, or if one does
develop, that it will be sustained.
The market for non-investment grade debt has been highly volatile in terms
of price. It is possible that the market for the notes will also be volatile.
This volatility in price may affect your ability to resell your notes or the
timing of their sale.
If a change of control takes place, and we are unable to raise sufficient
funds, we will be unable to repurchase your notes
A change of control is an event which includes certain changes in ownership
of us. If a change of control occurs, you may require us to purchase any or all
of your notes at 101% of their principal amount plus any accrued and unpaid
interest. We may not have enough money, however, to purchase your notes upon a
change of control and also may not be able to raise the money to do so.
Restrictions on a change of control contained in the indenture may make it more
difficult for others to obtain control of BROKAT.
The change of control provisions may not protect you in a transaction in
which we incur a large amount of debt, including a reorganization,
restructuring, merger or other similar transaction, because that kind of
transaction may not involve any shift in voting power or beneficial ownership,
or may not involve a shift large enough to trigger a change of control.
If you do not exchange your original notes for exchange notes, your ability to
transfer old notes will be restricted
We will only issue exchange notes in exchange for original notes that are
timely and properly tendered. If you do not exchange your original notes in the
exchange offer, you may only sell your original notes if:
. they are registered under the Securities Act and applicable state
securities laws, or
. they are offered or sold under an exemption from these registration
requirements.
You should allow sufficient time to ensure timely delivery of the original
notes and you should carefully follow the instructions on how to tender your
original notes. Neither we nor the exchange agent are required to tell
you of any defects or irregularities in your tender of the original notes. We
relied on exemptions from the registration requirements of the Securities Act
and applicable state securities laws when we sold the original notes. We do not
intend to register the original notes under the Securities Act.
After the exchange offer is completed, if you continue to hold any original
notes, you may have trouble selling them because there will be fewer original
notes outstanding. If a large number of original notes are not tendered or are
tendered improperly, the limited amount of exchange notes that would be issued
and outstanding after we complete the exchange offer could lower the market
price of the exchange notes.
21
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IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
General
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
The information contained in this prospectus is subject to change, completion
or amendment without notice. You should not assume that the information
contained in this prospectus is accurate as of any date other than the date on
the cover page of this prospectus.
The distribution of this prospectus and the offer and sale of the notes may
be restricted by law in some jurisdictions. Persons into whose possession this
prospectus or any of the notes come must inform themselves about, and observe,
these restrictions. In particular, except for:
. our filing of registration statement with the SEC on Form F-4, No. 333-
37780, under the Securities Act of 1933 for the exchange notes;
. listing of the original notes on the Luxembourg Stock Exchange; and
. our application to list the exchange notes on the Luxembourg Stock
Exchange,
we have taken no action which would permit a public offering of the notes or
distribution of this prospectus or any other offering material in any
jurisdiction where action for that purpose is required.
Because of these restrictions, the notes may not be offered or sold,
directly or indirectly, and neither this prospectus nor any other offering
material may be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with applicable laws and
regulations. Each prospective purchaser of the notes must comply with all
applicable laws and regulations in force in any jurisdiction in which it
purchases, offers or sells the notes or possesses or distributes this
prospectus and must obtain any consent, approval or permission required of it
for the purchase, offer or sale by it of the notes under the laws and
regulations in force in any jurisdiction to which it is subject or in which it
makes these purchases, offers or sales and we shall have no responsibility for
the purchaser's compliance.
Market and Industry Data
The market share estimates that we provide in this prospectus, unless
otherwise noted, have been prepared by our management based on consultations
with our customers and suppliers, as well as on publicly available information
about market size and our competitors. The information provided in this
prospectus about us, our products and our industry is derived from publicly
available reports and other publications of eStats, IDC Corporation,
Datamonitor, Gartner Group, Durlacher Research, Booz Allen & Hamilton,
Forrester Research and Killen & Associates. Although we believe that all of
these sources are reliable, the accuracy and completeness of this information
is not guaranteed and has not been independently verified. We accept
responsibility for having correctly reproduced this information from these
sources.
For New Hampshire Residents:
Neither the fact that a registration statement or an application for a
license has been filed under Chapter 421-b of the New Hampshire Uniform
Securities Act with the State of New Hampshire nor the fact that a security is
effectively registered or a person is licensed in the State of New Hampshire
constitutes a finding by the Secretary of State that any document filed under
RSA 421-B is true, complete and not misleading. Neither these facts nor the
fact that an exemption or exception is available for a security or a
transaction means that the Secretary of State has passed in any way upon the
merits or qualifications of, or recommended or given approval to, any person,
security, or transaction. It is unlawful to make, or cause to be made, to any
prospective purchaser, customer, or client any representation inconsistent with
the provisions of this paragraph.
TRADEMARKS AND SERVICE MARKS
We have registered or applied for registration of Twister, BROKAT, X.PRESSO
Security Package, X.PRESSO, (without addendum), X.Agent, X.PAY, X PAY and XPAY
as our word trademarks and the BROKAT logo and esign as our word/device
trademarks in various jurisdictions. All other trademarks, registered
trademarks, service marks and registered service marks used in this prospectus
are the property of their owners.
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC on
Form F-4, No. 333-37780, under the Securities Act for the exchange notes. As
permitted by the rules and regulations of the SEC, this prospectus omits some
of the information, exhibits and undertakings contained in the registration
statement. For further information about us and the exchange notes, see the
registration statement, including its exhibits.
You may read and copy any document we file at the following SEC public
reference rooms:
<TABLE>
<S> <C> <C>
Judiciary Plaza 500 West Madison Street 7 World Trade Center
450 Fifth Street, N.W. 14th Floor Suite 1300
Room 1024 Chicago, Illinois 60661 New York, New York 10048
Washington, D.C. 20549
</TABLE>
Statements contained in this prospectus relating to the contents of any
contract or other document are for informational purposes and should not
substitute for your review of the copy of the contract or document filed as an
exhibit to the registration statement.
We are not currently required to satisfy the information requirements of the
Exchange Act. Upon the effectiveness of the registration statement, we will
have to satisfy these requirements as they apply to foreign private issuers. To
meet these requirements, we will file all reports and other information
required by the SEC. We also have agreed to file with the SEC and to provide to
the trustee and the holders of the notes quarterly and annual financial
information and related disclosure for as long as the notes are outstanding.
Additional Copies
For a period of one year after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to it to
any broker-dealer that requests these documents. You may request these
documents by contacting:
General Counsel
BROKAT AG
Industriestrasse 3
D-70565 Stuttgart
Federal Republic of Germany
Tel: +49-711-788 44-0
Fax: +49-711-788 44-777
You can obtain, free of charge, copies of this prospectus and copies of the
documents referred to in this prospectus, from us and, as long as the notes are
listed on the Luxembourg Stock Exchange, from Kredietbank S.A. Luxembourgeoise,
our listing, paying and transfer agent in Luxembourg at 43 Boulevard Royal, L-
2955 Luxembourg.
ENFORCEABILITY OF CIVIL LIABILITIES
United States
We are a stock corporation organized under the laws of Germany. Most of our
management board and supervisory board members and executive officers reside
outside the United States. All or a substantial portion of our assets and most
of our management board and supervisory board members also are located outside
the United States. Because of the location of our assets and board members, it
may not be possible for investors to serve process within the United States
upon BROKAT or persons on matters arising under the United States federal
securities laws or to enforce against BROKAT or persons located outside the
United States judgments of United States courts asserted upon the civil
liability provisions of the United States federal securities laws.
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Germany
We have been advised by our special counsel, Haver & Mailaender, that under
German law there is doubt about the enforceability in Germany, in original
actions or in actions for enforcement of judgments of United States courts, of
civil liabilities based solely upon the federal securities laws of the United
States. Also, awards of punitive damages in actions brought in the United
States or elsewhere may be unenforceable in Germany.
We have appointed CT Corporation Systems, 111 Eighth Avenue, New York, New
York 10011 as our agent to receive service of process in any action against us
in any state or federal court in the State of New York arising out of this
offering.
CURRENCY AND FINANCIAL STATEMENT PRESENTATION
We prepare our consolidated financial statements in Deutsche marks. In this
prospectus, unless otherwise specified or unless the context otherwise
requires, all references to Deutsche marks, DM and pfennigs are to the
denominative currency of the euro used in the Federal Republic of Germany, all
references to euro and (Euro) are to the single lawful currency of the
countries participating in the European Economic and Monetary Union, and all
references to U.S. dollars, dollars and $ are to the lawful currency of the
United States.
Conversion Rates
The Federal Reserve Bank of New York provides conversion rates for the euro
in place of the individual euro zone currencies, such as the Deutsche mark.
Deutsche mark rates can be derived from the euro rate by using the fixed
conversion rate of DM 1.95583 = (Euro) 1.00, the exchange rate fixed by the
Council of the European Economic and Monetary Union or the EMU Council. Solely
for your convenience, unless otherwise indicated, we have translated:
. euro into U.S. dollars at the rate of (Euro) 1.0477 = $1.00, based on
the noon buying rate in the City of New York for cable transfers in
foreign currencies certified by the Federal Reserve Bank of New York for
customs purposes of (Euro) 1 = $0.9545 on June 30, 2000, and
. Deutsche mark into U.S. dollars at the rate of DM 2.0491 = $1.00, based
on the noon buying rate for euros on June 30, 2000 and the conversion
rate of DM 1.95583 = (Euro) 1.00 fixed by the EMU Council.
You should not interpret these translations as a representation that the
translated amounts actually represent the Deutsche mark, euro or U.S. dollar
amounts from which they were translated or that they could be converted into
the Deutsche mark, euro or U.S. dollar amounts at the rates indicated or any
other rates. On September 7, 2000, the exchange rate was (Euro) 1.1442 = $1.00,
based on the noon buying rate. You should read "Exchange Rate Information" for
information about recent rates of exchange between the U.S. dollar and the
Deutsche mark and between the U.S. dollar and the euro.
Financial information in this prospectus has been prepared based on U.S.
GAAP, except for financial information for the fiscal year ended June 30, 1995,
which was prepared based on German GAAP, and except for financial information
of ESD Vermoegensverwaltungsgesellschaft mbH and MeTechnology AG for the fiscal
years ended December 31, 1997 and 1998, which was prepared based on German GAAP
with reconciliation to U.S. GAAP in compliance with Item 17 of SEC Form 20-F.
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EXCHANGE RATE INFORMATION
The following tables describe the exchange rates for the indicated periods
based on the noon buying rates for Deutsche marks and euro, expressed in
Deutsche marks and euro, per dollar. We have provided these rates solely for
your convenience and you should not interpret these translations as a
representation that Deutsche marks or euro amounts actually represent the
indicated dollar amounts or that these Deutsche mark or euro amounts could have
been, or could be, converted into dollars at that rate or at any other rate. We
did not use these rates in the preparation of our combined financial statements
included elsewhere in this prospectus.
The "Average Rate" columns represent the exchange rates based on the average
noon buying rates for Deutsche marks and euro on the last business day of each
month during the relevant period. Since January 1, 1999, the exchange rate
between the Deutsche mark and the euro is fixed at (Euro) 1.00 = DM 1.95583.
<TABLE>
<CAPTION>
Average Period
Deutsche Mark-Dollar Exchange Rate Rate High Low End Rate
---------------------------------- ------- ------ ------ --------
<S> <C> <C> <C> <C>
Year Ended December 31,
1995........................................... 1.4261 1.5612 1.3565 1.4345
1996........................................... 1.5070 1.5655 1.4354 1.5387
1997........................................... 1.7394 1.8810 1.5413 1.7991
1998........................................... 1.7588 1.8542 1.6060 1.6670
<CAPTION>
Average Period
Euro-Dollar Exchange Rate Rate High Low End Rate
------------------------- ------- ------ ------ --------
<S> <C> <C> <C> <C>
Year Ended December 31,
1999........................................... 0.9445 0.9930 0.8466 0.9930
Month Ended 2000
January 31..................................... 1.0249 0.9676 1.0249
February 29.................................... 1.0370 0.9940 1.0370
March 31....................................... 1.0499 1.0284 1.0444
April 30....................................... 1.1010 1.0366 1.1002
May 31......................................... 1.1247 1.0720 1.0720
June 30........................................ 1.0745 1.0365 1.0477
July 31........................................ 1.0826 1.0473 1.0792
August 31...................................... 1.1264 1.0837 1.1264
At September 7................................. 1.1442
</TABLE>
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DISCLOSURE ABOUT FORWARD LOOKING STATEMENTS
This prospectus contains statements that constitute forward looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Forward looking statements are statements other than historical
information or statements of current condition. These statements appear in a
number of places in this prospectus and include statements concerning our
intent, belief or expectations of future events, for example:
. increased competition from other companies in the industry;
. changing technology and future demand for our products;
. changes in our business strategy or development plans;
. our ability to attract and retain qualified personnel;
. worldwide economic and business conditions;
. regulatory, legislative and judicial developments;
. our financing plans; and
. trends affecting our financial condition or results of operations.
Forward looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those in the forward looking statements because of various factors. The
information in the "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" sections identifies some of the important factors that could cause
results to differ from those in the forward looking statements. Although our
management believes that the expectations as reflected by the forward looking
statements are reasonable based on information available to them, we cannot
assure you that the expectations will prove to have been correct. Because of
these uncertainties, you should not place undue reliance on these forward
looking statements.
These statements speak only as of the date of this prospectus, and we
undertake no obligation to revise or update any of them to reflect events or
circumstances after the date of this prospectus, including, for example,
changes in our business strategy or planned capital expenditures, or to reflect
new information or the occurrence of unanticipated events.
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THE EXCHANGE OFFER
General
Background and Purpose of the Exchange Offer
In March, 2000 we sold the original notes to WestLB Panmure Limited and
entered into a registration rights agreement. This agreement requires us to
file a registration statement under the Securities Act offering to exchange the
exchange notes for your original notes. We are meeting this requirement by
offering you the opportunity to exchange your original notes for exchange
notes. The exchange notes will be registered and issued without a restrictive
legend. This means that, unlike your original notes which contain restrictions
on their transfer, the exchange notes may be reoffered and resold freely by you
to any potential buyer without further registration under the Securities Act.
This is beneficial to you since you must find an available exemption from the
registration requirements of the Securities Act to sell your original notes.
Registration Rights Agreement
The registration rights agreement further provides that we must cause the
registration statement to be declared effective on or before August 25, 2000,
or we will owe liquidated damages to the holders of original notes. Except as
discussed below, upon the completion of the exchange offer we will have no
further obligations to register your original notes.
We want to advise you that a copy of the registration rights agreement has
been filed as an exhibit to the registration statement. The following
description is a summary of the material provisions of the registration rights
agreement. We urge you to read the registration rights agreement, because this
summary description does not restate the agreement in its entirety.
Your Representations
Before you can participate in the exchange offer, you need to represent to
us that:
. the exchange notes you acquire in an exchange offer are being obtained
in the ordinary course of business;
. neither you nor any person you are acting for is engaging in or intends
to engage in a distribution of the exchange notes;
. neither you nor any person you are acting for has an arrangement or
understanding with any person to participate in the distribution of the
exchange notes;
. neither you nor any person you are acting for is our affiliate, as
defined under Rule 405 of the Securities Act; and
. if you or any other person you are acting for is a broker-dealer, and
you receive exchange notes for your own account in exchange for your
original notes which were acquired through market-making activities or
other trading activities, you will deliver a prospectus relating to any
offer of the exchange notes.
Registration Statement for a Continuous Offering
We are required to file a registration statement for a continuous offering
according to Rule 415 of the Securities Act to register your original notes if:
. the exchange offer is not permitted under applicable law;
. the exchange offer is not completed by October 24, 2000; or
. you notify us timely that any of the reasons included in the
registration rights agreements exist for us to do so following the
exchange offer.
If we are obligated to file a shelf registration statement, we will be required
to keep that shelf registration statement effective for up to two years from
the date of effectiveness. Other than as described above, you will not have the
right to participate in the shelf registration or require that we register your
original notes under the Securities Act.
27
<PAGE>
Resale of Your Exchange Notes
If you participate in any exchange offer, you will be able to freely sell
or transfer your exchange notes if:
. the exchange notes issued in the exchange offer are being acquired in
the ordinary course of business;
. you are not participating, do not intend to participate and have no
arrangement or understanding with any person to participate in the
distribution of the exchange notes issued to you in the exchange offer;
and
. you are not our affiliate.
We believe that the exchange notes issued to you in this exchange offer may
be offered for resale, sold and otherwise transferred by you, without
compliance with the registration and prospectus delivery provisions of the
Securities Act, only if you make the representations that we discuss above.
Our belief is based upon existing interpretations by the SEC staff
contained in several no-action letters to third-parties unrelated to us. If
you tender your original notes in the exchange offer for the purpose of
participating in a distribution of exchange notes you cannot rely on these
interpretations by the SEC staff and you must comply with the registration and
prospectus delivery requirements of the Securities Act relating to a secondary
resale transaction. Each broker-dealer that receives exchange notes for its
own account in exchange for its original notes, whether the original notes
were acquired by that broker-dealer through market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus
relating to any offer of the exchange notes.
Failure to Exchange Your Original Notes
You may suffer adverse consequences if you fail to exchange your original
notes. Following the completion of the exchange offer, except as provided
above and in the registration rights agreement, you will not have any further
registration rights and your original notes will continue to be subject to
restrictions on transfer. If you do not participate in the exchange offer,
your ability to sell your original notes could be adversely affected.
Acceptance and Exchange
We will accept any validly tendered original notes which are not withdrawn
before 5:00 p.m., London time, on the expiration date. We will issue
(Euro)1,000 principal amount of exchange notes in exchange for each
(Euro)1,000 principal amount of your original notes tendered. You may tender
some or all of your original notes in the exchange offer.
The form and terms of the exchange notes will be substantially the same as
the form and terms of your original notes except that the exchange notes have
been registered under the Securities Act and will not bear a legend
restricting their transfer. The exchange notes will be issued under, and
entitled to the benefits of the same indenture governing your original notes.
This prospectus and the letter of transmittal you received with this
prospectus, is being sent to you and to others who have beneficial interests
in the original notes. There is no fixed record date for determining the
registered holders of original notes entitled to participate in the exchange
offer. We intend to conduct the exchange offer according to the applicable
requirements of the Exchange Act and the rules and regulations of the SEC. The
exchange offer is not conditioned upon any minimum amount of original notes.
We will accept for exchange properly tendered original notes when we give
oral or written notice of acceptance to the exchange agent and comply with the
applicable provisions of the registration rights agreement. We expressly
reserve the right to amend or terminate the exchange offer, and not to accept
for exchange any original notes upon the occurrence of any of the conditions
specified below under "Conditions to the Exchange Offer."
28
<PAGE>
You will not be required to pay brokerage commissions, fees, or transfer
taxes in the exchange of your original notes. We will pay all charges and
expenses incurred in making the exchange offer.
Expiration Date; Extensions; Amendments
The exchange offer will expire at 5:00 p.m., London time, on October 11,
2000 unless we extend the exchange offer. If we extend the offer the exchange
offer shall terminate at 5:00 p.m., London time, on the last day of the
extension. In either situation, the exchange offer will be held open for at
least 20 business days. To extend the exchange offer, we will inform the
exchange agent by oral or written notice and will mail to the registered
holders of the original notes an announcement of the exchange offer, before
9:00 a.m. London time on the next business day after the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
. to delay accepting your original notes;
. to extend the exchange offer;
. to terminate the exchange offer, if any of the conditions shall not have
been satisfied; or
. to amend the terms of the exchange offer in any manner.
If we delay, extend, terminate or amend the exchange offer, we will give an
oral or written notice to the exchange agent. We will also promptly notify the
registered holders of the original notes. If we determine changes to the
exchange offer to be material, then we will promptly disclose these changes by
means of a prospectus supplement to be distributed to registered holders of the
original notes. If this situation should occur, we would also extend the
exchange offer.
Interest on the Exchange Notes
Interest on the exchange notes will be payable semiannually in arrears on
March 31 and September 30 of each year, beginning on September 30, 2000.
Procedures for Tendering Your Original Notes
Tenders of original notes may be made only in book-entry form. Before
tendering your original notes in the exchange offer, you should read this
prospectus and the relevant accompanying letter of transmittal and you must
comply with the relevant procedures established by Euroclear or Clearstream, as
applicable, before 5:00 p.m., London time, on the expiration date. The exchange
agent must also receive a timely confirmation of any book-entry transfer of
original notes into the exchange agent's account at Euroclear or Clearstream,
as applicable, before 5:00 p.m., London time, on the expiration date.
Any tender that you do not withdraw before 5:00 p.m., London time, on the
expiration date will constitute an agreement between you and us governed by the
terms and conditions described in this prospectus and in the letter of
transmittal.
If you are a beneficial owner whose original notes are held on your behalf
in the name of a broker, dealer, commercial bank, trust company, or other
nominee, and you wish to tender, you should contact that holder promptly,
instructing it to tender on your behalf.
Confirmation of Original Notes Tendered
We will issue exchange notes only after the exchange agent receives, before
5:00 p.m., London time, on the expiration date, confirmation from Euroclear or,
as applicable, Clearstream that original notes have been tendered according to
the procedures established by Euroclear or Clearstream, as applicable. To make
this book-entry confirmation, you must acknowledge your receipt of the letter
of transmittal and agree to be bound by its terms. If we do not accept any
tendered original notes for any reason or if you submit original notes for a
29
<PAGE>
greater principal amount than you desire to exchange, the unaccepted or non-
exchanged original notes will be returned without expense to you, according to
the book-entry transfer procedures, and will be credited to the appropriate
account with Euroclear or Clearstream, as applicable as promptly as
practicable.
Participants in Euroclear or Cedelbank, as applicable, must send an
electronic instruction to Euroclear or Clearstream, as applicable, in
compliance with their procedures established to tender original notes, in place
of sending a signed, hard copy of the letter of transmittal. The electronic
instruction transmitted by Euroclear or Clearstream, as applicable, to the
exchange agent must contain a computer generated message, by which you
acknowledge your receipt of the letter of transmittal and agree to be bound by
it.
Conditions to the Exchange Offer
All questions about the validity, form, eligibility, including time of
receipt, acceptance, and withdrawal of tendered original notes will be
determined by us in our sole discretion. Our interpretation of the terms and
conditions of the exchange offer, will be final and binding on all parties. We
reserve the absolute right to reject any and all original notes not properly
tendered or any original notes the acceptance of which would be unlawful in the
opinion of our counsel.
Defects or Irregularities of Tender
We also reserve the right to waive any defects, irregularities, or
conditions of tender for particular original notes. Any defects or
irregularities related to tenders of original notes must be cured within the
time determined by us, unless waived by us. Although we intend to notify you of
defects or irregularities, we or the exchange agent or any other person shall
not incur any liability for failure to give this notification. Tenders of
original notes will not be accepted until the defects or irregularities have
been cured or waived. Any original notes received by the exchange agent that
are not properly tendered and for which the defects or irregularities have not
been cured or waived will be returned by the exchange agent, as soon as
practicable following the expiration date, to you.
We reserve the right in our sole discretion to purchase or make offers for
any original notes that remain outstanding after the expiration date or to
terminate the exchange offer and if permitted by applicable law, purchase
original notes in the open market in privately negotiated transactions. The
terms of any of these purchases or offers could differ from the terms of this
exchange offer.
These conditions are for our sole benefit and may be asserted by us at any
time or for any reason or may be waived by us in whole or in part at any time
in our sole discretion. The failure by us to exercise any of our rights shall
not be a waiver of our rights.
Non-acceptance of Tendered Original Notes
We will not accept for exchange any original notes tendered, and we will not
issue any exchange notes in exchange for any original notes, if at that time
any stop order shall be threatened or in effect under the Securities Act or the
Trust Indenture Act. We are required to use best efforts to obtain the
withdrawal of any stop order at the earliest possible time.
If we do not accept your tendered original notes or if you submit original
notes for a greater aggregate principal amount than you desire to exchange,
then the unaccepted or unexchanged original notes will be returned without
expense to you.
Withdrawal Rights
You may withdraw your tender of original notes at any time before 5:00 p.m.,
London time, on the expiration date.
For a withdrawal of tendered original notes to be effective, an electronic
transmission containing notice of withdrawal must be received by the exchange
agent before 5:00 p.m., London time, on the expiration date.
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<PAGE>
The notice of withdrawal must:
. specify your name; and
. identify the original notes to be withdrawn and principal amount of the
original notes.
All questions about the validity, form, and eligibility, including time of
receipt, of these notices will be determined by us, and our determination shall
be final and binding on all parties. Any original notes withdrawn will be
considered not to have been validly tendered for the purposes of the exchange
offer. Any original notes which have been tendered for exchange but which are
not exchanged for any reason will be returned to you as soon as practicable
after withdrawal, rejection of tender, or termination of the exchange offer
relating to the original notes. Properly withdrawn original notes may be
retendered by following one of the procedures described in "Procedures for
Tendering Your Original Notes" at any time before 5:00 p.m., London time, on
the expiration date.
Exchange Agent
We have appointed The Bank of New York as the exchange agent for the
exchange offer. Questions, requests for assistance and requests for additional
copies of the prospectus or a letter of transmittal should be directed to the
exchange agent at:
The Bank of New York, London Branch
One Canada Square
London E14 5AL
United Kingdom
Attn: Emma Wilkes
Corporate Trust
Fax: 44 20 7964 6369
Telephone: 44 20 7964 7235
Luxembourg Paying Agent and Notices Required by the Luxembourg Stock Exchange
The exchange of original notes for exchange notes under the exchange offer,
and any related transactions, may be accomplished through the paying agent in
Luxembourg. All documentation for the exchange offer will be available at the
office of the paying agent in Luxembourg.
So long as the notes are listed on the Luxembourg Stock Exchange and the
rules of the exchange so require: before the start of the exchange offer,
notice of the exchange offer will be given to the Luxembourg Stock Exchange and
will be published in a newspaper having a general circulation in Luxembourg,
which we expect to be the Luxembourg Wort. This notice will provide details of
the conditions to, and the starting date and expected completion date of, the
exchange offer.
So long as the notes are listed on the Luxembourg Stock Exchange and the
rules of the exchange so require, notice of the results of the exchange offer
will be given to the Luxembourg Stock Exchange and will be published in a
newspaper having a general circulation in Luxembourg, which we expect to be the
Luxembourg Wort.
Fees and Expenses
We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail. However, additional solicitations may be made in person or by telephone
by our officers and employees
We will pay the expenses incurred in making the exchange offer, including
the fees and expenses incurred by the exchange agent.
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<PAGE>
Transfer Taxes
Noteholders who tender their original notes for exchange will not be
obligated to pay any transfer taxes. If, however,
. a tendering noteholder instructs us to register exchange notes in the
name of any person other than the registered holder of the original
notes tendered, or
. a tendering noteholder requests that original notes to tendered or not
accepted in this exchange offer be returned to a person other than the
registered holder of the original notes, or
. a transfer tax is imposed for any reason other than the exchange of
original notes under this exchange offer,
then the amount of these transfer taxes, whether imposed on the registered
noteholder or any other persons, will be payable by the tendering noteholder.
Failure to Exchange Your Original Notes
Your participation in the exchange offer is voluntary. You are urged to
consult your financial and tax advisors in making your own decisions on what
actions to take and should read the "Taxation" section of this prospectus.
. If you do not exchange your original notes, you may resell them only to
a person whom you reasonably believe is a qualified institutional buyer,
as defined in Rule 144A under the Securities Act, in a transaction
meeting the requirements of Rule 144A;
. in a transaction meeting the requirements of Rule 144 under the
Securities Act;
. under another exemption from the registration requirements of the
Securities Act, and based upon an opinion of your counsel if we so
request;
. to us; or
. under an effective registration statement.
You must comply with any applicable securities laws of any state of the U.S.
or any other applicable jurisdiction. We may be required to file a shelf
registration statement. We do not expect to have to file a shelf registration
statement.
Payment of Liquidated Damages upon Registration Default
We will be required to pay liquidated damages on the original notes if:
. the exchange offer registration statement is not filed with the SEC on
or before May 28, 2000;
. the exchange offer registration statement is not declared effective on
or before August 25, 2000;
. the shelf registration statement, if any, is not filed with the SEC on
or before December 22, 2000;
. the shelf registration statement, if any, is not declared effective on
or before March 23, 2001;
. the exchange offer is not completed within 30 business days after the
exchange offer registration statement is declared effective; or
. the exchange offer registration statement or the shelf registration
statement is declared effective but then ceases to be effective or fails
to be usable for its intended purpose without being succeeded
immediately by a post-effective amendment to the registration statement
that cures this failure and that is itself declared effective
immediately.
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<PAGE>
Each of these events is a registration default. In the case of a
registration default, we will be required to pay liquidated damages at a rate
of 0.25% annually for the first 90-day period immediately following the
occurrence of a registration default. The amount of liquidated damages shall
increase by an additional 0.25% annually for each subsequent 90-day period
until all registration defaults have been cured, up to a maximum amount of
liquidated damages of 2.0% annually. Once the registration default is cured,
the liquidated damages will cease to accrue.
33
<PAGE>
THE COMPANY
We were originally established as BROKAT Informationssysteme GmbH on
September 17, 1994. We have become a leading provider of software for the
rapidly expanding e-banking market and the leading provider of this kind of
software to European banks. We design, develop, market and support e-business
software. We have concentrated on providing e-banking solutions, particularly
to banks in Germany and Austria, and to a lesser extent, other geographic areas
such as the United Kingdom, the United States, the Asia-Pacific region,
Switzerland and the Benelux countries.
Our core product, Twister, is an open architecture software platform that
integrates the information technology systems of a business with a variety of
electronic communications channels. We also offer industry-specific software
application packages, allowing a business to establish e-front offices through
which consumers can access its products or services.
We also provide professional services that include: consulting,
customization, installation, training, and maintenance and support related to
our products.
By shareholder resolution of April 1, 1998, we changed our name to BROKAT
Infosystems and converted our corporate form from a limited liability company,
Gesellschaft mit beschraenkter Haftung, or GmbH, to a stock corporation,
Aktiengesellschaft, or AG. The change was filed with the commercial register in
Stuttgart on July 3, 1998. By shareholder resolution of May 26, 2000, we
changed our name to BROKAT AG. This name change was registered with the
Stuttgart commercial register on July 10, 2000 and is effective as of that
date.
On September 17, 1998, we completed an initial public offering of our common
shares in Germany and listed our shares on the Neuer Markt segment of the
Frankfurt stock exchange under the symbol "BRJ." We raised net proceeds of
approximately DM 83.0 million in our initial public offering.
Our principal executive office is located at Industriestrasse 3, D-70565
Stuttgart, Germany, and our telephone number is +49-711-78844-0.
Corporate Structure
[LOGO FOR PROJECT TORNADO]
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<PAGE>
RECENT ACQUISITIONS AND OTHER STRATEGIC INITIATIVES
TST Acquisition
On May 9, 1999, we acquired Transaction Software Technologies, Inc., for DM
34.9 million in cash. TST has been active in the development and implementation
of cash management systems for banking institutions in the United States. The
TST acquisition provides us with a corporate cash management software
application marketable in the United States and thus enhanced our presence in
the U.S. market.
Acquisition of MeTechnology AG
On May 21, 1999, we acquired MeTechnology AG, a German company involved in
the development and implementation of online banking software. Consideration
for this acquisition consisted of 2,332,374 post-split shares of our common
stock having a value of DM 159.7 million on the date of acquisition. Through
the acquisition of MeTechnology, we acquired technology and research personnel
complementary to our existing business, which will allow us to widen the range
of our products and enhance our existing products.
Proposed Acquisitions of Blaze Software and GemStone Systems
On June 19, 2000, we entered into definitive agreements to acquire:
. Blaze Software, Inc. - a Nasdaq listed company which is a leading
provider of rule-based Internet infrastructure software for enterprise-
scale applications that deliver personalized, adaptable business
processes across multiple electronic touchpoints; and
. GemStone Systems, Inc. - a technology leader of JavaTM-based application
server software for high performance scalable applications to automate
enterprise level business-to-business transactions.
Through addition of these two companies we intend to strengthen the product
portfolios of all three companies and enhance the technology of Twister.
For the Blaze acquisition, we intend to apply for the quotation on the
Nasdaq National Market of American Depositary Shares (ADSs) representing our
underlying ordinary shares.
To acquire Blaze, we will issue approximately 5.0 million ordinary shares in
the form of ADSs, valued at approximately euro 585.9 million on the acquisition
date. The acquisition will be submitted for approval by Blaze stockholders and
is subject to the satisfaction of regulatory requirements, the listing of the
ADSs on Nasdaq and other customary closing conditions. Blaze expects to hold a
meeting of its shareholders on September 25, 2000, to vote upon the proposed
transactions.
To acquire GemStone, we will issue approximately 2.4 million of our shares,
valued at approximately euro 283.5 million on the acquisition date. The
acquisition will be submitted for approval by GemStone stockholders and is
subject to the satisfaction of regulatory requirements, the listing of the new
shares on Neuer Markt and other customary closing conditions.
There is no assurance that the acquisition of Blaze or Gemstone will be
completed.
For additional information please see "Unaudited Pro Forma Combined
Financial Data" and the historical financial statements of Blaze and GemStone
included in this prospectus.
Additional Strategic Initiatives
On December 20, 1999, we acquired 25.1% of the outstanding capital stock of
Fernbach Financial Software S.A., a Luxembourg company, for a capital
contribution of DM 4.0 million in cash. In February 2000, subject to the
completion of formalities under applicable law, we acquired the remaining 74.9%
of Fernbach's outstanding capital stock, effective as of January 1, 2000, for
182,838 post-split shares of our common stock to be issued out of a capital
increase against the contribution in kind of the Fernbach shares. Fernbach
companies develop and market software products for the processing of
transactions of banks. Through this acquisition, we gained the expertise and
specialized e-finance software that will allow us to enhance our standardized
software packages offered to brokerage firms and banks.
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<PAGE>
As part of our marketing strategy, we have also acquired minority interests
in Bremen Online Services Entwicklungs-und Betriebsgesellschaft mbH & Co. KG
and LexLinkLine AG, German companies providing e-services.
On August 3, 2000, we acquired a 9% minority interest in MyAlert.com, a
Spanish company which offers various personalized services over an internet
portal to approximately 450,000 registered customers. The purchase price was
$12.0 million, 80% of which consists of our stock and the remaining portion
will be paid in cash. The MyAlert.com technology will allow our customers to
offer individual mobile information services.
We work closely with several strategic partners that are involved in various
aspects of e-business. We are one of the original ten software companies
worldwide selected by a subsidiary of Intel Corporation as a preferred business
partner to optimize our software for use with the newly developed generation of
64-bit Intel processors. We also founded a consortium to develop a uniform
application interface as a mobile digital signature standard to facilitate
confirmations of e-business transactions by means of mobile telephones. The
consortium includes mobile telephone manufacturers and network operators,
software vendors and smart card manufacturers. We were the first provider of e-
front office software certified by SAP for compatibility with SAP software,
allowing financial institutions using the SAP back office software to offer e-
finance services using our platform.
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<PAGE>
USE OF PROCEEDS
No Cash Proceeds from Offering of Exchange Notes
We will not receive any cash proceeds from the offering of the exchange
notes. In consideration for issuing the exchange notes as described in this
prospectus, we will receive in exchange original notes in like principal
amount, the terms of which are identical in all material respects to those of
the exchange notes. The original notes surrendered in exchange for the exchange
notes will be retired and cancelled and cannot be reissued.
Application of Proceeds from Offering of Original Notes
We applied the net proceeds from the sale of the original notes of
approximately (Euro) 120.5 million, or DM 235.7 million, in part to repay
substantially all of our outstanding debt. We repaid the following debt
obligations with the proceeds of the offering of the original notes:
. DM 38.4 million under a DM 60.0 million overdraft bank credit facility,
which accrues interest at 6.0% annually;
. DM 3.8 million under a DM 5.0 million bank credit facility, which
accrues interest at 4.0% annually;
. DM 2,000 under a DM 5.0 million bank credit facility, which accrues
interest at 6.0% annually;
. DM 2.0 million under a DM 2.0 million bank line of credit, which accrues
interest at 7.0% annually and entitles the lender to participate in a
portion of our net profits up to 3.0% of the stated value of the
facility, subject to the consent of the lender and a prepayment premium
of 1.0% of the prepayment amount;
. three loans aggregating DM 4.0 million from Technologie-Beteiligungs-
Gesellschaft mbH, which accrue interest at 6.0% annually and entitle the
lender to participate in a portion of our net profits equal to 8.0%
annually, as well as to receive an aggregate payment of up to 32.5% of
the value of the loans on the repayment date less any net profits paid
to the lender during the term of the loans, if justified in the lender's
judgment based on the overall financial situation of BROKAT; and
. approximately (Euro) 370,000 of secured indebtedness owed to a bank by
Fernbach Financial Software S.A. under a credit facility.
Balance of Proceeds from Offering of Original Notes
We plan to use the balance of the proceeds from the offering of the notes
for working capital requirements and other general corporate purposes, which
may include acquisitions of related businesses. Pending utilization of the
balance of the proceeds, we have invested these proceeds in short-term
investment grade securities and money market instruments.
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<PAGE>
CAPITALIZATION
Our authorized share capital consists of 45,258,412 shares of common stock,
of which 29,959,932 shares were issued and outstanding as of August 31, 2000.
Our shares have no par value. The portion of the share capital attributable to
each share is euro 1.00.
The following table describes as of June 30, 2000 our capitalization. There
has been no material change in our capitalization or short-term debt since June
30, 2000 except for the application of the proceeds from the issuance of the
notes to repay outstanding indebtedness. This table should be read with the
"Unaudited Pro Forma Financial Data," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
At June 30, 2000
--------------------------
Actual
--------------------------
DM (Euro) $(1)
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents........................... 163,856 83,778 79,964
======== ======= =======
Short-term debt(2).................................. 174 89 85
-------- ------- -------
Long-term debt including the Notes.................. 248,596 127,105 121,318
-------- ------- -------
Shareholders' equity:
Common Stock...................................... 53,416 27,311 26,068
Additional paid-in capital(3)..................... 449,338 428,880 409,354
Accumulated deficit............................... (185,719) (94,957) (90,634)
Deferred compensation(3).......................... (118,809) (60,746) (57,980)
Accumulated other comprehensive loss.............. (4,133) (2,113) (2,017)
-------- ------- -------
Total shareholders' equity.......................... 194,091 99,237 94,719
-------- ------- -------
Total capitalization and short-term debt.......... 442,861 226,431 216,122
======== ======= =======
</TABLE>
--------
(1) Solely for your convenience, we have translated Deutsche marks into U.S.
dollars at the rate of (Euro) 1.0477 = $1.00 based on the noon buying rate
for euros on June 30, 2000 and the conversion rate of DM 1.95583 =
(Euro) 1.00 fixed by the EMU Council.
(2) Includes current portion of long-term debt.
(3) In granting stock options to some of our employees, we were required by
accounting principles to record deferred compensation representing the
difference between the intrinsic value of the options based on the current
value of our stock at the period-end and the exercise price of the options.
This amount is reserved in the deferred compensation account and additional
paid-in capital is credited with a corresponding amount. It is amortized
ratably over the vesting period of the applicable options.
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<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
What is reflected in the unaudited pro forma financial data
The following unaudited pro forma consolidated balance sheet as of June 30,
2000 reflects the offering of the notes and the application of the net
proceeds of the offering and gives effect to the proposed acquisitions of
Blaze Software, Inc. and GemStone Systems, Inc. as if they had occurred on
June 30, 2000.
The following unaudited pro forma consolidated statement of operations
gives effect to the acquisitions of MeTechnology AG and Transaction Software
Technologies, Inc., the offering of the notes and the application of the net
proceeds of the offering and the proposed acquisitions of Blaze Software, Inc.
and GemStone Systems, Inc. as if they had occurred on July 1, 1998.
Significant intercompany accounts and transactions that were reflected
previously in the historical financial statements before the acquisitions have
been eliminated.
We have adjusted MeTechnology and TST data because our fiscal year differed
from the fiscal year of those companies
The unaudited pro forma consolidated financial data are derived from our
historical consolidated financial statements and the historical consolidated
financial statements of MeTechnology and TST which are included elsewhere in
this prospectus. Because our fiscal year differed from those of MeTechnology
and TST financial data presented for those companies reflect adjustments to
present financial information for periods comparable to ours. These
adjustments are quantified in the tables following the pro forma consolidated
statements of operations. Amounts are given in thousands of Deutsche marks
unless otherwise specified.
You should read the unaudited pro forma financial data with other financial
data provided in this prospectus
The pro forma adjustments are described in the accompanying notes to the
unaudited pro forma combined financial data and are based upon available
information and upon assumptions that we considered reasonable. You should
read the unaudited pro forma financial data with the historical financial
statements and related notes appearing elsewhere in this prospectus.
We have provided pro forma financial data only for informational purposes
We have provided the unaudited pro forma financial data for informational
purposes only and you should not consider the data indicative of actual
results that we would have achieved had these transactions been completed on
the date or for the periods indicated. We do not claim to indicate the balance
sheet data or results of operations as of any future date or for any future
period.
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<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Total
Pro Forma Pro Forma Pro Forma Pro Forma
Brokat(1) Gemstone Adjustments Notes Combined Blaze Adjustments Notes Combined
--------- -------- ----------- ----- --------- -------- ----------- ----- ---------
(DM) (DM) (DM) (DM) (DM) (DM) (DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Currents Assets:
Cash and cash
equivalents............. 163,856 324 -- 164,180 92,408 -- 256,588
Short term investments.. -- -- -- -- 46,760 -- 46,760
Accounts receivable
(less pro forma
allowance for doubtful
accounts of DM 3,456 at
June 30, 2000).......... 63,419 9,456 -- 72,875 11,155 -- 84,030
Cost and estimated
earning in excess of
billings on uncompleted
contracts............... 2,965 -- -- 2,965 -- -- 2,965
Prepaid expenses and
other current assets.... 21,781 801 -- 22,582 4,043 -- 26,625
-------- -------- ------- --------- -------- --------- ---------
Total Current Assets.... 252,021 10,581 -- 262,602 154,366 -- 416,968
-------- -------- ------- --------- -------- --------- ---------
Property and equipment,
net..................... 14,382 1,914 -- 16,296 6,604 -- 22,900
-------- -------- ------- --------- -------- --------- ---------
Goodwill................ 245,267 -- 524,772 (6d) 770,039 -- 871,637 (6d) 1,641,676
Other intangible
assets.................. 10,130 -- -- 10,130 -- -- 10,130
Less accumulated
amortization............ (36,627) -- -- (36,627) -- -- (36,627)
-------- -------- ------- --------- -------- --------- ---------
218,770 -- 524,772 743,542 -- 871,637 1,615,179
-------- -------- ------- --------- -------- --------- ---------
Other long-term
investments............. 6,631 -- -- 6,631 -- -- 6,631
Deferred income taxes... 4,363 -- -- 4,363 -- -- 4,363
Restricted cash......... -- -- -- 1,467 -- 1,467
Deposits and other
assets.................. -- 535 -- 535 756 -- 1,291
-------- -------- ------- --------- -------- --------- ---------
Total assets............ 496,167 13,030 524,772 1,033,969 163,193 871,637 2,068,799
======== ======== ======= ========= ======== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt to
banks................... 174 -- -- 174 -- -- 174
Current portion of
capital lease
obligations............. -- 375 -- 375 354 -- 729
Notes payable to
affiliated companies.... -- 13,984 (13,984) (6b) -- -- -- --
Notes payable........... -- 2,197 -- 2,197 -- -- 2,197
Accounts payable,
trade................... 8,391 6,356 1,400 (6d) 16,147 1,873 1,400 (6d) 19,420
Payroll-related
accruals................ 8,852 3,336 -- 12,188 -- -- 12,188
Tax-related accruals.... 4,096 -- -- 4,096 -- -- 4,096
Billings in excess of
cost and estimated
earnings on uncompleted
contracts............... 5,546 -- -- 5,546 -- -- 5,546
Other accrued expenses
and current
liabilities............. 17,217 2,319 -- 19,536 12,829 -- 32,365
Deferred income......... 4,853 9,573 -- 14,426 5,092 -- 19,518
Deferred income taxes... 4,025 -- -- 4,025 -- -- 4,025
-------- -------- ------- --------- -------- --------- ---------
Total current
liabilities............. 53,154 38,140 (12,584) 78,710 20,148 1,400 100,258
Long-term debt to
banks................... 2,000 -- -- 2,000 -- -- 2,000
Capital lease
obligations, net of
current portion......... -- 137 -- 137 432 -- 569
Other long-term debt.... 246,596 -- -- 246,596 70 -- 246,666
-------- -------- ------- --------- -------- --------- ---------
Total liabilities....... 301,750 38,277 (12,584) 327,443 20,650 1,400 349,493
-------- -------- ------- --------- -------- --------- ---------
Minority interest....... 326 -- -- 326 -- -- 326
Shareholders' equity
(deficit):
Common Stock............ 53,416 67,236 4,351 (6a) 57,767 4 8,748 (6a) 66,515
(67,236) (6c) (4) (6c)
Convertible preferred
stock................... -- 77,805 (77,805) (6c) -- -- -- --
Additional paid-in
capital................. 449,336 -- 523,303 (6a) 972,639 314,286 1,078,879 (6a) 2,051,518
(314,286) (6c)
Accumulated deficit..... (185,719) (115,180) 115,180 (6c) (185,719) (137,820) 137,820 (6c) (185,719)
Deferred compensation... (118,809) -- (19,145) (7) (137,954) (34,579) (78,447) (7) (216,401)
34,579 (6c)
Employee Stock Trust.... -- (55,028) 55,028 (6c) -- -- -- --
Accumulated other
comprehensive income
(loss).................. (4,133) (80) 80 (6c) (4,133) 652 (652) (6c) (4,133)
-------- -------- ------- --------- -------- --------- ---------
Total shareholders'
equity (deficit)........ 194,091 (25,247) 533,756 702,600 142,543 866,637 1,711,780
-------- -------- ------- --------- -------- --------- ---------
Total liabilities and
shareholders' equity.... 496,167 13,030 524,772 1,033,969 163,193 871,637 2,068,799
======== ======== ======= ========= ======== ========= =========
</TABLE>
The notes to unaudited pro forma financial data are an integral part of this
combined pro forma balance sheet.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE
30, 1999
(In thousands except share and per share data)
<TABLE>
<CAPTION>
Brokat MeTechnology TST Gemstone
---------- ------------ ------------ ----------
Year Ended July 1, 1998 July 1, 1998 Total Year Ended
June 30, thru May 21, thru May 9, Pro Forma Pro June 30, Pro Forma Pro Forma
1999 1999 1999 Adjustments Notes Forma 1999 Adjustments Notes Combined
---------- ------------ ------------ ----------- ----- -------- ---------- ----------- ----- ----------
(DM) (DM) (DM) (DM) (DM) (DM) (DM) (DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......... 62,487 4,544 8,375 (3,753) (2) 71,653 41,942 -- 113,595
Cost of Sales... (31,325) (2,619) (2,989) -- (36,933) (12,515) -- (49,448)
---------- ------- ------ ------- -------- ------- --------- ----------
Gross profit.... 31,162 1,925 5,386 (3,753) 34,720 29,427 -- 64,147
---------- ------- ------ ------- -------- ------- --------- ----------
Selling
expenses........ (38,848) (4,960) (862) -- (44,670) (17,017) -- (61,687)
General and
administrative
expenses........ (10,639) (5,833) (1,450) -- (17,922) (10,145) -- (28,067)
Research and
development
expenses........ (8,733) (3,180) (3,206) -- (15,119) (10,144) -- (25,263)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (3,686) -- -- (27,802) (3) (31,488) -- (74,967) (3) (106,455)
Non-cash charges
associated with
stock option
grants.......... (16,340) -- -- -- (16,340) -- (8,368) (7) (24,708)
---------- ------- ------ ------- -------- ------- --------- ----------
Total operating
expenses........ (78,246) (13,973) (5,518) (27,802) (125,539) (37,306) (83,335) (246,180)
---------- ------- ------ ------- -------- ------- --------- ----------
Operating loss.. (47,084) (12,048) (132) (31,555) (90,819) (7,879) (83,335) (182,033)
Interest
expense......... 568 (390) (86) (28,579) (4) (28,487) -- -- (28,487)
Other income,
net............. 2,565 -- -- -- 2,565 (186) -- 2,379
---------- ------- ------ ------- -------- ------- --------- ----------
Loss before
income taxes and
minority
interests....... (43,951) (12,438) (218) (60,134) (116,741) (8,065) (83,335) (208,141)
Income tax
expense......... (113) (17) (80) -- (210) (235) -- (445)
Minority
interest........ 90 -- -- -- 90 -- -- 90
---------- ------- ------ ------- -------- ------- --------- ----------
Net loss before
extraordinary
item............ (43,974) (12,455) (298) (60,134) (116,861) (8,300) (83,335) (208,496)
Extraordinary
loss on early
extinguishment
of debt......... (64) -- -- -- (64) -- -- (64)
---------- ------- ------ ------- -------- ------- --------- ----------
Net loss from
continuing
operations...... (44,038) (12,455) (298) (60,134) (116,925) (8,300) (83,335) (208,560)
========== ======= ====== ======= ======== ======= ========= ==========
Basic and
diluted loss per
share:
Loss before
extraordinary
items........... (2.23) (9.51)
Extraordinary
loss............ (0.01) (0.00)
---------- ----------
Net loss from
continuing
operations...... (2.24) (9.51)
========== ==========
Weighted average
number of common
shares
outstanding..... 19,694,650 2,219,983 (6e) 21,914,633
========== ========= ==========
<CAPTION>
Blaze
----------
Year Ended Total
June 30, Pro Forma Pro Forma
1999 Adjustments Notes Combined
---------- ----------- ----- -----------
(DM) (DM) (DM)
<S> <C> <C> <C> <C>
Revenue......... 19,754 -- 133,349
Cost of Sales... (6,540) -- (55,988)
---------- ----------- -----------
Gross profit.... 13,214 -- 77,361
---------- ----------- -----------
Selling
expenses........ (10,950) -- (72,637)
General and
administrative
expenses........ (4,334) -- (32,401)
Research and
development
expenses........ (7,669) -- (32,932)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... -- (124,520) (3) (230,975)
Non-cash charges
associated with
stock option
grants.......... -- (25,442) (7) (50,150)
---------- ----------- -----------
Total operating
expenses........ (22,953) (149,962) (419,095)
---------- ----------- -----------
Operating loss.. (9,739) (149,962) (341,734)
Interest
expense......... (623) -- (29,110)
Other income,
net............. -- -- 2,379
---------- ----------- -----------
Loss before
income taxes and
minority
interests....... (10,362) (149,962) (368,465)
Income tax
expense......... (169) -- (614)
Minority
interest........ -- -- 90
---------- ----------- -----------
Net loss before
extraordinary
item............ (10,531) (149,962) (368,989)
Extraordinary
loss on early
extinguishment
of debt......... -- -- (64)
---------- ----------- -----------
Net loss from
continuing
operations...... (10,531) (149,962) (369,053)
========== =========== ===========
Basic and
diluted loss per
share:
Loss before
extraordinary
items........... (13.99)
Extraordinary
loss............ (0.00)
-----------
Net loss from
continuing
operations...... (13.99)
===========
Weighted average
number of common
shares
outstanding..... 4,463,246 (6e) 26,377,879
=========== ===========
</TABLE>
The notes to unaudited pro forma data are an integral part of this combined
pro forma statement of operations.
41
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(In thousands except share and per share data)
<TABLE>
<CAPTION>
Pro Forma Total Pro Forma Pro Forma Pro Forma
Brokat Adjustments Notes Pro Forma Gemstone Adjustments Notes Combined Blaze Adjustments Notes
---------- ----------- ----- --------- -------- ----------- ----- ---------- ------- ----------- -----
(DM) (DM) (DM) (DM) (DM) (DM) (DM) (DM)
<CAPTION>
Total
Pro Forma
Combined
-----------
(DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......... 51,287 -- 51,287 21,251 -- 72,538 14,793 --
Cost of Sales .. (22,937) -- (22,937) (6,492) -- (29,429) (5,591) --
---------- ------- ------- ------- --------- ---------- -------
Gross profit.... 28,350 -- 28,350 14,759 -- 43,109 9,202 --
---------- ------- --- ------- ------- --------- ---- ---------- ------- --------- ----
Selling expenses
................ (27,714) -- (27,714) (9,779) -- (37,493) (8,148) --
General and
administrative
expenses ....... (12,643) -- (12,643) (4,272) -- (16,915) (2,754) --
Research and
development
expenses ....... (12,769) -- (12,769) (5,244) -- (18,013) (3,910) --
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (15,797) -- (15,797) -- (37,484) (3) (53,281) -- (62,260) (3)
Non-cash charges
associated with
stock option
grants.......... (12,240) -- (12,240) -- (4,184) (7) (16,424) (21,148) (12,721) (7)
---------- ------- ------- ------- --------- ---------- ------- ---------
Total Operating
expenses........ (81,163) -- (81,163) (19,295) (41,668) (142,126) (35,960) (74,981)
---------- ------- ------- ------- --------- ---------- ------- ---------
Operating loss.. (52,813) -- (52,813) (4,536) (41,668) (99,017) (26,758) (74,981)
Interest
expense......... (832) (13,777) (5) (14,609) -- -- (14,609) (202) --
Other income,
net............. 2,298 -- 2,298 (321) -- 1,977 -- --
---------- ------- ------- ------- --------- ---------- ------- ---------
Loss before
income taxes and
minority
interests....... (51,347) (13,777) (65,124) (4,857) (41,668) (111,649) (26,960) (74,981)
Income tax
expense......... (104) -- (104) (170) -- (274) (168) --
Minority
interest........ (26) -- (26) -- -- (26) -- --
---------- ------- ------- ------- --------- ---------- ------- ---------
Net loss from
continuing
operations...... (51,477) (13,777) (65,254) (5,027) (41,668) (111,949) (27,128) (74,981)
========== ======= ======= ======= ========= ========== ======= =========
Basic and
diluted loss per
share; Net loss
from continuing
operations...... (1.92) (3.85)
========== ==========
Weighted average
number of common
shares
outstanding..... 26,848,773 2,219,983 (7e) 29,068,756 4,463,246 (7e)
========== ========= ========== =========
<S> <C>
Revenue......... 87,331
Cost of Sales .. (35,020)
-----------
Gross profit.... 52,311
-----------
Selling expenses
................ (45,641)
General and
administrative
expenses ....... (19,669)
Research and
development
expenses ....... (21,923)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (115,541)
Non-cash charges
associated with
stock option
grants.......... (50,293)
-----------
Total Operating
expenses........ (253,067)
-----------
Operating loss.. (200,756)
Interest
expense......... (14,811)
Other income,
net............. 1,977
-----------
Loss before
income taxes and
minority
interests....... (213,590)
Income tax
expense......... (442)
Minority
interest........ (26)
-----------
Net loss from
continuing
operations...... (214,058)
===========
Basic and
diluted loss per
share; Net loss
from continuing
operations...... (6.38)
===========
Weighted average
number of common
shares
outstanding..... 33,532,002
===========
</TABLE>
The notes to unaudited pro forma data are an integral part of this
consolidated pro forma statement of operations.
42
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands except share and per share data)
<TABLE>
<CAPTION>
Pro Forma Total Pro Forma Pro Forma Pro Forma
Brokat Adjustments Notes Pro Forma Gemstone Adjustments Notes Combined Blaze Adjustments Notes
---------- ----------- ----- --------- -------- ----------- ----- ---------- ------- ----------- -----
(DM) (DM) (DM) (DM) (DM) (DM) (DM) (DM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......... 81,729 -- 81,729 24,639 -- 106,368 14,750 --
Cost of Sales... (32,870) -- (32,870) (9,110) -- (41,980) (6,533) --
---------- ------- -------- ------- --------- ---------- ------- --------- ---
Gross profit.... 48,859 -- 48,859 15,529 -- 64,388 8,217 --
---------- ------- -------- ------- --------- ---------- ------- --------- ---
Selling
expenses........ (36,283) -- (36,283) (13,062) -- (49,345) (12,150) --
General and
administrative
expenses........ (15,725) -- (15,725) (6,144) -- (21,869) (3,748) --
Research and
development
expenses ....... (21,437) -- (21,437) (7,612) -- (29,049) (3,878) --
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (15,184) -- (15,184) -- (37,484) (3) (52,668) -- (62,260) (3)
Non-cash charges
associated with
stock option
grants.......... (30,735) -- (30,735) -- (4,184) (7) (34,919) (8,829) (12,721) (7)
---------- ------- -------- ------- --------- ---------- ------- ---------
Total Operating
expenses........ (119,364) -- (119,364) (26,818) (41,668) (187,850) (28,605) (74,981)
---------- ------- -------- ------- --------- ---------- ------- ---------
Operating loss.. (70,505) -- (70,505) (11,289) (41,668) (123,462) (20,388) (74,981)
Interest
expense......... (6,410) (13,777) (5) (20,187) (646) -- (20,833) (57) --
Other income,
net............. 460 -- 460 -- -- 460 2,141 --
---------- ------- -------- ------- --------- ---------- ------- ---------
Loss before
income taxes and
minority
interests....... (76,455) (13,777) (90,232) (11,935) (41,688) (143,835) (18,304) (74,981)
Income tax
expense......... (330) -- (330) (259) -- (589) (12) --
Minority
interest........ 99 -- 99 -- -- 99 -- --
---------- ------- -------- ------- --------- ---------- ------- ---------
Net loss from
continuing
operations...... (76,686) (13,777) (90,463) (12,194) (41,668) (144,325) (18,316) (74,981)
========== ======= ======== ======= ========= ========== ======= =========
Basic and
diluted loss per
share; Net loss
from continuing
operations...... (2.84) (4.94)
========== ==========
Weighted average
number of common
shares
outstanding..... 26,966,236 2,219,983 (7e) 29,186,219 4,463,246 (7e)
========== ========= === ========== ========= ===
<CAPTION>
Total
Pro Forma
Combined
-----------
(DM)
<S> <C>
Revenue......... 121,118
Cost of Sales... (48,513)
-----------
Gross profit.... 72,605
-----------
Selling
expenses........ (61,495)
General and
administrative
expenses........ (25,617)
Research and
development
expenses ....... (32,927)
Amortization of
goodwill and
other intangible
assets from
acquisitions.... (114,928)
Non-cash charges
associated with
stock option
grants.......... (56,469)
-----------
Total Operating
expenses........ (291,436)
-----------
Operating loss.. (218,831)
Interest
expense......... (20,890)
Other income,
net............. 2,601
-----------
Loss before
income taxes and
minority
interests....... (237,120)
Income tax
expense......... (601)
Minority
interest........ 99
-----------
Net loss from
continuing
operations...... (237,622)
===========
Basic and
diluted loss per
share; Net loss
from continuing
operations...... (7.06)
===========
Weighted average
number of common
shares
outstanding..... 33,649,465
===========
</TABLE>
43
<PAGE>
The unaudited statement of operations of MeTechnology for the period July 1,
1998 to May 21, 1999 is:
<TABLE>
<CAPTION>
MeTechnology
---------------------------------------------------------------
January 1, 1998 (Less) (Add)
thru January 1, 1998 January 1, 1999 July 1, 1998 July 1, 1998
December 31, thru thru thru Reconciliation thru
1998 June 30, 1998 May 21,1999 May 21, 1999 German GAAP May 21, 1999
German GAAP German GAAP German GAAP German GAAP to US GAAP US GAAP
--------------- --------------- --------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. 4,870 2,922 1,400 3,348 1,196 4,544
Cost of sales........... (1,874) (625) (1,223) (2,472) (147) (2,619)
------ ------ ------ ------- ----- -------
Gross profit (loss)..... 2,996 2,297 177 876 1,049 1,925
------ ------ ------ ------- ----- -------
Selling expenses........ (3,514) (1,171) (2,617) (4,960) -- (4,960)
General and
administrative
expenses............... (4,100) (1,367) (3,100) (5,833) -- (5,833)
Research and development
expenses............... (2,226) (742) (1,696) (3,180) -- (3,180)
------ ------ ------ ------- ----- -------
Total operating
expenses............... (9,840) (3,280) (7,413) (13,973) -- (13,973)
------ ------ ------ ------- ----- -------
Operating loss.......... (6,844) (983) (7,236) (13,097) 1,049 (12,048)
------ ------ ------ ------- ----- -------
Interest expense........ (267) (75) (198) (390) -- (390)
------ ------ ------ ------- ----- -------
Loss before income
taxes.................. (7,111) (1,058) (7,434) (13,487) 1,049 (12,438)
------ ------ ------ ------- ----- -------
Income taxes............ (27) (13) (3) (17) -- (17)
------ ------ ------ ------- ----- -------
Net loss................ (7,138) (1,071) (7,437) (13,504) 1,049 (12,455)
====== ====== ====== ======= ===== =======
</TABLE>
Based on German GAAP, the audited statement of operations for the year ended
December 31, 1998 has been prepared presenting costs by their nature. To comply
with the functional cost format commonly used under U.S. GAAP, the costs
incurred have been reclassified to cost of sales, selling, general and
administrative as well as research and development expenses based on the
character of the underlying costs.
A reconciliation from German GAAP to U.S. GAAP has been performed to account
for differences in revenue recognition on long-term software customization
projects. Under German GAAP, license revenue is realized upon delivery of the
software, while the customization work is accounted for separately under the
completed-contract-method. Under U.S. GAAP, these license and customization
revenues would be recognized using the percentage-of-completion-method.
44
<PAGE>
The statement of operations of TST for the period July 1, 1998 to May 9,
1999 is:
<TABLE>
<CAPTION>
TST
------------------------------------------------------------------
(Less) (Add)
October 1, 1997 October 1, 1998 July 1, 1998
Year ended to to to
September 30, 1998 June 30, 1998 May 9, 1999 May 9, 1999
------------------ --------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue................. 7,896 5,219 5,698 8,375
Cost of sales........... (2,633) (2,168) (2,524) (2,989)
------ ------ ------ ------
Gross profit............ 5,263 3,051 3,174 5,386
------ ------ ------ ------
Selling expenses........ (1,109) (802) (555) (862)
General and
administrative
expenses............... (735) (470) (1,185) (1,450)
Research and development
expenses............... (3,232) (1,917) (1,891) (3,206)
------ ------ ------ ------
Total operating
expenses............... (5,076) (3,189) (3,631) (5,518)
------ ------ ------ ------
Operating income
(loss)................. 187 (138) (457) (132)
------ ------ ------ ------
Interest income......... 43 33 37 47
Interest expense........ (23) (15) (125) (133)
------ ------ ------ ------
Income before taxes..... 207 (120) (545) (218)
------ ------ ------ ------
Income taxes............ (83) (1) 2 (80)
------ ------ ------ ------
Net income (loss)....... 124 (121) (543) (298)
====== ====== ====== ======
</TABLE>
The statement of operations of TST was translated to Deutsche marks using
the average translation rate for the relevant periods.
NOTES TO UNAUDITED PRO FORMA DATA
(1) Reflects the historical issuance of notes at a rate of 11.5%, with a
face value of DM 244,479 and deferred note issuance costs of DM 8,800.
(2) To eliminate license sales of DM 3,000 from Brokat to MeTechnology and
DM 753 from us to TST. No material direct costs were related to these licenses.
(3) To record additional amortization expense resulting from the increase in
goodwill and intangible assets from acquisitions. These amounts are expected to
be amortized over the following useful lives:
<TABLE>
<CAPTION>
Amortization Included in
already June 30,
Six Months Annual included in 1999 report Estimated
Amortization Amortization June 30, pro forma Useful
Intangible Asset Total total 1999 figures Adjustments Life
---------------- ------------ ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
MeTechnology
Customer list..... 131 261 29 232 5 years
Goodwill.......... 12,927 25,854 2,905 22,949 7 years
------- ------- ----- -------
13,058 26,115 2,934 23,181
------- ------- ----- -------
TST
Customer list..... 402 803 112 691 5 years
Goodwill.......... 2,284 4,567 637 3,930 7 years
------- ------- ----- -------
2,685 5,370 749 4,621
------- ------- ----- -------
Blaze
Goodwill.......... 62,260 124,520 -- 124,520 7 years
------- ------- ----- -------
GemStone
Goodwill.......... 37,484 74,967 -- 74,967 7 years
------- ------- ----- -------
TOTAL............. 115,486 230,972 3,683 227,289
======= ======= ===== =======
</TABLE>
45
<PAGE>
The allocations of purchase price related to the acquisitions of
MeTechnology and TST, and proposed acquisitions of Blaze and Gemstone are:
<TABLE>
<CAPTION>
MeTechnology TST Blaze GemStone
------------ ------ --------- --------
<S> <C> <C> <C> <C>
Assets assumed........................ 8,876 5,345 163,193 13,030
Liabilities assumed................... (30,324) (6,703) (20,650) (38,277)
Customer list......................... 1,307 4,015 -- --
Goodwill.............................. 180,980 31,969 871,637 524,772
------- ------ --------- -------
Purchase Price..................... 160,839 34,626 1,014,180 499,525
======= ====== ========= =======
</TABLE>
The purchase price allocations related to our probable acquisitions of
Blaze and GemStone, which are based on management's best estimates at this
time, are preliminary and subject to change. At present, we have not been able
to perform a formal review of the net assets that we acquired of these
entities and, accordingly, for purposes of these pro forma financial
statements, have allocated the excess of purchase price over the fair value of
net assets acquired to goodwill. It is possible that a portion of this excess
will be allocated to other acquired intangible assets, such as employee base,
customer lists, or technology. These intangible assets generally have shorter
useful lives than that of goodwill. Had we assigned the entire purchase price
to an intangible asset such as software, which typically has a useful life of
three years, our pro forma net loss and loss per share would have been as
follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Six Months
June 30, December 31, Ended June
2000 1999 30, 2000
---------- ------------ ----------
<S> <C> <C> <C>
Net loss.................................... (635,036) (347,049) (304,117)
Basic and diluted net loss per share........ (24.07) (10.35) (9.04)
</TABLE>
(4) To account for:
. DM 52 related to financing the acquisition of TST,
. DM 28,115 related to interest expense on the notes,
. DM 880 related to the amortization of deferred note issuance costs,
and
. DM (468) related to a decrease in interest expense through the
repayment of indebtedness with the proceeds from the offering
As described in the notes to the consolidated financial statements,
interest on the financing related to the TST acquisition has been calculated
by discounting the non-interest bearing notes of DM 1,665 using an imputed
rate of interest of 5%. The DM 52 shown above does not include interest
expense of DM 20 which already was reflected in our historical financial
statements of BROKAT from the date of acquisition to June 30, 1999.
Interest expense on the notes has been calculated by applying the rate of
interest, 11.5%, to their face value. Deferred note issuance costs are being
recognized over the 10-year term of the notes.
Management used part of the proceeds from the note offering to repay
indebtedness of BROKAT. The annual interest rate on this debt outstanding at
the year ended June 30, 1999 was between 4.08% and 7%. No extraordinary gain
or loss will be recognized in relation to the repayment of the debt mentioned
in the preceding paragraph.
(5) For the six months ended December 31, 1999 and six months ended June
30, 2000 to account for:
. DM 14,058 related to current bond interest expense,
. DM 440 related to the recognition of deferred note issuance costs and
. DM (721) related to a decrease of interest expenses from the
repayment of indebtedness with the proceeds from the sale of the
notes.
Interest expense on the notes has been calculated by applying the rate of
interest, 11.5%, to their face value. Deferred note issuance costs are being
recognized over the 10-year term of the notes.
46
<PAGE>
Management used part of the proceeds from the note offering to repay
indebtedness of BROKAT. The annual interest rate on this debt outstanding at
the year ended June 30, 1999 was between 4.08% and 7%. No extraordinary gain or
loss will be recognized in relation to the repayment of this short-term debt.
(6) To account for the proposed acquisitions of Blaze Software, Inc. and
GemStone Systems, Inc.: (The purchase price allocation, which is based on
management's best estimates at this time, is preliminary and is subject to
change.)
(a) Reflects the issuance of BROKAT AG ordinary shares of 4.1 million
for Blaze and 2.1 million for GemStone. According to Financial
Accounting Standards Board, Interpretation No. 44, also reflects
the fair market value, as determined by Black-Scholes, of vested
and unvested options of 0.9 million and 0.2 million for Blaze and
Gemstone. Excluded from this value and included in deferred
compensation is the intrinsic value of unearned options of 77% for
Blaze and 70% for Gemstone. See footnote (7) below:
(b) Reflects the repayment of GemStone debt by BROKAT AG from the
issuance of 66,200 shares of Brokat AG common stock.
(c) Reflects the elimination of the historical shareholders' equity
accounts of Blaze and GemStone.
(d) The excess of purchase price over fair value of assets acquired
plus acquisition costs is reflected as goodwill and is amortized
over an estimated life of 7 years.
(e) Pro forma basic and diluted net loss per share is computed by
dividing the pro forma net loss from continuing operations by the
pro forma weighted average number of common shares outstanding.
(7) In our acquisition of Blaze, we will replace outstanding Blaze stock
options held by employees and directors of Blaze with BROKAT AG stock options,
using the exchange ratio ultimately employed to consummate the merger. In
compliance with FASB Interpretation No. 44, the fair value of the BROKAT AG
stock options issued to replace Blaze awards will be included as a component of
the purchase price for those BROKAT AG options that are vested as of the date
of grant. For those BROKAT AG options that are not exercisable at the time of
grant, the fair value of the BROKAT AG stock options issued to replace Blaze
awards will also be included as component of the purchase price, except that a
portion of this amount will be classified as deferred compensation expense and
amortized over the remaining vesting periods of the options granted. The
portion to be classified as deferred compensation will be initially calculated
by taking the difference between the fair market value of BROKAT AG ordinary
shares on the date of grant compared to the exercise prices of the new awards.
However, this amount will be adjusted to recognize deferred compensation
expense only to extent of the ratio of the remaining service period on the new
awards as a percentage of total service period under the original award.
(8) Exchange rates used for conversion from US dollars to Deutsche marks
(average for 12 months ending):
<TABLE>
<S> <C>
September 30, 1998......................................... $1.00 = DM 1.755
June 30, 1998.............................................. $1.00 = DM 1.745
May 29, 1999............................................... $1.00 = DM 1.747
June 30, 1999.............................................. $1.00 = DM 1.876
June 30, 1999 (average for 12 months ended)................ $1.00 = DM 1.755
December 31, 1999 (average for 6 months ended)............. $1.00 = DM 1.755
June 30, 2000 (average for 6 months ended)................. $1.00 = DM 2.039
As of June 30, 2000........................................ $1.00 = DM 2.049
</TABLE>
(9) For the GemStone and Blaze mergers, BROKAT has reserved 213,000
common shares for issuance of future stock options to the employees of GemStone
and 413,000 common shares for issuance of future stock options to the employees
of Blaze. These options will be granted through 2001 with exercise prices at
the future fair market value at the date of grant. These options will be issued
under a compensatory plan as defined by Accounting Principles Board Opinion No.
25.
47
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical consolidated financial
data as of and for:
. the five years ended June 30, 1999,
. the six months ended December 31, 1998 and 1999 and
. the six months ended June 30, 1999 and 2000.
The selected historical consolidated financial data as of and for the three
years ended June 30, 1999 and for the six months ended December 31, 1999 have
been extracted or derived from our audited consolidated financial statements
which are included elsewhere in this prospectus, with the report by Arthur
Andersen, Wirtschaftspruefungsgesellschaft Steuerberatungsgesellschaft mbH,
independent auditors.
The selected historical financial data as of and for the year ended June 30,
1996 were derived from audited consolidated financial statements for that
period not included in this prospectus, and the selected historical financial
data as of and for the year ended June 30, 1995 were derived from our unaudited
consolidated financial statements for that period, which were prepared under
German GAAP.
The selected historical interim financial data as of and for the six months
ended December 31, 1998 and the six months ended June 30, 1999 and 2000 were
derived from management records and in our opinion, reflect all adjustments
necessary to present fairly the financial position and results of operations
for the periods presented.
You should read the following table with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements and the notes to the consolidated financial
statements included elsewhere in this prospectus.
48
<PAGE>
SELECTED FINANCIAL DATA
(Deutsche marks and dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended June 30 Six Months Ended December 31
--------------------------------------------------------------- ---------------------------------
1995(1) 1996 1997 1998 1999 1999 1998 1999 1999
----------- --------- --------- --------- --------- ----------- ----------- --------- -----------
DM DM DM DM DM $ DM DM $
(unaudited) (audited) (audited) (audited) (audited) (unaudited) (unaudited) (audited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue(2)
Software
licensing
fees.......... 7,231 21,056 10,276 5,458 19,141 9,341
Professional
service fees.. 16,529 21,913 10,694 9,638 22,630 11,044
Customer
support fees.. 1,397 5,970 2,913 2,530 5,709 2,786
Product sales.. 4,414 13,492 6,584 2,045 3,558 1,736
Other revenue.. -- 56 27 -- 249 122
---- ------ ------ ------- ------- ------- ------- ------- -------
Total revenue... 768 2,684 12,101 29,571 62,487 30,494 19,671 51,287 25,029
Cost of sales... (531) (1,272) (7,971) (15,493) (31,325) (15,287) (10,371) (22,937) (11,194)
---- ------ ------ ------- ------- ------- ------- ------- -------
Gross profit.... 237 1,412 4,130 14,078 31,162 15,208 9,300 28,350 13,835
---- ------ ------ ------- ------- ------- ------- ------- -------
Selling
expenses....... (149) (524) (3,118) (16,636) (38,848) (18,959) (15,535) (27,714) (13,525)
General and
administrative
expenses....... (46) (197) (1,332) (4,305) (10,639) (5,192) (4,092) (12,643) (6,170)
Research and
development
expenses....... (20) (546) (1,450) (4,917) (8,733) (4,262) (3,896) (12,769) (6,232)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions... -- -- -- -- (3,686) (1,799) -- (15,797) (7,709)
Non-cash charges
associated with
stock option
grants......... -- -- -- -- (16,340) (7,974) -- (12,240) (5,973)
---- ------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses....... (215) (1,267) (5,900) (25,858) (78,246) (38,186) (23,523) (81,163) (39,609)
---- ------ ------ ------- ------- ------- ------- ------- -------
Operating income
(loss)......... 22 145 (1,770) (11,780) (47,084) (22,978) (14,223) (52,813) (25,774)
---- ------ ------ ------- ------- ------- ------- ------- -------
Interest
income......... 1 -- 5 150 1,528 746 726 35 17
Interest
expense........ -- (7) (157) (454) (960) (468) (209) (867) (423)
Other income,
net............ -- 32 198 239 2,565 1,252 1,261 2,298 1,121
---- ------ ------ ------- ------- ------- ------- ------- -------
Income (loss)
before income
taxes and
extraordinary
items.......... 23 170 (1,724) (11,845) (43,951) (21,448) (12,445) (51,347) (25,058)
Income tax
benefit........ (13) (73) 10 -- (113) (55) -- (104) (51)
Minority
interest....... -- -- -- -- 90 44 -- (26) (13)
Other Taxes..... -- -- -- -- -- -- -- -- --
---- ------ ------ ------- ------- ------- ------- ------- -------
Income (loss)
before
extraordinary
items.......... 10 97 (1,714) (11,845) (44,038) (21,459) (12,445) (51,477) (25,122)
Extraordinary
loss on early
extinguishment
of debt net of
taxes.......... -- -- -- -- (64) (31) (64) -- --
---- ------ ------ ------- ------- ------- ------- ------- -------
Net income
(loss)......... 10 97 (1,714) (11,845) (44,038) (21,490) (12,509) (51,477) (25,122)
==== ====== ====== ======= ======= ======= ======= ======= =======
Basic and
diluted loss
per common
share(3)....... -- -- -- -- (2.24) (1.09) -- (1.92) (.94)
Cash Flow
Information:
Net cash (used
in) provided by
operating
activities(4).. -- 235 (3,214) (13,449) (35,686) (17,415) (11,996) (27,480) (13,411)
Net cash used in
investing
activities(4).. -- (370) (1,744) (3,763) (39,973) (19,508) (3,396) (8,890) (4,338)
Net cash
provided by
financing
activities(4).. -- 76 4,965 19,008 83,025 40,518 82,806 37,746 18,420
Other Financial
Data:
EBITDA(5)....... 71 332 (838) (10,167) (37,725) (18,410) (11,977) (31,649) (15,445)
Adjusted
EBITDA(5)...... 71 332 (838) (10,167) (21,385) (10,436) (11,977) (19,409) (9,472)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions
and
depreciation... 49 155 734 1,374 6,705 3,272 985 18,892 9,220
Capital
expenditures... 155 384 1,748 3,869 10,835 5,288 3,396 4,334 2,115
Ratio of
earnings to
fixed
charges(6)..... 4.83x 7.3x -- -- -- -- -- -- --
<CAPTION>
Six Months Ended June 30
-----------------------------------
1999 2000 2000
----------- ----------- -----------
DM DM $
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue(2)
Software
licensing
fees.......... 15,598 38,499 18,789
Professional
service fees.. 12,275 31,094 15,175
Customer
support fees.. 3,440 8,891 4,339
Product sales.. 11,447 3,207 1,565
Other revenue.. 56 38 19
----------- ----------- -----------
Total revenue... 42,816 81,729 39,887
Cost of sales... (20,954) (32,870) (16,042)
----------- ----------- -----------
Gross profit.... 21,862 48,859 23,845
----------- ----------- -----------
Selling
expenses....... (23,313) (36,283) (17,708)
General and
administrative
expenses....... (6,547) (15,725) (7,674)
Research and
development
expenses....... (4,837) (21,437) (10,462)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions... (4,020) (15,184) (7,410)
Non-cash charges
associated with
stock option
grants......... (10,280) (30,735) (15,000)
----------- ----------- -----------
Total operating
expenses....... (48,997) (119,364) (58,255)
----------- ----------- -----------
Operating income
(loss)......... (27,135) (70,505) (34,409)
----------- ----------- -----------
Interest
income......... 802 1,857 906
Interest
expense........ (749) (8,267) (4,035)
Other income,
net............ 1,711 460 224
----------- ----------- -----------
Income (loss)
before income
taxes and
extraordinary
items.......... (25,371) (76,455) (37,313)
Income tax
benefit........ (113) (227) (111)
Minority
interest....... 90 99 48
Other Taxes..... -- (103) (50)
----------- ----------- -----------
Income (loss)
before
extraordinary
items.......... (25,394) (76,686) (37,426)
Extraordinary
loss on early
extinguishment
of debt net of
taxes.......... -- -- --
----------- ----------- -----------
Net income
(loss)......... (25,394) (76,686) (37,426)
=========== =========== ===========
Basic and
diluted loss
per common
share(3)....... (1.29) (2.84) (1.39)
Cash Flow
Information:
Net cash (used
in) provided by
operating
activities(4).. (23,690) (45,631) (22,270)
Net cash used in
investing
activities(4).. (36,577) (11,956) (5,835)
Net cash
provided by
financing
activities(4).. 219 215,227 105,040
Other Financial
Data:
EBITDA(5)....... (19,614) (50,715) (24,751)
Adjusted
EBITDA(5)...... (9,334) (19,980) (9,751)
Amortization
costs on
goodwill and on
intangible
assets from
acquisitions
and
depreciation... 5,720 19,231 9,386
Capital
expenditures... 7,439 7,731 3,773
Ratio of
earnings to
fixed
charges(6)..... -- -- --
</TABLE>
<TABLE>
<CAPTION>
As of June 30 As of December 31
--------------------------------------------------------------- ---------------------------------
1995 1996 1997(7) 1998 1999 1999 1998 1999 1999
----------- --------- --------- --------- --------- ----------- ----------- --------- -----------
DM DM DM DM DM $ DM DM $
(unaudited) (audited) (audited) (audited) (audited) (unaudited) (unaudited) (audited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Total assets.... 531 1,008 7,222 19,680 275,070 134,239 94,246 248,685 121,363
Total long-term
debt........... -- 23 2,730 (13,560) 24,356 11,886 6,000 3,850 1,879
Total
liabilities.... 471 839 8,208 (22,471) 56,731 27,686 18,354 78,313 38,218
Total
shareholders'
equity......... 60 169 (986) (2,791) 217,939 106,358 75,892 169,946 82,937
<CAPTION>
As of June 30,
2000
-----------------------
DM $
(unaudited) (unaudited)
<S> <C> <C>
Balance Sheet
Data:
Total assets.... 496,167 242,151
Total long-term
debt........... 248,596 121,326
Total
liabilities.... 301,750 147,267
Total
shareholders'
equity......... 194,091 94,725
</TABLE>
49
<PAGE>
--------
(1) For the fiscal year ended June 30, 1995, our consolidated financial
statements were prepared based on German GAAP.
(2) We did not categorize our sources of revenue before July 1, 1997.
(3) Per share data were unavailable before our conversion from a limited
liability company to a stock corporation in July 1998.
(4) Financial statements for the fiscal year ended June 30, 1995 were
prepared under German GAAP, which does not require cash flow information.
(5) We have presented EBITDA and Adjusted EBITDA to allow for greater
comparability between periods as well as an indication of our results on
an ongoing basis.
We define EBITDA as:
. net loss, plus
. extraordinary losses, income tax expense, interest expense, and
depreciation and amortization, less
. interest income and income tax benefit.
We define Adjusted EBITDA as:
. EBITDA plus
. non-cash charges related to stock option grants.
Because all companies do not calculate EBITDA or similarly titled financial
measures in the same manner, other companies' disclosures of EBITDA may not be
comparable with EBITDA as used here.
EBITDA and Adjusted EBITDA as used here should not be considered as an
alternative to net income or loss (as an indicator of operating performance)
or as an alternative to cash flow (as a measure of liquidity or ability to
service debt obligations) and they are not a measure of performance or
financial condition under U.S. GAAP. EBITDA and Adjusted EBITDA are intended
to provide additional information for evaluating the ability of an entity to
meet its obligations.
Cash flows under U.S. GAAP consist of cash flows from operating, investing
and financing activities. Cash flows from operating activities reflect net
income or loss, including charges for interest and income taxes not reflected
in EBITDA as used here, adjusted for:
. all non-cash charges or credits which include, for example, depreciation
and amortization and
. changes in operating assets and liabilities, not reflected in EBITDA.
EBITDA as used here differs from consolidated cash flow as defined in the
indenture governing the notes.
(6) Ratio of earnings to fixed charges is computed by dividing our earnings
from continuing operations before income taxes, minority interest and
fixed charges by our fixed charges. Our fixed charges consist of interest
expense plus one-third of rental expense (the portion that has been
considered by management to be representative of the interest factor).
Earnings were insufficient to cover fixed charges by DM (1,724), DM
(11,845), DM (43,951), DM (12,445), DM (51,347), DM (25,371) and DM
(76,455) for the years ended June 30, 1997, 1998 and 1999, six months
ended December 31, 1998 and 1999 and six months ended June 30, 1999 and
2000, respectively.
(7) Our financial statements contained in this prospectus have been prepared
to comply with SEC requirements, as well as U.S. GAAP requirements. To
maintain a consistent presentation, the balance sheet data at June 30,
1997 differs from the balance sheet data at that date included in our
published accounts.
50
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our financial statements and, except as otherwise indicated, all financial
information about us in this prospectus were prepared based on U.S. GAAP.
Overview
Our Business
We are a leading provider of software for the rapidly expanding e-banking
market and the leading provider of this kind of software to European banks. We
design, develop, market and support e-business software. We have concentrated
on providing e-banking solutions, particularly to banks in Germany and Austria,
and to a lesser extent, other geographic areas such as the United Kingdom, the
United States, the Asia-Pacific region, Switzerland and the Benelux countries.
We intend to further take advantage of our leading position in the European e-
banking sector to expand our presence in other geographic areas and in other e-
business sectors, with the long-term objective of establishing our core product
as the industry standard platform for the delivery of e-business services.
In May 1999, we acquired MeTechnology AG and Transaction Software
Technologies, Inc., and the results of operations for periods after these
acquisitions include the results of these subsidiaries. These and other
acquisitions we made in the last twelve months are described above under
"Recent Acquisitions and Other Strategic Initiatives." These acquisitions were
accounted for under purchase accounting principles, resulting in acquired
goodwill of DM 212.9 million. This goodwill is being amortized over seven
years. The results of operations for the year ended June 30, 1999 and the six
months ended December 31, 1999 included amortization of goodwill and other
intangible assets from acquisitions of DM 3.7 million and 15.8 million.
Our Revenue
Our revenue is derived primarily from four sources:
. Software licensing fees. We derive licensing fees from the licensing of
the software we develop. Fees from the sale of licenses are recognized
upon delivery of the software to our customer if collection of the
resulting receivable is probable, an agreement has been signed, the fee
is fixed or determinable and we have no significant obligations
remaining. Revenue is recognized over the duration of the project when
we are obligated to provide a significant amount of professional
services to customize the software to meet our customer's requirements.
. Professional service fees. We derive fees from providing consulting,
customization and installation services, which are recognized relative
to the portion of the project completed on fixed fee contracts and as
these services are performed on variable fee contracts.
. Customer service revenue. We derive fees from providing ongoing customer
support services, which are provided based on maintenance agreements.
These agreements typically have a term of one year, and revenue is
recognized ratably over the period of the agreement.
. Product sales. We derive revenue from the resale of hardware and, to a
lesser extent, software obtained from third parties as part of the
provision to our customers of comprehensive e-business solutions. This
revenue is recognized at the time of delivery.
Seasonality of Our Business
As is the case with many other software companies, there is a seasonal
variability to our business relating to the receipt of orders. Orders generally
increase in the fourth quarter of each calendar year, as business customers
attempt to make full use of their software budgets before year end. The CeBIT
information
51
<PAGE>
technology fair, which takes place annually in late February or early March,
also leads to an increase in orders in the second quarter of each calendar
year, while the first and third quarters of the calendar year tend to be less
active quarters for the receipt of new orders. However, because of the
continuing growth in overall sales and the impact of our revenue recognition
policies, this seasonal variability in orders has not resulted in any
significant seasonal variability in revenue.
Our Stock Option Plans
Under our 1998 and 1999 stock option plans for employees, we have issued
options to acquire up to an aggregate of approximately 2.6 million shares. For
optionees to exercise these options, the increase in the market value of BROKAT
shares above the exercise price must at least equal the overall increase in the
value of the Frankfurt Stock Exchange Neuer Markt Index. Based on the intrinsic
value method required by the Accounting Principles Board, or APB, Opinion No.
25 "Accounting for Stock Issued to Employees", we recognized in our statement
of operations non-cash charges related to stock option grants of DM 12.2
million for the six months ended December 31, 1999 and DM 16.3 million for the
year ended June 30, 1999. The amount of these non-cash charges under this
accounting treatment generally increases as the market price of our shares
increases during an accounting period and decreases as the market price
declines. Our consolidated balance sheets also reflect a reserve in our
deferred compensation account and a credit to additional paid-in capital
relating to these options.
On May 26, 2000, our shareholders approved the establishment of an employee
participation program similar to our stock option programs with convertible
bonds of up to euro 2.6 million and a corresponding conditional authorized
capital increase to provide a sufficient number of shares for our employees who
exercise their conversion rights under this program.
tbg Investment
By contract dated September 19, 1997, Technologie-Beteiligungs-Gesellschaft
mbH, also known as tbg, invested DM 7,000.0 thousand in a silent participation
in the Company. Payment was made on December 2, 1997. The investment was
originally scheduled to mature on December 31, 2007. Under the silent
participation agreement tbg participated proportionately in the losses of the
Company. However, the agreement did not allow for tbg to participate
proportionately in any gains of the Company. Instead, tbg had the right to
convert its silent participation into equity interests in the Company with a
value of DM 7,000.0 thousand only in the event that the Company completes an
initial public offering of its common stock or if a change in control in the
Company, as defined, occurs. Accordingly, as tbg had the right to convert its
interests into equity at the same amount of its original investment, during all
periods presented, the Company did not recognize any loss participations in
relation to this silent participation.
As a result of the Company's initial public offering of common shares, tbg
exercised its right to convert its silent participation into equity of the
Company and was issued common shares with a value of DM 7,000.0 thousand on
August 4, 1998. As this conversion was in accordance with the terms of the
original agreement, there was no gain or loss recognized in relation to this
conversion.
Fiscal Year Change
In November 1999, our shareholders approved a change in our fiscal year from
a fiscal year ended June 30 to a calendar fiscal year ended December 31, 1999.
For the transition period in 1999, our fiscal year began on July 1, 1999 and
ended on December 31, 1999.
52
<PAGE>
Results of Operations
The following table presents for the periods indicated income and expense
items as a percentage of total revenue:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended Fiscal Years Ended
June 30, December 31, June 30,
-------------- --------------- --------------------------
1999 2000 1998 1999 1997 1998 1999
----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Software licensing
fees................. 36% 47% 28% 38% --* 24% 34%
Professional service
fees................. 29 38 49 44 --* 56 35
Customer support
fees................. 8 11 13 11 --* 5 10
Product sales......... 27 4 10 7 --* 15 21
----- ----- ----- ------ ------ ------ ------
Total revenue....... 100 100 100 100 100% 100 100
----- ----- ----- ------ ------ ------ ------
Cost of sales........... 49 40 53 45 66 52 50
----- ----- ----- ------ ------ ------ ------
Gross margin............ 51 60 47 55 34 48 50
Selling expenses........ (54) (44) (79) (54) (26) (56) (62)
General and
administrative
expenses............... (15) (19) (21) (25) (11) (15) (17)
Research and development
expenses............... (11) (26) (20) (25) (12) (17) (14)
Amortization costs on
goodwill and on
intangible assets from
acquisitions........... (9) (19) -- (30) -- -- (6)
Non-cash charges --
stock option grants.... (24) (38) -- (24) -- -- (26)
Interest income, net.... 2 2 3 (1) (1) (1) 1
Other income, net....... (4) 1 6 4 2 1 4
----- ----- ----- ------ ------ ------ ------
Net loss................ (59)% (94)% (64)% (100)% (14)% (40)% (70)%
===== ===== ===== ====== ====== ====== ======
</TABLE>
--------
* We did not categorize our revenue before July 1, 1997.
Six months ended June 30, 2000 compared with six months ended June 30, 1999
General
The consolidation of Fernbach Financial Software S.A., a Luxembourg company,
was completed as of May 19, 2000. Fernbach's income statement and balance sheet
will be included in BROKAT"s consolidated income statement and balance sheet
from that date forward.
Revenue
Total revenue increased DM 38.9 million, or 91%, from DM 42.8 million for
the six months period ended June 30, 1999 to DM 81.7 million for the first six
months ended June 30, 2000. This growth in revenue was largely attributable to:
(i) new orders received during the period, including an indirect sale of DM 6.2
million to a German reseller and one indirect sale to a Spanish reseller of DM
8.0 million; (ii) an increase in the revenue recognized from orders received in
prior periods; and (iii) a significant increase in international revenues,
mainly from the United States and the United Kingdom.
The sale to the German reseller accounted for approximately 7.5% and the
sale to the Spanish reseller accounted for 9.8% of our total revenue in the six
months ended June 30, 2000.
Revenue from licensing software increased DM 22.9 million, or 147%, from DM
15.6 million for the six months period ended June 30, 1999 to DM 38.5 million
for the first six months ended June 30, 2000. Software licensing revenue
represented 47% of sales revenue for the first six months ended June 30, 2000
as compared to 36% for the six months period ended June 30, 1999.
53
<PAGE>
Professional services revenue increased DM 18.8 million, or 153%, from DM
12.3 million for the six months period ended June 30, 1999 to DM 31.1 million
for the first six months ended June 30, 2000. Professional service revenue
represented 38% of total sales revenue for the first six months ended June 30,
2000, compared to 29% in the comparable period ended June 30, 1999.
Revenue from the sale of tradable goods decreased DM 8.2 million, or 72%,
from DM 11.4 million for the six months period ended June 30, 1999 to DM 3.2
million for the first six months ended June 30, 2000. Tradable goods revenue
represented 4% of total sales revenue for the first six months ended June 30,
2000, compared to 27% for the comparable six months period ended June 30, 1999.
Customer service revenue increased DM 5.5 million, or 162%, from DM 3.4
million for the six months period ended June 30, 1999 to DM 8.9 million for the
first six months ended June 30, 2000. Customer service revenue represented 11%
of total sales revenue for the first six months ended June 30, 2000, compared
to 8% for the comparable six months period ended June 30, 1999. The absolute
increase in customer service revenue is mainly due to the increase in the
number of our customers related to the growth in product sales.
Revenue from sources outside of Germany increased DM 40.6 million, or 526%,
from DM 7.7 million for the six months period ended June 30, 1999 to DM 48.3
million for the first six months ended June 30, 2000. Revenue from outside of
Germany represented 59% of total sales revenue for the first six months ended
June 30, 2000, compared to 18% for the comparable period ended June 30, 1999.
This increase is the result of our significantly increased efforts abroad,
which have led to broad acceptance of our products in foreign markets. In the
first six months of 2000, the US became the second strongest revenue generator
behind Germany. The US accounted for 12.6% of total revenues, followed by Great
Britain at 12.0%.
Cost of Sales
For the six months ended June 30, 2000, cost of sales increased DM 11.9
million to DM 32.8 million or 57% from DM 20.9 million in the same period last
year. This resulted in an increase of the gross margin from 51% to 60%. This is
mainly due to (i) the higher proportion of license revenue and (ii) the
decrease of revenue from tradable goods.
Operating Expenses
Selling expenses. Selling expenses increased DM 13.0 million or 56% from DM
23.3 million for the six months ended June 30, 1999, to DM 36.3 million for the
six months ended June 30, 2000. The increase resulted from our efforts to
expand our sales and marketing capabilities and activities internationally as
well as in Germany. However, as a percentage of total revenues, selling
expenses went down from 54% in the six month period ended June 30, 1999 to 44%
in the six month period ended June 30, 2000. This decrease was the result of a
fundamental change in our cost structure due to the acquisitions of
MeTechnology and TST, both of which took place during the quarter ended June
30, 1999 and did not have a big impact on the financial figures in that
quarter.
Research and development expenses. Research and development expenses
increased DM 16.6 million or 346% from DM 4.8 million for the six months ended
June 30, 1999, to DM 21.4 million for the six months ended June 30, 2000. This
increase was the result of the addition of research and development personnel
of MeTechnology and TST, which were acquired in May 1999.
General and administrative expenses. General and administrative expenses
increased DM 9.2 million or 141% from DM 6.5 million for the six months ended
June 30, 1999, to DM 15.7 million for the six months ended June 30, 2000. This
increase was due primarily to (i) the continued development of an
administrative infrastructure for the conduct of our business internationally,
and (ii) legal fees and consulting costs related to our expansion strategy.
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Interest expenses, net. For the six months ended June 30, 2000, interest
expenses net were DM 6.4 million. This presents an increase of DM 6.5 million
compared to the interest income net of DM 0.1 million for the six months ended
June 30, 1999. This increase resulted primarily from the change in our sources
of funding from the proceeds of our initial public offering together with a
line of credit provided by Deutsche Bank to the proceeds of the issuance of
unsecured senior notes in a volume of euro 125 million (DM 244.5 million).
Other expenses, net. Other expenses, net decreased DM 1.2 million or 73%,
from DM 1.7 million for the six months ended June 30, 1999, to DM 0.5 million
for the six months ended June 30, 2000. This decrease resulted primarily from
changes in foreign currency translation.
Net Loss
Net loss increased DM 51.3 million or 202% from DM 25.4 million for the six
months ended June 30, 1999, to DM 76.7 million for the six months ended June
30,2000. Excluding the effect of amortization of goodwill and non-cash charges
associated with stock option grants, net losses would be DM 30.7 million for
the six month period ended June 30, 2000 as compared with DM 11.1 million for
the six month period ended June 30, 1999.
Six months ended December 31, 1999 compared with six months ended December 31,
1998
Revenue
Total revenue increased DM 31.6 million, or 160%, from DM 19.7 million in
the six months ended December 31, 1998 to DM 51.3 million in the six months
ended December 31, 1999. This growth in revenue was largely attributable to:
. new orders received during the period, including an increase in
international sales and in indirect sales through resellers;
. an increase in the revenue recognized from orders received in prior
periods;
. license upgrades; and
. sales revenue related to the businesses acquired in the TST and
MeTechnology acquisitions in May 1999.
The Co-operative Bank plc, Manchester, accounted for 11.3% of our total revenue
for the six months ended December 31, 1999.
Revenue from licensing software increased DM 13.6 million, or 247%, from DM
5.5 million in the six months ended December 31, 1998 to DM 19.1 million in the
six months ended December 31, 1999. Software licensing revenue represented 38%
of total revenue in the six months ended December 31, 1999, compared to 28% for
the six months ended December 31, 1998 due primarily to increasing indirect
sales of our software to resellers resulting from greater standardization of
our products. These indirect sales included two sales to resellers outside of
Germany, totaling DM 5.7 million in aggregate.
Professional services revenue increased DM 13.0 million, or 135%, from DM
9.6 million in the six months ended December 31, 1998 to DM 22.6 million in the
six months ended December 31, 1999, reflecting increases in sales of
professional services both to new and existing customers. Professional service
revenue represented 44% of total revenue in the six months ended December 31,
1999, compared to 49% for the six months ended December 31, 1998, reflecting
the relative increase in indirect sales to resellers described above for which
we are not obligated to perform significant professional services.
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Revenue from the sale of third party products increased DM 1.6 million, or
80%, from DM 2.0 million in the six months ended December 31, 1998 to DM 3.6
million in the six months ended December 31, 1999 because of an increase in the
number of third party product sales. Third party product revenue represented 7%
of total revenue in the six months ended December 31, 1999, compared to 10% for
the six months ended December 31, 1998. Revenue from the sales of third party
products is not regarded as a core part of business revenues. These sales are
made solely as an accommodation to strategic customers. We anticipate that
there will be substantial variability in this revenue from period to period.
Customer service revenue increased DM 3.2 million, or 128%, from DM 2.5
million in the six months ended December 31, 1998 to DM 5.7 million in the six
months ended December 31, 1999 reflecting an increase in the number of
maintenance agreements entered into with our customers as direct sales of our
software licenses have increased. Customer service revenue represented 11% of
total revenue in the six months ended December 31, 1999, compared to 13% for
the six months ended December 31, 1998. The decline in the percentage of our
revenue derived from customer service fees was due to the disproportionate
increase in indirect sales of our products for which we did not enter into
maintenance agreements with the ultimate end-user. Approximately 85% of our
customers enter into maintenance agreements with us.
Revenue from sources outside of Germany increased DM 18.2 million, or 190%,
from DM 9.6 million in the six months ended December 31, 1998 to DM 27.8
million in the six months ended December 31, 1999, due to the:
. DM 5.7 million of sales to two resellers described above;
. revenues from the sale of corporate cash management software in the
United States following the TST acquisition in May 1999; and
. a general increase in international sales believed to be attributable to
the increased international presence of BROKAT.
Revenue from outside of Germany represented 54% of total revenue in the six
months ended December 31, 1999, compared to 49% for the six months ended
December 31, 1998. For the six months ended December 31, 1999, sales of our
products and services in Great Britain and Scandinavia accounted for 24% of our
total revenue, the United States accounted for 11%, Asia accounted for 9% and
Luxembourg accounted for 6%.
Cost of Sales
Cost of sales includes all costs related to the production of our products,
including salaries and related indirect costs of personnel in our professional
services and customer support departments, the costs for the use of outside
programmers and costs of purchasing third party products that we resell to
customers. Cost of sales increased DM 12.5 million, or 120%, from DM 10.4
million in the six months ended December 31, 1998 to DM 22.9 million in the six
months ended December 31, 1999 due to the increase in sales. Gross margins
increased from DM 9.3 million, or 47% of revenue in the six months ended
December 31, 1998, to DM 28.4 million, or 55% of revenue in the six months
ended December 31, 1999 due to the relative growth in indirect sales. Although
we expect continued growth in indirect sales, we anticipate that cost of sales
will remain a significant expense as we enter new markets which will require us
to use the professional skills of BROKAT employees to implement projects in
these new markets.
Operating Expenses
Selling expenses. Selling expenses primarily consist of direct and indirect
costs related to personnel in our sales and marketing department, costs of
travel and trade shows, and promotional and advertising costs, as well as the
costs of expanding our sales offices. Selling expenses increased DM 12.2
million, or 79%, from DM 15.5 million in the six months ended December 31, 1998
to DM 27.7 million in the six months ended December 31, 1999. The increase
resulted from our continuing efforts to expand our sales and marketing
capabilities and activities. The smaller increase in selling expenses relative
to the increase in our sales revenue
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reflected the efforts expended in prior periods to hire staff and purchase
equipment to provide a sufficient infrastructure for the international
activities of our sales and marketing department. Selling expenses,
particularly advertising and promotional costs, are expected to continue to
increase in line with our strategy to establish our brand name on a global
basis.
Research and development expenses. Research and development expenses
primarily consist of personnel costs in our research and development department
and the cost of equipment and supplies used to enhance existing products and
develop new products. Research and development expenses increased DM 8.9
million, or 228%, from DM 3.9 million in the six months ended December 31, 1998
to DM 12.8 million in the six months ended December 31, 1999. Research and
development expenses represented 25% of total revenue in the six months ended
December 31, 1999, compared to 20% for the six months ended December 31, 1998.
The increase in research and development expense resulted primarily from the
acquisition of MeTechnology and TST and, in particular, the addition of 132
research and development employees.
General and administrative expenses. General and administrative expenses
primarily consist of personnel costs for administrative and support staff and
legal, consulting and accounting fees and facility costs. General and
administrative expenses increased DM 8.5 million, or 207%, from DM 4.1 million
in the six months ended December 31, 1998 to DM 12.6 million in the six months
ended December 31, 1999. General and administrative expenses represented 25% of
sales revenue in the six months ended December 31, 1999, compared to 21% for
the six months ended December 31, 1998. The increase in expense primarily
reflected the acquisition of MeTechnology and TST in May 1999 and in particular
the addition of their administrative staffs. As we continue to reduce
duplicative administrative functions through the consolidation of MeTechnology
and TST into the existing Brokat organization, we anticipate a favorable impact
on general and administrative expenses in future periods. The increase also
reflected additional accounting expenses in preparation for a possible listing
in the United States later this year.
Interest expense, net. Net interest expense increased DM 1.3 million, or
260% from net interest income of DM 0.5 million in the six months ended
December 31, 1998 to net interest expense of DM 0.8 million for the six months
ended December 31, 1999, due to the change in our sources of funding from the
proceeds of our initial public offering to credit facilities.
Other income, net. Other income, net increased DM 1.0 million, or 77%, from
DM 1.3 million in the six months ended December 31, 1998 to DM 2.3 million in
the six months ended December 31, 1999. Other income, net represented 4% of
total revenue in the six months ended December 31, 1999, compared to 6% for the
six months ended December 31, 1998. This increase resulted primarily from the
higher income derived because of changes in exchange rates.
Net Loss
Our net loss for the six months ended December 31, 1999 increased by DM 39.0
million, or 312%, to DM 51.5 million from DM 12.5 million for the six months
ended December 31, 1998. Our earnings before interest, tax, depreciation,
amortization and non-cash charges related to our stock option program resulted
in a loss of DM 19.4 million for the six months ended December 31, 1999
compared to a loss of DM 12.0 million for the six months ended December 31,
1998.
Year ended June 30, 1999 compared to year ended June 30, 1998
Revenue
Total revenue increased DM 32.9 million, or 111%, from DM 29.6 million for
the year ended June 30, 1998 to DM 62.5 million for the year ended June 30,
1999.
This growth in revenue was attributable to:
. new orders received during the year, including an indirect sale of DM
9.0 million to German reseller and an increase in international sales;
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. an increase in the revenue recognized from orders received in prior
periods; and
. the sale of third party products to a strategically important German
customer for DM 9.6 million.
ConSors Discount Brokers AG accounted for approximately 20.3% and Media Support
Group GmbH and its affiliates accounted for approximately 18.5% of our total
revenue in the year ended June 30, 1999.
Revenue from licensing software increased DM 13.9 million, or 193%, from DM
7.2 million for the year ended June 30, 1998 to DM 21.1 million for the year
ended June 30, 1999. Software licensing revenue represented 34% of sales
revenue for the year ended June 30, 1999 as compared to 24% for the year ended
June 30, 1998 due primarily to increasing indirect sales of our software to
resellers reflecting the greater standardization of our products. Indirect
sales included a sale to a German reseller totaling DM 9.0 million.
Professional services revenue increased DM 5.4 million, or 33%, from DM 16.5
million for the year ended June 30, 1998 to DM 21.9 million in the year ended
June 30, 1999 reflecting an increase in sales of our professional services both
to new and existing customers. Professional service revenue represented 35% of
total sales revenue for the year ended June 30, 1999, compared to 56% for the
year ended June 30, 1998, reflecting the relative increase in indirect sales to
resellers described above.
Revenue from the sale of third party products increased DM 9.1 million, or
207%, from DM 4.4 million for the year ended June 30, 1998 to DM 13.5 million
for the year ended June 30, 1999. Third party product revenue represented 21%
of total sales revenue for the year ended June 30, 1999, compared to 15% for
the year ended June 30, 1998. This increase is largely attributable to a DM 9.6
million sale of third party products to a strategically important customer in
Germany.
Customer service revenue increased DM 4.6 million, or 329%, from DM 1.4
million for the year ended June 30, 1998 to DM 6.0 million for the year ended
June 30, 1999. Customer service revenue represented 10% of total sales revenue
for the year ended June 30, 1999, compared to 5.0% for the year ended June 30,
1998. The increase in customer service revenue is due to the increase both in
the proportion of our customers entering into maintenance agreements with us
and in the absolute number of our customers related to the growth in product
sales.
Revenue from sources outside of Germany increased DM 6.8 million, or 65%,
from DM 10.4 million for the year ended June 30, 1998 to DM 17.2 million for
the year ended June 30, 1999. Revenue from outside of Germany represented 28%
of total sales revenue for the year ended June 30, 1999, compared to 35% for
the year ended June 30, 1998. The significant sales of our software to a German
reseller for DM 9.0 million and of third party products to a significant German
customer for DM 9.6 million were responsible for the decrease in international
sales as a percentage of total sales revenue.
Cost of Sales
Cost of sales increased DM 15.8 million, or 102%, from DM 15.5 million for
the year ended June 30, 1998 to DM 31.3 million for the year ended June 30,
1999, which was generally consistent with the increase in sales revenue. Gross
margins increased from DM 14.1 million, or 48% of revenue for the year ended
June 30, 1998, to DM 31.2 million, or 50% of revenue for the year ended June
30, 1999 due to an increase in the proportion of revenue derived from higher
margin license fees, which was offset in part by the effect of the DM 9.6
million sale of third party products, which had a lower margin.
Operating Expenses
Selling expenses. Selling expenses increased DM 22.2 million, or 134%, from
DM 16.6 million for the year ended June 30, 1998 to DM 38.8 million for the
year ended June 30, 1999. The increase resulted from our efforts to expand our
sales and marketing capabilities and activities internationally as well as in
Germany.
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Research and development expenses. Research and development expenses
increased DM 3.8 million, or 78%, from DM 4.9 million from the year ended June
30, 1998 to DM 8.7 million for the year ended June 30, 1999. Research and
development expenses represented 14% of total sales revenue for the year ended
June 30, 1999, compared to 17% for the year ended June 30, 1998. This increase
was the result of the addition of personnel, including six weeks of costs
related to the research and development personnel of MeTechnology and TST,
which were acquired in May 1999.
General and administrative expenses. General and administrative expenses
increased DM 6.3 million, or 147%, from DM 4.3 million for the year ended June
30, 1998 to DM 10.6 million for the year ended June 30, 1999. General and
administrative expenses represented 17% of sales revenue for the year ended
June 30, 1999, compared to 15% for the year ended June 30, 1998. These
increases were due to:
. the continued development of an administrative infrastructure for the
conduct of our business internationally, including the hiring of
administrative staff, primarily in finance and human resources, and the
implementation of new software for our information systems, and
. expenses related to the integration of the operations of MeTechnology
and TST.
Interest expense, net. In the year ended June 30, 1999, we incurred net
interest income of DM 0.6 million, which represented a decrease in our net
interest expense of 0.9 million, or 300%, when compared to the net interest
expense of DM 0.3 million for the year ended June 30, 1998. This decrease
resulted primarily from the change in our sources of funding from interest-
bearing debt of silent partners to the proceeds of our initial public offering.
Other income, net. Other income, net increased DM 2.33 million, or 971%,
from DM 0.24 million in the year ended June 30, 1998 to DM 2.57 million in the
year ended June 30, 1999. Other income, net represented 4% of total revenue in
the year ended June 30, 1999, compared to 0.8% for the year ended June 30,
1998. This increase resulted primarily from (i) income derived from a customer
who paid us the full contract value following its decision to halt
implementation of a project due to internal considerations and (ii) income
derived because of changes in exchange rates.
Net Loss
Our net loss for year ended June 30, 1999 increased by DM 32.2 million, or
273% to DM 44.0 million from DM 11.8 million for the year ended June 30, 1998.
Excluding the effect of extraordinary items, amortization of goodwill and non-
cash charges related to stock option grants, net losses would be DM 23.9
million for the year ended June 30, 1999 as compared with DM 11.8 million of
the year ended June 30, 1998.
Year ended June 30, 1998 compared to year ended June 30, 1997
Revenue
Total revenue increased DM 17.5 million, or 145%, from DM 12.1 million for
the year ended June 30, 1997 to DM 29.6 million for the year ended June 30,
1998. This growth in revenue was attributable to:
. new orders from German and other European banks for our software
products and services for e-banking as well as our first orders from
companies in the insurance and telecommunications sector;
. an increase in the revenue recognized from orders received in prior
periods, and
. an increase in international sales.
This increase was primarily attributable to the developing demand by German
and European credit institutions for complete software solutions to provide
secure Internet banking. During the year ended June 30, 1998, we also
implemented software solutions for insurance and telecommunications companies
for the first time.
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For periods before the year ended June 30, 1998, we did not classify
revenues by source among the categories of license fee, professional service,
third party product and customer service revenue. However, the preponderance of
our revenue during the year ended June 30, 1997 and prior periods was derived
from the provision of professional services as we had relatively little
standardized software available for sale. Revenue from licensing software was
DM 7.2 million for the year ended June 30, 1998, which represented 24.0% of
sales revenue for the year. Professional services revenue was DM 16.5 million
for the year ended June 30, 1998, which represented 56% of total sales revenue
for the year ended June 30, 1998. Revenue from the sale of third party products
was DM 4.4 million for the year ended June 30,1998, which represented 15% of
total sales revenue for the year ended June 30,1998. Customer service revenue
was DM 1.4 million for the year ended June 30, 1998, which represented 5.0% of
total sales revenue for the year ended June 30, 1998.
Revenue from sources outside of Germany increased DM 8.2 million, or 373%,
from DM 2.2 million for the year ended June 30, 1997 to DM 10.4 million for the
year ended June 30, 1998. Revenue from outside of Germany represented 35% of
total sales revenue for the year ended June 30, 1998, compared to 18% for the
year ended June 30, 1997. The increase in sales revenue outside of Germany was
primarily due to our increased international marketing and sales efforts,
including the opening of regional offices, that increased our international
presence.
Cost of Sales
Cost of sales increased DM 7.5 million, or 94%, from DM 8.0 million for the
year ended June 30, 1997 to DM 15.5 million for the year ended June 30, 1998.
Gross profits increased from DM 4.1 million, or 34% of sales revenue, for the
year ended June 30, 1997 to DM 14.1 million, or 48% of sales revenue, for the
year ended June 30, 1998. The 94% increase in the cost of sales was relatively
lower than the 145% increase in sales revenue primarily because during the year
ended June 30, 1998, we developed a range of more standardized software
products which we then were able to sell to our customers. Although most of
these products still required customization to meet the customer's needs, the
higher degree of standardization led to a lower costs of sales and an increase
in gross margins.
Operating Expenses
Selling expenses. Selling expenses increased DM 13.5 million, or 435%, from
DM 3.1 million for the year ended June 30, 1997 to DM 16.6 million for the year
ended June 30, 1998. The increase resulted from our efforts to achieve higher
market penetration by expanding our sales and marketing capabilities and
activities internationally and in Germany.
Research and development expenses. Research and development expenses
increased DM 3.4 million, or 227%, from DM 1.5 million from the year ended June
30, 1997 to DM 4.9 million for the year ended June 30, 1998. Research and
development expenses represented 17% of total sales revenue for the year ended
June 30, 1998, compared to 12% for the year ended June 30, 1997. This increase
was due primarily to higher R&D costs during the year ended June 30, 1998 to
enhance and standardize our products.
General and administrative expenses. General and administrative expenses
increased DM 3.0 million, or 231%, from DM 1.3 million for the year ended June
30, 1997 to DM 4.3 million for the year ended June 30, 1998. General and
administrative expenses represented 15% of sales revenue for the year ended
June 30, 1998, compared to 11% for the year ended June 30, 1997. These
increases were due primarily to the development of an administrative
infrastructure to manage the future growth of our business on a global basis,
including the purchase of new software tools and the hiring of administrative
staff.
Interest expense, net. Net interest expenses increased DM 0.15 million, or
100%, from DM 0.15 million in the year ended June 30, 1997 to DM 0.3 million in
the year ended June 30, 1998. This increase reflected primarily the increase in
the volume of our business activities and the corresponding higher funding
needs. In both periods our funding source principally consisted of loans from
silent partners.
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Other income, net. Other income, net increased DM 0.04 million, or 20%, from
DM 0.2 million in the year ended June 30, 1997 to DM 0.24 million in the year
ended June 30, 1998. Other income, net represented 0.8% of total revenue in the
year ended June 30, 1998, compared to 1.6% for the year ended June 30, 1997.
Net Loss
Our net loss increased by DM 10.1 million, or 594%, for the year ended
June 30, 1998 from DM 1.7 million for the year ended June 30, 1997 to DM 11.8
million for the year ended June 30, 1999.
Liquidity and Capital Resources
Since our incorporation in September 1994, we have met our cash requirements
through issuances of our equity shares, bank borrowings and other indebtedness,
including loans from silent partners, cash flow from operations and interest
income on short-term investments. We have not been profitable since the fiscal
year ended June 30, 1996 and have an accumulated deficit of DM 185.7 million as
of June 30, 2000, which included DM 35.0 million in amortization of goodwill
and DM 59.4 million of non-cash charges related to stock option grants.
We expect to continue to generate losses for the foreseeable future as we
continue to pursue our strategy to establish our Twister platform as the
industry standard for the delivery of e-business services. We anticipate that
our current cash and cash equivalents, plus the net proceeds from the sale of
the notes, will be sufficient to meet our cash requirements for at least the
next twelve months. However, our cash requirements may vary significantly from
current projections.
During the years ended June 30, 1999, 1998 and 1997, the six month period
ended December 31, 1999 and the six month period ended June 30, 2000, our
EBITDA and adjusted EBITDA were negative. We also reported a deficiency in
earnings to cover fixed charges of DM 1.7 million, DM 11.8 million, DM 44.0
million, DM 51.3 million and DM 76.5 million for the years ended June 30, 1997,
1998 and 1999, six months ended December 31, 1999 and six months ended June 30,
2000.
If we continue to operate at a net loss and experience negative cash flow,
we may need to incur additional debt or obtain equity financing, which may not
be available to us on a timely basis, at acceptable terms or at all. If we
cannot obtain acceptable financing, we may be forced to discontinue our
development programs or our business expansion.
Current Assets and Liabilities
As of June 30, 2000, we had current assets of DM 252.0 million and current
liabilities of DM 53.2 million. Current assets included cash and cash
equivalents of DM 163.9 million and accounts receivable of DM 63.4 million.
Current liabilities included DM 0.2 million of short-term borrowings under four
credit facilities with banks with aggregate commitments of DM 25.5 million.
These facilities, which contain customary financial and operating covenants,
consist of:
. an unsecured revolving credit facility with a bank under which we can
borrow up to DM 10.0 million for working capital and other general
corporate purposes. As of June 30, 2000, there was no amount outstanding
under this credit facility;
. an unsecured revolving bank credit facility under which we can borrow up
to an aggregate of DM 5.0 million for working capital and other general
corporate purposes. The revolving credit facility is scheduled to expire
on December 31, 2000;
. an unsecured revolving credit facility with a bank under which we can
borrow up to DM 5.0 million for working capital and other general
corporate purposes. This facility is extended by the lender on a month-
to-month basis. Amounts outstanding under this facility bear interest at
6%, subject to change based on market conditions. The facility contains
customary financial and operational covenants. We may prepay loans at
month-end; and
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. an unsecured revolving bank credit facility under which we can borrow up
to an aggregate of DM 5.5 million for working capital and other general
corporate purposes. The revolving credit facility is scheduled to expire
on June 30, 2001.
Our ability to incur indebtedness under these arrangements or otherwise is
severely constrained by the terms of the indenture governing the notes. See
"Description of the Notes--Material Covenants--Incurrence of Indebtedness and
Issuance of Preferred Equity."
We also have outstanding obligations owed to the former shareholders of TST
that were incurred because of our acquisition of TST, of DM 1.5 million, at
present value, potentially due in May 2001.
Operating Activities
Net cash used in operating activities totaled DM 45.6 million for the six
months ended June 30, 2000, and DM 27.5 million, DM 35.7 million, DM 13.4
million and DM 3.2 million for the six months ended December 31, 1999 and the
years ended June 30, 1999, 1998 and 1997. The increase in net cash used in
operations reflects the net losses experienced in these periods.
Investing Activities
Net cash used in investing activities totaled DM 11.9 million for the six
months ended June 30, 2000, and DM 8.9 million, DM 40.0 million, DM 3.8 million
and DM 1.7 million for the six months ended December 31, 1999 and the years
ended June 30, 1999, 1998 and 1997. Cash used for the purchase of property and
equipment was DM 6.6 million for the six months ended June 30, 2000, and DM 3.9
million, DM 5.2 million, DM 3.7 million and DM 1.5 million for the six months
ended December 31, 1999 and the years ended June 30, 1999, 1998 and 1997. The
largest component of capital expenditures for property and equipment during all
periods was for software, hardware, information technology infrastructure and
office equipment for new employees.
Financing Activities
Net cash provided by financing activities was DM 215.2 million resulting
from the issuance of senior notes in March 2000 with gross proceeds of DM 244.7
million and the repayment of existing debt in the amount of DM 47.8 million and
cash proceeds of DM 18.2 million from an investment in our equity shares by a
subsidiary of Intel Corporation. In earlier periods, net cash provided by
financing activities was DM 37.7 million, DM 83.0 million, DM 19.0 million and
DM 5.0 million for the six months ended December 31, 1999 and the years ended
June 30, 1999, 1998 and 1997. In September and October 1998, we realized net
cash proceeds of DM 83.0 million from an initial public offering of our shares.
In the year ended June 30, 1998, we raised DM 10.0 million through the issuance
of equity and DM 11.0 million through the investment of tbg.
In May 2000, we received cash proceeds of DM 19.6 million from an investment
in our equity shares by a subsidiary of Intel Corporation.
Expansion Activities
Since 1998, we have invested approximately DM 163.8 million in our
expansion. We used about 76% of this investment to finance our internal growth
and 20% for the external growth through the acquisition of TST. We expect that
we will continue to invest in our business in similar amounts and proportions,
but since we, like other companies operating in our market, require high degree
of flexibility, these amounts and proportions may change.
Quantitative and Qualitative Disclosures About Market Risk
We do not use market-sensitive instruments, such as derivative financial
instruments. Our primary market risk is in the area of exchange rate
fluctuations.
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We maintain our cash balances in deposits at banks and in highly liquid
short-term investments, such as money market mutual funds, which lowers our
exposure to interest income risks. We do not consider our exposure to interest
rate and exchange rate fluctuation risks to be material to our deposits and
investments.
Interest Rate and Exchange Rate Risk
We have financial instruments that are subject to interest rate risk,
principally short-term investments and debt obligations. We have not
experienced material gains or losses due to interest rate changes. We do not
consider our interest rate risk to be material to our short-term investments
and debt obligations.
Foreign Currency Exchange Risk
A significant portion of our revenues and expenses are denominated in
currencies other than the Deutsche mark and euro. Approximately 20% of our
revenues for the fiscal year ended June 30, 1999, 38% of our revenues for the
six months ended December 31, 1999 and 30% of our revenues for the six months
ended June 30, 2000 were denominated in currencies other than the Deutsche mark
and euro. For the six months ended June 30, 2000, sales of our products and
services in the United Kingdom accounted for 12% of our revenue, the United
States accounted for 13%, Asia-Pacific region accounted for 3%, and Switzerland
accounted for 2% of our revenue. The majority of our exposure related to the
fluctuations in the exchange rates between the Deutsche mark and the British
pound, the U.S. dollar, the Singapore dollar, the Hong Kong dollar, the Swiss
franc and the Australian dollar.
Sensitivity Analysis
We prepared a sensitivity analysis to assess the impact of exchange rate
fluctuations on our operating results for the year ended June 30, 1999, for the
six months ended December 31, 1999 and for the six months ended June 30, 2000.
Based on this analysis, we estimate that a 10% adverse change in the rates of
exchange of Deutsche marks against the basket of currencies comprising our
revenues from sources outside of the euro zone would have increased our
reported net loss for the year ended June 30, 1999 and for the six months ended
December 31, 1999 by approximately DM 0.5 million and for the six months ended
June 30, 2000 by approximately DM 1.1 million. Our analysis also indicated that
a 10% decrease in the rates of exchange of Deutsche marks against this basket
of currencies would have resulted in a decrease of the value of our net assets
by approximately DM 1.2 million as of June 30, 2000.
We have not entered into any derivative hedging instruments to reduce the
risk of exchange rate fluctuations.
Accounting for Income Taxes
We utilize the liability method of accounting for income taxes in compliance
with SFAS No. 109, Accounting for Income Taxes. Under the liability method,
deferred taxes are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized.
For the year ended June 30, 1999 and the six months ended December 31, 1999
we had deferred tax assets in the amount of DM 1.4 million and DM 2.3 million,
respectively, and deferred tax liabilities in the amount of DM 1.4 million and
DM 2.4 million, respectively. Due to our history of operating losses, the
probability that we can make use of our loss-carryforwards in the future must
be regarded as less than 50%, so we booked valuation allowances on the deferred
tax asset when the deferred tax assets equal the deferred tax liabilities.
Recent Accounting Pronouncements
Disclosure on Comprehensive Income
Effective July 1, 1998, we adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires companies to report comprehensive income, which
is defined as all changes in equity during a period,
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except those resulting from investment by owners and distribution to owners, in
financial statements for the period in which they are recognized. Net income
and other comprehensive income, including foreign currency translation, minimum
pension liability and unrealized gains and losses on investments are to be
reported, net of their relaxed tax effect, to arrive at comprehensive income.
SFAS No. 130 requires only additional disclosure in the financial statements
and does not affect our financial condition or results of operation. Our prior
year financial statements have been restated to conform to the requirements of
SFAS No. 130.
Reporting Segments of an Enterprise and Related Information
Effective July 1, 1998, we adopted SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information. Because we operate in one business
segment, the licensing of software products, the adoption of SFAS No. 131 had
no impact on our financial condition or results of operations.
In March 1998, the Accounting Standards Executive Committee of the AICPA
approved Statement of Position, or SOP, 98-1. This SOP governs the accounting
for internally used, acquired or internally developed software and requires the
capitalization of some associated costs. SOP 98-1 is applicable for financial
years beginning after December 15, 1998. Effective July 1, 1998, we adopted SOP
98-1. Based on the capitalization criteria of SOP 98-1 we capitalized the costs
related to internally developed, and used software in the amount of DM 437.0
thousand during the year ended June 30, 1999. During the six months ended
December 31, 1999, we did not capitalize these costs.
The Financial Accounting Standards Board, or the FASB, recently issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under this statement,
accounting for changes in the fair value of a derivative depends on its
intended use and designation. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133. SFAS No. 137 amends the effective date of SFAS
No. 133. SFAS No. 133 will now be effective for all fiscal quarters and all
fiscal years beginning after June 15, 2000. We are assessing the potential
effects of this new standard. Based on our current and expected levels of use
of derivative instruments, the adoption of this new standard is not expected to
have a material effect on our financial condition or results of operations.
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BUSINESS
General
Who We Are
We are a leading provider of software for the rapidly expanding e-banking
market and the leading provider of this software to European banks. We design,
develop, market and support e-business software. We have concentrated on
providing e-banking solutions, particularly to banks in Germany and Austria,
and to a lesser extent, other geographic areas such as the United Kingdom, the
United States, the Asia-Pacific region, Switzerland and the Benelux countries.
We intend to further use our leading position in the European e-banking sector
to expand our presence in other geographic areas and in other e-business
sectors, with the long-term objective of establishing our core product as the
industry standard platform for the delivery of e-business services.
Our Products and Services
Our core product, Twister, is an open architecture software platform that
integrates the information technology systems of a business with a variety of
electronic communications channels. This software enables consumers to interact
with the business over the Internet through a range of secure electronic
communication channels, such as personal computers, mobile telephones, call
centers, personal digital assistants and WebTV while permitting the business to
offer its products and services regardless of the types of computer systems in
use and regardless of the language in which its software applications are
written.
We also offer industry-specific software application packages, allowing a
business to establish e-front offices through which consumers can access its
products or services. These software packages, with our Twister platform,
provide a business with both customer relationship management and back office
integration functions. We also provide a range of professional services, such
as consulting, customization, installation, training, and maintenance and
support related to the sales of our products.
Our Distribution and Sales
We distribute, implement and support our products worldwide through our
subsidiaries and sales offices as well as through distribution partners, such
as consulting firms and value added resellers, and through joint ventures. We
estimate that, as of December 31, 1999, more than 2,000 financial institutions
and more than 2 million end-users worldwide--principally in Germany and
Austria--conducted e-business activities using our products. Our market share
of the e-banking sector is approximately 80-90% in Germany and Austria, and
approximately 40% in the rest of Europe. We believe that the majority of all
banks in Germany offering the e-banking services use our software.
Our Revenues
We derive our revenues from four principal sources:
. software license fees, including fees for initial installations, and
version and capacity upgrades;
. professional service fees, including fees paid for customization of
software for particular end use applications;
. customer support fees, covering minor software upgrades and technical
support; and
. sale of hardware and software sourced from third parties used as part of
our software solutions.
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Market Overview
In recent years, businesses and consumers have been transforming the
Internet into a commercial medium. In 1999, the number of Internet users was
estimated at 130 million worldwide. The number of Internet users is forecasted
to reach 540 million in 2005. Newly developed electronic communication channels
are also expected to increase the importance and potential of e-business. For
example, by 2004, the total number of interactive mobile telephone banking
customers is projected to reach almost 13.9 million, and at least 40% of
business to consumer e-commerce transactions outside North America are expected
to be initiated from mobile, cellular-enabled devices. The European mobile
commerce market alone is projected to grow from (Euro) 323.0 million in 1998 to
(Euro) 23.0 billion in 2003.
Businesses are using electronic communication channels to provide the same
products and services as they have traditionally, but, in many cases, faster,
more effectively and less expensively than using traditional distribution
channels, such as branches and retail stores. In particular, businesses are
increasingly using electronic communication media to offer their products and
services by establishing e-front offices, through which they can make contact
with their customers, identify their needs and offer individualized services.
For their part, customers can contact businesses 24 hours a day, through a
variety of channels, including channels such as mobile telephones that can
access, and be accessed following a customer-initiated transaction, wherever
the customer may be. Businesses are expected to accelerate the adaptation of
their web sites to handle online transactions. Although estimates of the future
growth of e-business vary widely, they all foresee growth in the coming years.
Although there are tremendous opportunities that e-business can offer,
businesses still face challenges in establishing and conducting e-business
operations. These businesses may be using different generations and different
types of information technology systems. Their e-business software applications
may be written in different programming languages. A variety of electronic
communication channels are also available for consumers to access products and
services of e-business providers. To take full advantage of the potential
offered by e-business, a company must have the capacity to connect each of its
computer systems and software applications with every possible electronic
communication channel used by its customers.
The growth of e-business is stimulating the market for software that has the
capacity to integrate different computer systems into coherent infrastructures
for the electronic delivery of information. Most software used for this
integration task addresses only a portion of the required functions. Due to the
low level of standardization, that software usually requires significant effort
and expense to achieve even a modest level of system integration. Tailor-made
solutions, often developed at great technical effort and expense, may
subsequently prove to be inflexible and expensive to maintain.
Our Strengths
We rely on the following key strengths to respond to the needs of the e-
business market:
Our Products
Our Twister platform and related applications allow businesses engaged in e-
business operations to integrate their existing information technology systems
with a variety of electronic communications channels. Users of our platform are
generally not constrained by the source and format of their data. The platform
extracts the data from different systems and applications of a business,
reformats the data as necessary and communicates the data to the business'
consumers securely through a variety of electronic communication media the
consumers may be using. The platform allows communications over multichannels
simultaneously. Our software offers:
. simplicity--our products are designed to be easy to maintain and enhance
and allow for integration of an existing information system environment
with electronic communications channels and functions. We also believe,
based on our experience in modifying the Twister platform for our
customers, that
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new distribution channels, services and systems may be added easily and
relatively inexpensively, without major modifications to the back-end
systems, due to Twister's modular architecture;
. security--our products use 128-bit encryption technology and thus
provide the highest economically feasible standard generally available
today for secrecy, data protection, user authentication and non-
repudiation of electronically initiated transactions;
. reliability--based on the experience of our customers with our software,
we believe that our products are generally stable and fault-tolerant;
. scalability--based primarily on our experience in satisfying the volume
requirements of large German banks using our e-banking software, we
believe that our products are capable of meeting the high volume
requirements of large businesses as well as those of smaller businesses;
and
. openness--based on design characteristics of our products and our
experience with customizing our products for different operating
systems, we believe that our products are compatible with a wide range
of major operating systems and industry standards for application
development.
Strategic Alliances
We cooperate with several strategic partners that are engaged in various
aspects of e-business. We are one of the original ten software companies
worldwide selected by Intel as a preferred business partner to optimize our
software for use with the newly developed generation of 64-bit Intel
processors. We founded a consortium to develop a uniform application interface
as a mobile digital signature standard to facilitate confirmations of
e-business transactions over mobile telephones. The consortium includes mobile
telephone manufacturers and network operators, software vendors and smart card
manufacturers. We were also the first provider of e-front office software
certified by SAP for compatibility with SAP software, which allows financial
institutions using the SAP back office software to offer e-finance services
using our platform.
Continuity of Senior Management
We benefit from the continuity of our senior management team. Messrs.
Roever, Anderer, Schlumpberger, Janssen and Schumacher have been with us since
the establishment of BROKAT in 1994. Our senior management has been
strengthened by the addition of Mr. Maestrini in 1999. As a group, our senior
management has a significant economic stake in BROKAT, beneficially owning
approximately 32.2% of outstanding shares.
Technical Expertise of Our Personnel
We benefit from a talented and motivated technical staff, with a broad
range of skills and expertise in the technologies relevant to our business.
Our employees share in our financial success through participation in our
firm-wide employee stock option plans and our annual bonus scheme.
Market Position
We have successfully established BROKAT as a recognized brand name in the
European e-banking market. We intend to use our brand name recognition, our
leading market position and our growing global distribution and sales network
to expand into other fast growing segments of the e-finance market as well as
other sectors of e-business.
Strategy
Our principal objective is to establish Twister as the standard worldwide
software platform for the delivery of e-finance, e-commerce and other e-
services through all significant electronic distribution channels, including
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personal computers, mobile telephones, call centers, personal digital
assistants and WebTV. The principal elements of our business strategy to
achieve this objective include:
Continue to enhance the functionality of the Twister platform
No software platform has yet been accepted as the e-business industry
standard. The platform ultimately accepted as the industry standard will have
to have broad compatibility and be reliable, simple, scalable, open and secure.
In future versions of our Twister platform, we will seek to maintain our
technological leadership by refining elements of the platform. We are
developing Twister Version 4.0 for launch later this year. In this version, we
will offer a wireless application protocol feature, as well as application
development support that will enable our customers to develop their own
applications compatible with multi-industry standards. We have developed and
tested a prototype of Twister 4.0 and are working on further enhancement to its
design and functionalities.
Expand our range of standardized software applications and enhance our
existing software applications based on our Twister platform
Through our own research and development activities and through joint
ventures and the efforts of our business partners, we will seek both to expand
the range of affordable, quick and reliable applications targeted to specific
industry sectors and to enhance our existing software applications. These
applications will allow our customers and other third parties to minimize the
customization and implementation processes of Twister-based solutions. These
products are expected to increase the appeal of Twister to e-business
participants and the probability that Twister will become the industry standard
e-services software platform. Our emphasis on both platform technology and
application technology gives us a competitive advantage over providers that
offer one or the other, but not both, technologies.
Expand our presence throughout Europe, North America and the Asia-Pacific
region, through internal growth, joint ventures and strategic acquisitions
We intend to establish a global presence through internal growth, joint
ventures and strategic acquisitions. We have established subsidiaries and sales
offices in 13 countries around the world outside of Germany. Our geographic
expansion efforts will be affected by differences in the e-business
environment, technology and the relative maturity of each targeted market. We
seek to adapt to the unique conditions to each of these geographic markets by
focusing on a market segment where we can quickly establish a leading position
through internal efforts, joint ventures or acquisitions. In the United States,
for example, we are focused, as our initial e-finance beachhead, on expanding
the opportunities for the sale of corporate cash management software products
based on the Twister platform. We market these products to banks which, in
turn, can offer the cash management capabilities to their corporate clients. In
Singapore, we now provide e-finance services to three of the leading banks.
Continue to emphasize indirect sales through the strengthening and expansion
of our network of business partners, including through joint ventures and
value added resellers, consultants, system integrators and solution providers
In recent years, we have shifted the emphasis of our marketing and sales
activities away from direct sales, which include the provision of customized
software products and services that yielded revenues from the provision of
professional services, to indirect sales. Indirect sales involve the provision
of standardized software packages to value added resellers and other
distributors who:
. perform professional services, or
. contract with or license software to others who will perform the
customization or other services necessary to meet the end-user's needs.
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We believe that indirect sales and licensing through third parties will give us
the opportunity to increase revenues at a faster rate and at higher margins
than we could through direct sales.
Leverage our leading market position in the European e-banking services sector
and technological leadership to position ourselves to take advantage of the
development of other e-business segments and other aspects of e-business
We believe that the participants in the e-banking sector are at the
forefront of the development of e-business. We will seek to use our resources
to strengthen our position as a leading developer and seller of e-banking
software and solutions to European banks, insurance companies and other
financial institutions, and to take advantage of our leading position as an
established brand in e-banking to capture opportunities in other rapidly
growing e-business sectors. We will seek to diversify into other e-business
sectors as opportunities arise for collaboration with our distribution and
joint venture partners in the countries in which we do business.
Products
Twister
We design, develop, market and support Twister--an electronic services
software platform--and related software applications which enable businesses to
build e-front offices. E-front offices form the basis for all customer-focused
business models that include the offering of products and services through both
electronic and traditional distribution channels. E-front offices present an
entirely new organizational approach to the convergence of traditional business
and new electronic communication media.
Twister integrates the benefits of various platform concepts into one model.
In effect, the Twister platform and its standard components create a
comprehensive infrastructure for e-front offices through which a variety of
electronic and traditional distribution channels can be integrated.
ready-to-run components of e-front offices which complement
Twister by providing various functionalities relating to
customer contact tracking, data warehousing, decision support,
personalization and workflow
Application Services
Customer Enterprise
Interaction Enterprise Application
Channels Services Application Server Integration Back-Office
(Gateways) Services
(Accessors)
provides services such as scalability,
distribution, security and transaction
handling
provide connectivity and interactive facilitate integration of back-office
capabilities, and infrastructure for the systems and generate the basis for
e-front office software applications the development of new business
processes and software logic in
the e-front office
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Twister gateways provide a secure, application-specific interface between
the Twister platform and the various electronic communication channels, such as
personal computers, mobile telephones, call centers, personal digital
assistants and WebTV. Client requests are interpreted and transferred in the
acceptable format to the appropriate Twister application components. The
standard Twister gateways include:
. X.Presso 3.5, which provides a secure 128-bit encrypted Internet
connection;
. SMS and WAP gateways, which integrate Twister with the mobile telephone
industry Short Message Service standard and with the wireless
application protocol that enables mobile telephones to provide services
similar to the world wide web;
. OFX, HBCI and Star Money gateways, which integrate Twister with the U.S.
banking industry Open Financial Exchange or OFX standard, the German
banking industry alternative Home Banking Computer Interface or HBCI
standard and the Star Money Personal Finance Management;
. COM, which integrates Twister with the Microsoft Component Object Model-
based software applications;
. SAP R/3, which integrates Twister with the SAP R/3 enterprise resource
planning system;
. SET, which allows Twister to be used for the reception of Secure
Electronic Transaction messages for payment transactions; and
. Interactive Voice Response, which allows Twister to be connected to
interactive voice systems, which are an integral part of call centers.
Twister accessors are preconfigured software modules that provide access to
the various elements of a business' computer systems. Using accessors, business
functions or objects existing in those elements can be extracted and then
recombined as required. These extracted functional modules can be used in the
business' specific applications and thus, simultaneously, on various electronic
communication channels. Our standard Twister accessors include Oracle 7, Oracle
8, Informix, Sybase, MS SQL Server, DB/2, SAP R/3, BTX, MQ Series, Mail LDAP,
S.W.I.F.T., Kordoba, Reuters, and Micrologica Call Center Connector. These
accessors form the basis for other application-specific accessors.
Twister application services. As part of our Twister platform, we provide
two software utility applications. These enhance functionalities of all
software applications using Twister to interact with consumers, by allowing
them to provide additional services. Twister application developers can build
on these components when developing further e-business software applications.
Our application services include:
X.Agent provides a combination of telephone counseling and visual support as
a new form of communication. It enables call center and web site functions to
be merged, resulting in a web-based, one-on-one connection between a business
and its customers; and
Vignette Story Server Plugin integrates the Vignette Story Server into our
Twister platform. Vignette Story Server allows businesses to personalize
information provided to targeted customers. Because the integration of Twister
and Vignette solutions involves a standard Twister component, our customers can
quickly offer these personalized services over the Internet. For example, banks
could provide a customer with personalized news, quotes and market events.
Twister Development Tools
To enable our customers and distribution partners to more easily develop
their customized software applications, we have developed:
Twister Development Toolkit, which enables our business partners and our
customers to easily develop additional Twister components--either gateways or
accessors--to connect to application- or industry-specific communication
channels or back-end systems; and
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Twister Component Builder for SAP R/3, which enables automatic generation of
software applications for SAP R/3, a widely used enterprise resource planning
system, to achieve a seamless integration of SAP R/3 modules into existing
information technology environments on a technical and business level.
Twister Applications and Packages
We plan to offer our Twister platform with a variety of standardized
software applications. Because of Twister's modular architecture, these
applications will be capable of being freely combined to facilitate access to
additional electronic communication channels.
Brokerage and Banking. As part of the standardized application packages for
e-brokerage services, we will offer integrated components for brokerage service
providers on the basis of the Twister platform. These components will
complement the financial institution solutions that we have marketed to banks.
The brokerage modules will include functions such as portfolio management and
analysis, securities trading and reporting services. These functions will
enable clients to be informed automatically by the software that a transaction
is ready to be completed, subject to the client's authorization. For example, a
brokerage firm client can be notified by this application when a previously
designated price for a security has been reached. We are developing these
application packages on the basis of our experience in the e-banking sector and
our expertise and specialized banking products gained through the acquisition
of Fernbach Financial Software S.A. We have developed and tested a prototype of
these modules and are working on further improvements to their design. We
expect to launch these modules later this year.
Cash Management. Through our acquisition of TST, we have acquired cost-
effective applications that allow banks to provide cash management services to
their middle market and small business customers. We are working on additional
improvements to the design and functionalities of these applications to secure
full compatibility of these stand-alone applications with our Twister platform.
We expect that we will complete these enhancements later this year. The
Internet-based cash management products that we offer include: balance
reporting, stop payments, money market investment services and account
transfers. Our customers using this application include six of the largest
twenty U.S. banks: Bank of America, The Chase Manhattan Bank, SunTrust, Wells
Fargo, U.S. Bank and First Union Bank.
Payment. X.PAY provides a modular-built payment system based on Twister. It
supports the standard for electronic payments, provides convenient user
guidance, permits the use of all methods of electronic payments and is
certified for use with the Secure Electronic Transmission messages standard.
X.PAY supports the processing of direct debit payments as well as payments by
credit or debit cards. Our customers using this application include Pago
International and TeleCash, German electronic payment system providers; DBS, a
Singapore bank; and the Swiss Postfinance. We are working on additional
enhancements to the design and functionalities of this system to allow
electronic payment over mobile telephones. We expect that we will complete
these enhancements later this year.
To simplify the marketing of Twister, we have preconfigured several gateways
and accessors. These provide specific, standardized solutions for banks,
brokerage firms and insurance companies.
X.PRESSO security package 3.5 is a secure online gateway for Twister that
allows for highly secure data exchange over the Internet between businesses
using Java based applications and their clients. This gateway is compatible
with the following widely accepted web servers:
. Netscape Enterprise Server,
. Microsoft Internet Information Server and
. Stronghold.
The X.PRESSO security package can optionally provide 128-bit encryption for
the communication with the X.PRESSO Java classes. The security protocol SSL 3.0
(Secure Sockets Layer) allows secure
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communication. The security features of this gateway support encryption,
message integrity, and client and server authentication. In 1998, the German
Federal Authority for Security of Information Technology certified the security
features of the X.PRESSO security package 1.3.
On July 15, 1997, the U.S. Department of Commerce, Bureau of Export
Administration, granted to us an export license for the X.PRESSO security
package, under which we may distribute this product worldwide from the United
States. This export permit will expire on July 31, 2001 unless renewed or
extended.
We were also granted a license exception for the X.PRESSO Transaction
Applets, one of the components of this gateway. On December 2, 1998, the French
governmental body, Service Central de la Securite des Systemes d'Information,
or SCSSI, authorized the so-called collective use of the X.PRESSO security
package 1.3 by French financial institutions. This authorization will expire on
November 27, 2003 unless renewed or extended.
X.HBCI Banking is a gateway that supports the Home-Banking Computer
Interface or HBCI-standard, standard protocol for home-banking recently adopted
by the German banking industry as an alternative to OFX, a U.S. banking
standard for the electronic exchange of financial information developed by
Checkfree, Intuit and Microsoft. X.HBCI Banking allows customers to make
transfers, balance inquiries, standing orders and fixed-term deposits; to
obtain security account balance information; to transfer orders abroad; to
schedule appointments and to order bank forms. Additional services may easily
be added due to its modular architecture. X.HBCI Banking also supports industry
standards for authentication, safeguarding of integrity of transactions and
encryption.
X.OFX Banking is a platform-independent software application that supports
the Open Financial Exchange or OFX-standard Version 1, the U.S. home e-banking
standard jointly developed by Checkfree, Intuit and Microsoft in cooperation
with several U.S. banks. OFX provided a uniform interface for bank customers as
well as developers of home-banking software for communication with financial
services providers.
Services
We provide two types of services: professional services and customer
support.
Professional Services
Our professional services include: project-oriented consulting, design and
programming services related to the integration of a company's information
technology systems with various electronic communication channels. In the
initial phase, we advise companies on the feasibility and range of potential
projects. We then adapt our products to our customers' individualized needs.
During the installation phase, we adapt the customers' information technology
systems to enable the connection to electronic communication channels and, if
necessary, to further improve these systems. Our professional services staff
works closely with our various product divisions.
Customer Support
We offer various types of customer support services. Under our standard
service contracts, we offer world- wide support for the users of our standard
software, our customized software products, and software products provided by
third parties that are based on our products. We provide companies with
software updates. Software problems are diagnosed online and maintenance work
is performed at the company's premises. Our training center supports companies
and our distribution partners in the training of their help desk employees,
system administrators and system integrators, who must have an understanding of
our products. Following the installation of our software, we provide a
framework for defining operating procedures, developing surveillance systems
for systems operators and implementing fault information systems.
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Marketing
Our marketing efforts are directed at rapid global market penetration to
establish Twister as the worldwide standard for conducting e-business
operations. We intend to use our position as a recognized brand name in the e-
banking market to establish a presence in other markets for e-finance services
as well as other e-business sectors.
We rely on a strategy of reference marketing to develop new clients. When
entering into a market, our sales staff concentrates on the acquisition of key
customers and projects. Since businesses intending to offer products and
services through electronic communication channels typically are looking for
quick and easy-to-install applications, in the initial marketing phase we
concentrate on presenting industry specific applications to key participants in
the relevant industry sector. We emphasize flexible access to the entire range
of electronic communication channels at a reasonable cost. Once key
participants and projects are acquired, we use a more comprehensive marketing
campaign to attract other customers using our existing clients as reference.
In our broader marketing campaigns, we focus on two levels. First, we
emphasize the immediate and the mostly technological benefits of using our
platform and applications for the speedy deployment of mission-critical
e-business solutions. Second, we focus, based on our in-depth understanding of
the end-user's or a consumer's ultimate needs, on the business opportunity and
cost savings that our products have the potential to offer.
To broaden our brand name recognition, we use a variety of channels,
including advertising in print media, participation in key industry trade shows
and our web site. We target all market segments of e-finance, such as retail
banking, brokerage, corporate banking, payment, and insurance industry.
Banking sector (corporate banking and retail banking). The last decade has
been characterized by a fundamental change in the financial services industry.
The widespread use of fixed line and mobile telephones, personal digital
assistants and personal computers, as well as the emergence of the so-called
executable-content-technologies such as Java and ActiveX, enable banks to make
greater use of electronic communication channels. These channels allow banks
with the opportunity to provide more efficient and convenient banking services,
at reduced costs. While the cost per banking transaction processed by a branch
of a bank was estimated at around $1.07, transactions settled over the
telephone are estimated at 54 cents and transactions completed over the
Internet are estimated at 1 cent. As new competitors, relying on electronic
channels--such as Interactive Voice Response and Internet Banking--offer cost-
efficient products, and are thus in a position to compete with established
financial institutions, the pressure to use new channels is expected to
increase.
We have benefitted from this trend in Germany and intend to establish a
strong market position in other regional markets, such as other areas of Europe
and in Asia.
Brokerage services. The market for e-brokerage services in Europe is still
developing. To take advantage of the future opportunities in this market, we
are developing a comprehensive brokerage services application package that will
provide individual investors to enjoy the same trading and analysis
capabilities that are now generally available in Europe only to institutional
investors.
Cash Management. We expect to see a fundamental change in how businesses
will conduct cash management activities. In 2004, the business market for cash
management systems is expected to reach $80 billion. In offering cash
management products, we have focused primarily on the United States, where we
used the acquisition of a cash management software developer as the vehicle for
our entrance into the U.S. e-services market. We intend to make full use of the
experience and knowledge acquired in the U.S. market and penetrate other
regional markets for cash management software.
Payment services. With the increasing adoption of electronic payment, we
expect a growing demand for further improvement of the payment infrastructure.
Consequently, we expect that the number of businesses using our X.PAY product
will also increase.
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Insurance industry. We believe that competitive pressures in the insurance
sector will stimulate the online distribution of insurance services. The costs
to insurance companies in advising clients and entering into insurance
contracts have been estimated at being 20% lower when incurred over the
Internet than when incurred through traditional channels. Because of these
estimated savings, we expect that the demand for our products in this industry
sector will increase.
Distribution and Sales
We distribute our products in three regions: Europe, Middle East and Africa,
or EMEA; the Asia-Pacific region; and North America. Within each region, we
have established sales offices or subsidiaries. On February 1, 2000, our sales
organization included 59 sales representatives, managers and pre-sale support
staff. Our sales personnel is located in Germany, the United States,
Luxembourg, the United Kingdom, Austria, the Netherlands, France, Sweden,
Switzerland, Singapore, Hong Kong, Australia and Japan.
Besides using direct sales and joint ventures, we also use distribution
partners to market and sell our products. Our distribution partner programs are
managed from our headquarters in Stuttgart as well as through our local sales
operations. Our distribution partners include:
. Twister System Integrators and Solution Providers, who offer to our
customers additional services as well as complementary software and
hardware. These providers act as the principal interface with the
business customers up to the delivery of the solution. These providers
also sell Twister licenses and benefits as well as professional services
related to the Twister implementation;
. Twister Consulting Partners, who offer consulting services in specific
industry sectors. In contrast to Twister solution providers, consulting
partners do not resell Twister products; and
. Twister Application Providers, who are value added resellers and who
integrate their own applications with the Twister platform and develop
new gateways and accessors. Twister application providers enhance the
Twister platform by adding additional functionalities such as new
processes, functions and industry knowledge. Twister application
providers are able to offer complete e-business solutions by integrating
their applications with Twister using the Twister development tools.
Twister offers them access to a range of electronic communication
channels and back-end connectivity by focusing on their core competence
in developing their applications. They also benefit from Twister's
openness and scalability. The application providers also act as
resellers of Twister products.
We are attempting to develop additional partner programs that will attract
opinion leaders, such as consulting or technology companies, to broaden the
industry support for our platform.
We will seek to create a network of component suppliers to develop industry-
and region-specific software applications for Twister. Our distribution partner
programs are also directed at establishing lasting business relationships with
suppliers of products complementary to Twister. We act as a reseller for the
products of our distribution partners and we receive a selling commission for
our reselling activities. This commission is based on the sales volume
generated by us.
Our business partners include Sun Microsystems Inc., Hewlett-Packard, IBM
Deutschland Informationssysteme, debis Systemhaus, KPMG, Intershop,
Micrologica, Faktum, Telecash, IDS Scheer, PAGO id2, Siemens Business Services,
Bull Information Systems, Bosch Telecom, Intel, Periphonics, SAP, Roccade
Finance, SOPRA, PricewaterhouseCoopers, Information Mosaic, CMA Comedia and
Deloitte Touche Tomatsu Australia.
Research and Development
Our research and development department consists of:
. the Twister division--which focuses on the further development of
Twister; and
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. the commerce systems and financial systems divisions--which both focus
on the development of software applications for specific targeted
industry sectors.
These three development divisions are responsible for the complete lifecycle of
their product components. These divisions also are responsible for quality
assurance, program management, technical documentation and product management.
The research and development department facilities are located in Germany,
Hungary and the United States. Our total expenses for research and development
were approximately:
. DM 21.4 million for the six months ended June 30, 2000;
. DM 34.2 million for the twelve months June 30, 2000;
. DM 8.7 million for the twelve months ended June 30, 1999;
. DM 4.7 million for the twelve months ended June 30, 1998; and
. DM 1.5 million for the twelve months ended June 30, 1997.
As of June 30, 2000, our research and development department employed 257
staff members. To ensure the compliance of our products with market
requirements, the department closely cooperates with our professional services
staff as well as with the product marketing unit of our marketing department.
We generally seek to integrate innovations developed within the framework of
client projects into our standard software products and thus, attempt to retain
intellectual property rights to the broadest extent possible, and attempt to
avoid exclusive licenses to clients for which specific applications have been
developed.
Intellectual Property
Our success and ability to compete depend to a significant degree on our
proprietary technology. We rely primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights and information. This affords us
only limited protection. It is our policy to not allow a third party access to
our confidential intellectual property. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy different aspects
of our products or obtain and use information that we treat as proprietary.
Policing unauthorized use of our products is difficult, and while we are
unable to determine the extent to which piracy of our products exists, software
piracy can be expected to be a persistent problem. The laws of some foreign
countries also do not protect our proprietary rights to the same extent as the
laws of the United States or the laws of the Federal Republic of Germany. We
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop similar
technology.
Generally, it is our policy to enter into non-disclosure agreements with our
employees, distributors and other business partners and to control and to limit
access to and distribution of our software, documentation and other proprietary
information. However, we cannot assure you that the non-disclosure agreements
would survive a legal challenge to their validity or provide significant
protection. We have not generally executed post-contractual non-competition
agreements with employees, since we believe that this type of contractual
restraint would hinder our recruiting efforts.
Patents
We received a patent covering our core Twister technology from the German
Patent Office on May 31, 1999. We filed a subsequent patent application for
this technology with the United States Patent Office on February 2, 1999, which
is pending.
On October 28, 1997, we filed a patent application in Germany for our
methodology for digital authentication of messages sent over telephone
networks, or SMS banking. On December 28, 1999, we applied
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for registration of a utility model under German law to protect our technology
for the process of validating e-business transactions. Both applications are
pending.
We cannot assure you that our patent would survive a legal challenge to its
validity or provide significant protection. Also, we cannot assure you that we
will be issued patents under any of our pending applications.
Trademarks
In Germany, we have registered or applied for registration of the following
trademarks:
. Twister;
. BROKAT;
. X.PRESSO Security Package;
. X.PRESSO (without addendum);
. X.Agent;
. X.PAY;
. X PAY and XPAY, each a word-trademark; and
. the BROKAT logo and esign, a word/device-trademark.
Most of these trademarks have also been registered or filed in central and
western Europe as well as the United States, Canada, Singapore, Australia,
Japan, Malaysia and Thailand. We have also filed an application for a community
mark for the esign word/device trademark with the EU Office for Harmonization
in the Internal Market.
Licenses
For the development and production of our products, we use two licenses
related to RSA and IDEA, encryption algorithms commonly used in the industry.
Under the licensing agreements, the licensors are not entitled to terminate the
agreements as long as we pay the agreed licensing fees and are not in breach of
any other contractual arrangements. Encryption algorithms may also be drawn
from other sources.
We generally do not provide exclusive licenses to use our products. We issue
exclusive licenses for client- specific adaptation programming only if the
relevant adaptations are so client-specific that they could not be put to use
in relation to other clients.
Coexistence Agreements and Other Intellectual Property Matters
We have entered into a coexistence agreement with RSL COM, a parent company
of Twister Communications Network, a company located in the United States which
is active in the call-back business. The agreement allows us to use the Twister
trademark in our software business and in the field of mobile digital
signatures.
The Twister trademark is in conflict with the Type Twister trademark
registered by Adobe Systems for desktop publishing purposes. We have negotiated
a coexistence agreement, but it has not been signed by Adobe.
Following objections from France Telecom and co-ex GemPlus, our X.PRESSO
trademark application with the competent European Union authority has been
temporarily suspended. We are now negotiating a coexistence agreement.
Following objections from ESIGN AG, a German company active in the
development of video screen three-dimensional solutions, our esign trademark
application in the EU Office for Harmonization in the Internal Market has been
temporarily suspended. We are attempting to negotiate a coexistence agreement.
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Except as discussed above, we are not aware that any of our products
infringe upon the proprietary rights of third parties. We cannot assure you,
however, that third parties will not claim infringement by us related to
current or future products. We expect that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. These claims, with or without merit,
could result in costly litigation that could absorb significant management time
or cause product shipment delays, as well as delays in the marketing and sales
of our products which could have a material adverse effect upon our business,
financial condition and results of operations. These claims may require us to
enter into royalty or licensing agreements which may not be available on terms
acceptable to us or at all, which could have a material adverse effect upon our
business, financial condition and results of operations.
Competition
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Our products are targeted at the emerging
market for e-business software and our competitors are diverse and offer a
variety of solutions directed at various segments of the e-business market. We
distinguish ourselves from the majority of our competitors by a combination of
factors, which include the simplicity, security, reliability, scalability and
openness of our products. However, we expect the competition in the market for
e-business software from existing and new software developers to grow further.
We compete with suppliers of e-business software platforms and software
applications. Our potential clients may also develop their own e-business
solutions.
Our main competitors include:
. Platform developers such as BEA Systems Inc., New Era of Networks Inc.,
IBM and Tibco Finance Technology Inc.; and
. Application developers such as BroadVision, Inc., Open Market, Inc. and
S-1 Corporation.
BEA Systems Inc. and IBM are generally viewed as the dominant competitors in
the global e-business software platform market.
Based on our market share of approximately 40%, we are a dominant
participant in the European e-banking sector. S-1 Corporation is generally
viewed as the dominant competitor in the e-banking sector in the United States.
Several competitors have longer operating histories, greater financial,
technical, marketing and other resources, greater name recognition and a larger
installed base of customers than we do. Our competitors have, and other
potential competitors may have, well-established relationships with current and
potential customers and strategic partners of ours, extensive knowledge of the
e-business software industry and the resources to enable them more easily to
offer a single solution. These competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products, than can we.
We also expect that competition will increase because of software industry
consolidation. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of our prospective
customers. It is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced gross margins and loss of market share,
which could have a material adverse effect on our business, financial condition
and operating results. We cannot assure you that we will be able to compete
successfully against current and future competitors or that
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competitive pressures faced by us will not materially and adversely affect our
business, financial condition and results of operations.
Employees
We employed the following number of employees as of June 30, 1997, 1998 and
1999, December 31, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
As of June 30, As of
-------------- December 31, As of June 30,
Category 1997 1998 1999 1999 2000
-------- ---- ---- ---- ------------ --------------
<S> <C> <C> <C> <C> <C>
Professional Services............... 50 97 186 217 235
Sales and Marketing................. 19 39 98 120 185
Research and Development............ 11 72 178 189 257
Finance and Administration.......... 13 25 50 62 127
--- --- --- --- ---
Total............................. 93 233 512 588 814
=== === === === ===
</TABLE>
Of the total number of our employees, as of June 30, 2000, 430 are located
in Germany, 192 are located in Europe outside of Germany, 141 are located in
North America and 51 are located in the Asia/Pacific region.
Real Property
We do not own any real estate, but lease all of our facilities. Our
principal administrative, research and development, marketing and sales
facilities total approximately 8,245 square meters and are located in one
building in Stuttgart, Germany. We also have research and development
facilities near Atlanta in the United States, and administrative, sales,
marketing and customer service facilities near Atlanta in the United States;
Doelzig, Paderborn, Munich, Cologne and Wilhelmshaven, Germany; Singapore;
Luxembourg; London, United Kingdom; Zurich, Switzerland; Vienna, Austria;
Budapest, Hungary; Sydney, Australia; Hong Kong, China; Tokyo, Japan; Paris,
France; Stockholm, Sweden; and Tel Aviv, Israel.
Legal Proceedings
We are not a party to any legal proceedings that we expect to have a
material adverse effect on our business, operating results and financial
condition.
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MANAGEMENT
In compliance with German law governing a stock corporation, we have a
management board and a supervisory board. The two boards are separate and no
individual may simultaneously be a member of both boards.
In carrying out their duties, members of both the management board and the
supervisory board must exercise the standard of care of a diligent and prudent
businessperson. In complying with this standard of care, board members must
take into account a broad range of considerations, including our interests and
those of our shareholders, employees and creditors. The members of the
management board may also be personally liable for some violations by BROKAT
under the German Stock Corporation Act.
Management Board
The present members of our management board, their ages, current positions
and terms of appointment are:
<TABLE>
<CAPTION>
Member
Name since Term expires Age Current Position
---- ------ ----------------- --- ----------------------------
<S> <C> <C> <C> <C>
Mr. Stefan Roever........ 1994 February 28, 2003 35 Chief executive officer and
management board
spokesperson
Dr. Boris Anderer........ 1994 February 28, 2003 41 Management board co-
spokesperson
Mr. Michael Janssen...... 1996 February 28, 2003 34 Management board member and
chief financial officer
Mr. Achim Schlumpberger.. 1994 February 28, 2003 34 Management board member and
head of Twister Development
Division
Mr. Michael Schumacher... 1994 February 28, 2003 38 Management board member and
head of Financial Systems
Division
Mr. Angelo Maestrini..... 1999 October 1, 2003 39 Management board member and
chief operating officer
</TABLE>
Stefan Roever is our chief executive officer and spokesperson of the
management board. Mr. Roever is in charge of the implementation of our
strategic goals and corporate communications. He studied business
administration and law. As a student, he worked as an independent systems
developer. In 1992, he founded Roever Software GmbH where he was responsible
for software consulting and project management until 1995. Mr. Roever has been
one of the managing directors of BROKAT since 1994.
Dr. Boris Anderer is the co-spokesperson of the management board. He is
responsible for the strategic development of BROKAT and for implementing
special projects, such as our current contemplated expansion of the United
States operations. Dr. Anderer is a graduated physicist. On a scholarship from
the Kernforschungszentrum Karlsruhe he received a doctorate in physics in 1989.
Dr. Anderer was employed between 1990 and 1994 as a management consultant at
McKinsey & Company. He has been one of our managing directors since 1994.
Michael Janssen is a member of the management board and has served as our
chief financial officer since 1996. Mr. Janssen has a masters degree in
business. Both before and during his formal studies in Tuebingen and the United
States, he was trained as a bank apprentice and was employed as the assistant
to the managing director at the Direkt Anlage Bank GmbH and the Hypo EDV
Dienstleistungen fuer Banken GmbH.
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Achim Schlumpberger is a member of the management board and the head of the
Twister Development Division. Mr. Schlumpberger is a state certified computer
scientist and first worked as a computer consultant. In 1989, he became an
independent systems analyst through the sole proprietorship "AS
Systemanalysen." He has been one of our managing directors since 1994.
Michael Schumacher is a member of the management board and the head of the
Financial Systems Division. He is a graduated medical computer scientist. After
completing his university degree, he became an independent computer consultant
and systems analyst in 1990. He has been one of the managing directors of
BROKAT since 1994.
Angelo Maestrini is a member of the management board and has served as our
chief operating officer since October 1999. He is responsible for all customer-
related business activities, comprised of sales, marketing, professional
services and customer support, and, in particular, for the establishment and
management of our international business. Before joining BROKAT, Mr. Maestrini
was senior vice president (international) at Optika Inc., a leading United
States provider of e-commerce solutions.
The management board is responsible for managing our day-to-day business
according to the Stock Corporation Act, our articles of association and the
rules of procedure for the conduct of the affairs of the management board
adopted by the supervisory board. In the rules of procedure, the supervisory
board described the allocation of responsibilities of the members of the
management board and provided a list of important issues and important matters
which require the supervisory board's prior consent, such as borrowing or
lending of material amounts, participation in joint ventures, making
investments in other enterprises, the establishment of subsidiaries and
transactions involving a change in control of BROKAT.
The supervisory board has the power to determine, appoint and remove members
of the management board in compliance with the Stock Corporation Act. The
members of the management board are appointed by the supervisory board for a
maximum term of five years. They may be re-appointed or have their term
extended for additional five-year terms. The supervisory board may remove a
member of the management board before expiration of his term if he commits a
serious breach of duty or is incapable of carrying out his duties or if there
is a genuine vote of no confidence at the shareholders' meeting.
If only one member of the management board is appointed, then that member
alone will represent us. If more than one management board member is appointed,
then we shall be represented jointly by two management board members or by one
management board member acting with the holder or holders of a special power of
attorney. Recently, our management board has designated several employees of
BROKAT to be granted a special power of attorney. Under the articles of
association, the supervisory board may grant sole power of attorney to one, to
several, or to all members of the management board.
The management board must report regularly, at least once every quarter, to
the supervisory board. However, there is information on the status of our
business which must be reported on a monthly basis. Under the articles of
association, the management board is generally required to report on the
current status of our business and business prospects, as well as on any issues
of fundamental or unusual concern. The supervisory board is also entitled to
request special reports at any time.
Our management board consists of six members. The members of the management
board can be contacted at our offices in Stuttgart.
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Supervisory Board
The members of the supervisory board, their ages, the expiration of their
terms and principal occupations are:
<TABLE>
<CAPTION>
Name Member since Term expires Age Function Principal Occupation
---- ----------------- ------------- --- -------- ---------------------
<S> <C> <C> <C> <C> <C>
Mr. Falk F. Strascheg... April 1, 1998 May 2002 59 Chairman Managing director
Technologieholding VC
GmbH Munich
Dr. Hermann Wundt....... April 1, 1998 May 2002 56 Deputy Attorney at law, Tax
Chairman advisor, Accountant
Mr. Ernst G. Mayer...... April 1, 1998 May 2002 46 Member Managing director,
Technologie
Beteiligungs-
Gesellschaft mbH
Prof. Dr. Wolfgang May 5, 1998 May 2002 48 Member Professor of business
Koenig................. administration,
Universitaet
Frankfurt am Main
Ms. Angelika Pohlenz.... April 1, 1998 May 2002 51 Member Secretary General,
International Chamber
of Commerce
Dr. Peter Page.......... November 18, 1999 November 2003 60 Member Consultant, Former
management board
member of Software AG
and Siemens AG
</TABLE>
The principal function of our supervisory board is to advise and supervise
the management board without being involved in the conduct of day-to-day
transactions. The supervisory board has comprehensive monitoring functions and
is also responsible for appointing and removing the members of the management
board. Although the supervisory board may not make management decisions, it may
determine that there are types of transactions which require its prior consent,
and the rules of procedure provide that some affairs, operations and major
transactions, such as large capital expenditure items, require the prior
consent of the supervisory board. To ensure that the functions of the
supervisory board are carried out properly, the management board must regularly
report to the supervisory board on current business operations and future
business planning.
According to the articles of association, the supervisory board consists of
six members elected by a majority of our shareholders at a shareholders'
meeting in compliance with the provisions of the Stock Corporation Act. The
members of the supervisory board are each elected for a fixed term of
approximately five years, unless the shareholders' meeting determines a shorter
tenure for particular members or for all members elected. This term expires at
the shareholders' meeting to approve the actions taken by the supervisory board
during the fourth fiscal year following its members' election. However, the
fiscal year in which the term begins is not counted for these purposes.
Supervisory board members may be re-elected by a majority of the shareholders.
Except for Dr. Page, whose term expires in 2003, the current members of the
supervisory board are subject to re-election in fiscal 2002.
A member of the supervisory board may be removed by the shareholders by a
majority of at least three quarters of the votes cast at a shareholders'
meeting. The supervisory board appoints a chairperson and one or more deputy
chairpersons from among its members for the current term of office following
the shareholders' meeting at which the supervisory board members were elected.
The election of the chairperson and deputy chairpersons is held at a non-
specially convened meeting in compliance with the provisions of the Stock
Corporation Act. The election of the chairperson and the first deputy
chairpersons requires a majority vote.
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Should the chairperson or the deputy chairpersons resign from their position
before the end of their tenure, the supervisory board shall hold a new election
for the statutory term of office remaining after the resignation.
Unless otherwise provided for by applicable law, resolutions of the
supervisory board are passed by a simple majority of the votes cast. A majority
of the supervisory board members must be present at the supervisory board
meeting to constitute a quorum. If a supervisory board vote results in a tie,
then the vote of the supervisory board's chairman shall be decisive.
The members of our supervisory board can be contacted through our offices in
Stuttgart.
Management and employee incentive arrangements
Compensation
The aggregate amount of compensation paid by us to the members of our
management board in the six months ended December 31, 1999 amounted to
approximately DM 770.0 thousand. Between 20% and 25% of the total remuneration
paid to the members of the management board depends on their achievement of
performance targets, which are defined by particular qualitative criteria, as
well as our sales and profit. These targets are set annually by the supervisory
board in compliance with German law.
The supervisory board is also compensated for its activities. The articles
of association provide that, at the end of each year, each member of the
supervisory board receives a reimbursement of expenses as well as adequate
renumeration. The May 7, 1998 shareholders' meeting passed a resolution to fix
the aggregate remuneration of the supervisory board at DM 70.0 thousand. Value
added tax shown in an invoice by, or a credit to, a supervisory board member
is, over time, credited or reimbursed by BROKAT at the statutory rate
applicable. The total compensation for our current supervisory board for the
six months ended December 31, 1999 amounted to DM 35.0 thousand.
Annual bonus scheme
All of the members of the management board and all of our employees receive
part of their salary in bonuses tied to revenue or other achievement targets.
Employee stock option plans
We have two employee stock option plans. The members of the management board
and the supervisory board are not entitled to participate in these programs.
The stock option plans were introduced as an additional incentive tool. They
are also means of attracting and retaining experienced personnel and promoting
our success by providing employees the opportunity to acquire common stock.
On September 16, 1998, under our 1998 stock option plan, we have issued to
our employees options to acquire approximately 1.2 million shares of our common
stock. The option rights entitle the bearer to purchase our shares at a price
of DM 21.33 per share, and vest in three installments approximately after two,
three and four years.
On December 15, 1999, under our 1999 stock option plan, we have issued to
our employees options to acquire approximately 1.2 million shares of our common
stock. The option rights entitle the bearer to purchase shares in BROKAT at a
price of DM 65.85 per share, and vest in three installments approximately after
two, three and four years.
Under both plans the options can only be exercised, if at specified dates,
the increase in the value of our stock--based on a comparison of the average
price of the shares during the last five trading days before the
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first exercise period against the strike price of the options--at least equals
the performance of the Neuer Markt index.
Our principal investors have issued 200,460 option rights for the purchase
of our shares from their private holdings to several senior employees of
BROKAT. These rights entitle the bearer to purchase shares at DM 4.15 per
share. The options have been negotiated in February 1998, granted in August
1998, and vest ratably at the end of each of the next four years following the
date of grant. There is no performance criteria for these options.
In the course of the fiscal year ended June 30, 1999, the employees of one
of our subsidiaries were given options to acquire our shares. These options
were not granted by us, but pro rata by our shareholders using their own
shares.
On May 26, 2000, our shareholders approved the establishment of an employee
participation program similar to our stock option programs with convertible
bonds of up to euro 2.6 million and a corresponding conditional authorized
capital increase to provide a sufficient number of shares for our employees who
exercise their conversion rights under this program.
Former management shareholders of an affiliated company have issued options
for a portion of the BROKAT shares received in consideration of all of their
shares of the affiliated company. These options were issued to the present
employees of the affiliated company on July 26, 1999 per share, and entitle the
holders to purchase up to 135,150 of our shares from the shareholders at a
purchase price of DM 21.33 per share. The options vest ratably after
approximately 1.5, 2.5 and 3.5 years and can only be exercised if similar
performance criteria to the 1998 and 1999 options are met.
All options from all programs not exercised after the last vesting period
will expire.
As of December 31, 1999, none of the outstanding options was exercisable.
The options are scheduled to become exercisable between March 2000 and June
2004.
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MATERIAL RELATIONSHIPS AND RELATED TRANSACTIONS
License agreement with Fernbach Software S. A.
Effective December 30, 1999, we entered into a license agreement with
Fernbach Software S.A. The purpose of the license agreement is to give us the
right to market the computer programs offered by Fernbach. The license is
restricted to specific programs up to a value of DM 3.0 million; for each item
ordered, we will be given a discount of 50% on the list price. In return, we
paid a license fee of DM 3.0 million.
The pre-paid purchase commitment of DM 3.0 million has been shown as a
current asset even though all purchases under this agreement may not be made
during the next twelve months. This pre-paid license fee will then be recorded
as an expense in the fiscal year in which the license programs were acquired.
Transaction Software Technologies, Inc.
Before the date of our acquisition of TST, we recognized sales with TST for
software license of DM 753.0 thousand in the year ended June 30, 1999. These
sales were not recognized in the year ended June 30, 1998.
MeTechnology Europe GmbH
MeTechnology Europe GmbH is a 100% subsidiary of MeTechnology AG, Leipzig.
Before the acquisition date of MeTechnology AG, we recognized sales with
MeTechnology Europe GmbH for software license of DM 3.0 million in the year
ended June 30, 1999. These sales were not recognized in the year ended June 30,
1998.
Haver & Mailaender
The Stuttgart law firm Haver & Mailaender regularly performs services for
BROKAT. The wife of our Chief executive officer works there as a partner. In
her capacity as partner of the firm, Dr. Roever is not, however, involved in
the matters relating to BROKAT. Charges for services performed by Haver &
Mailaender are:
. for the six months ended June 30, 2000, DM 392.6 thousand;
. for the six months ended December 31, 1999, DM 251.0 thousand;
. for the year ended June 30, 1999, DM 301.0 thousand; and
. for the year ended June 30, 1998, DM 2.0 thousand;
while for the year ended June 30, 1997, there were no charges for services
performed.
Tax advisory firm RWT Reutlinger Wirtschaftstreuhand GmbH and the related law
firm Rechtsanwaltsgesellschaft RWT Anwaltskanzlei GmbH
RWT regularly provides tax advice to us. The managing partner of RWT is the
deputy chairman of our supervisory board, Dr. Hermann Wundt. For the six months
ended June 30, 2000, there were no charges for services provided by RWT to us.
Charges for prior services by RWT to us were:
. for the six months ended December 31, 1999, DM 53.0 thousand;
. for the year ended June 30, 1999 DM 351.0 thousand;
. for the year ended June 30, 1998 DM 62.0 thousand; and
. for the year ended June 30, 1997 DM 88.0 thousand.
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Our management believes that these related party transactions were under
terms no less favorable to us than those arranged with other third parties
because:
. we obtained Fernbach licenses under the terms of their standard
agreements with standard discounts;
. we sold our licenses to MeTechnology and TST under the terms of our
standard agreements with standard discounts; and
. Haver & Mailaender and RWT provided their services to us based on their
standard rates.
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PRINCIPAL SHAREHOLDERS
Our authorized share capital consists of 45,258,412 shares of common stock,
of which 29,959,932 shares were issued and outstanding as of August 31, 2000.
Our shares have no par value. The portion of the share capital attributable to
each share is euro 1.00.
Our common stock trades on the Neuer Markt segment of the Frankfurt Stock
Exchange under the symbol BRJ.
The table below provides information about the beneficial ownership of the
issued and outstanding shares of our common stock for: each person who owns
more than 10% of our common stock; and for members of our management board as a
group.
<TABLE>
<CAPTION>
Amount Percent of
Identity of Person or group Owned Class
--------------------------- --------- ----------
<S> <C> <C>
Members of the management board as a group........... 8,784,037 29.3%
</TABLE>
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DESCRIPTION OF THE NOTES
General
For purposes of this section, the terms "we," "us," "our" and "BROKAT" refer
only to BROKAT AG and not to our subsidiaries. All references in this section
to "notes" refer collectively to the original notes and the exchange notes,
unless the context otherwise requires.
We issued the original notes and will issue the exchange notes under an
indenture between us and The Bank of New York, as trustee. The terms of the
notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act. Copies of the indenture are
available as explained in "Where You Can Find More Information."
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because the indenture, and not this description, defines
your rights as an owner of an interest in the notes.
In this section we use terms that are defined in the indenture and have
meanings that may be different from their common meanings. For your convenience
we have provided a glossary at the end of this section to describe the defined
terms used in the indenture and in this section.
Brief Description of the Notes
We issued the original notes and will issue the exchange notes in fully
registered global form only, without coupons, in denominations of euro 1,000
and any integral multiple of euro 1,000, except that notes in definitive form
may be issued in limited circumstances described in "Form of the Notes,
Clearance and Settlement."
We will treat any original notes that remain outstanding after the
completion of the exchange offer as a single class of securities with the
exchange notes for all purposes under the indenture. We will treat the
registered holder of a note as its owner for all purposes.
Principal, Maturity and Interest
The notes:
. are our general unsecured senior indebtedness;
. are limited in aggregate principal amount to euro 125 million;
. will mature on March 31, 2010; and
. will be repaid at maturity at their principal amount unless previously
redeemed.
Interest on the notes will:
. accrue and be payable in cash at an annual rate of 11 1/2% semiannually
in arrears on March 31 and September 30 of each year, beginning on
September 30, 2000 to holders of record on the immediately preceding
March 15 and September 15;
. accrue from the most recent interest payment date or, if no interest has
been paid, from the date of original issuance of the notes; and
. be computed on the basis of a 360-day year comprised of twelve 30-day
months.
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Payments
We will pay:
. principal, interest and premium, if any, on the notes at our office or
agency maintained for that purpose;
. interest and premium, if any, at our option, by check mailed to the
holders of the notes at their addresses shown on the register of holders
of notes; and
. principal on the notes, as long as notes are listed on the Luxembourg
Stock Exchange, upon presentation and surrender of the notes at the
office of the paying agent in Luxembourg;
provided that we must pay principal, interest and premium, if any, to the
holders who have given us wire transfer instructions, by wire transfer of
immediately available funds to the accounts specified by those holders.
Until and unless we designate other offices, agencies or persons for
purposes of the indenture, our office and agency, registrar, paying agents and
transfer agents under the indenture will be those listed below:
. Principal executive office
BROKAT AG
Industriestrasse 3
D-70565 Stuttgart
Germany
. Registrar, principal paying and transfer agent
The Bank of New York
One Canada Square
London E145AL
United Kingdom
. Luxembourg listing, paying and transfer agent
Kredietbank S.A. Luxembourgeoise
43 Boulevard Royal
L-2955 Luxembourg
All references in this prospectus or the indenture to payments on or related
to the principal of, premium, if any, and interest on the notes, include
applicable additional amounts and liquidated damages, if any.
Ranking and Security
The notes are our general unsecured senior indebtedness. The notes will:
. rank equally in right of payment with any of our existing and future
senior indebtedness;
. rank equally among themselves;
. rank senior in right of payment to any of our existing and future
subordinated indebtedness;
. be effectively subordinated in right of payment to any of our secured
indebtedness as long as any of our assets serve as security for that
secured indebtedness; and
. be effectively subordinated to all liabilities of our subsidiaries.
The indenture permits us, subject to limitations, to incur substantial
additional indebtedness, including secured indebtedness to which the notes
would be effectively subordinated. See "Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Equity."
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As of December 31, 1999, on a pro forma basis after giving effect to the
offering and the application of the proceeds of this offering, we would have
had:
. no secured indebtedness to which the notes would have been effectively
subordinated;
. no amounts available for additional borrowing on a secured basis under
our senior credit facilities, to which the notes would have been
effectively subordinated;
. approximately euro 1.8 million of additional indebtedness that would
rank equally with the notes; and
. no additional indebtedness that would rank junior to the notes.
We conduct a significant portion of our operations through our subsidiaries.
We depend in part on the cash flow of our subsidiaries to meet our obligations,
including our obligations under the notes. As of December 31, 1999, on a pro
forma basis after giving effect to the offering, our subsidiaries had no
material outstanding indebtedness other than intercompany indebtedness and
trade payables. See "Risk Factors--We depend in part on our subsidiaries to
repay our debt."
Additional Amounts
We will make all payments on the notes without withholding or deduction for,
or on account of, any present or future taxes, duties, assessments or
governmental charges of whatever nature (collectively, "taxes") imposed or
levied by or on behalf of any relevant taxing jurisdiction unless the
withholding or deduction of any of those taxes is then required by law. If any
deduction or withholding for, or on account of, any taxes of any relevant
taxing jurisdiction, will at any time be required on any payments we made on
the notes, we will pay additional amounts necessary so that the net amounts
received by the holders of the notes or the trustee after the withholding or
deduction, equal the amounts which would have been received in the absence of
the withholding or deduction; except that we will not pay additional amounts
related to:
. any payments on a note held by or on behalf of a holder or beneficial
owner who is liable for the taxes on the note by reason of the holder or
beneficial owner having some connection with the relevant taxing
jurisdiction (including being a citizen or resident or national of, or
carrying on a business or maintaining a permanent establishment in, or
being physically present in, the relevant taxing jurisdiction) other
than by the mere holding of the note or enforcement of rights under the
note or the receipt of payments on the note;
. any taxes that are imposed or withheld as a result of a change in law
after March 28, 2000 where the withholding or imposition is by reason of
the failure of the holder or beneficial owner of the note to comply with
our request to provide information concerning its nationality, residence
or identity or to make any declaration or similar claim or satisfy any
information or reporting requirement, which is required or imposed by a
statute, treaty, regulation or administrative practice of the relevant
taxing jurisdiction as a precondition to exemption from all or part of
those taxes;
. except in the case of our winding up, any note presented for payment
(where presentation is required) in the relevant taxing jurisdiction; or
. any note presented for payment (where presentation is required) more
than 30 days after the relevant payment is first made available for
payment to the holder.
We will also not pay additional amounts if the beneficial owner of the note
would not have been entitled to payment of additional amounts had the
beneficial owner been the holder of the note.
Upon request, we will provide the trustee with documentation reasonably
satisfactory to the trustee showing that we paid the additional amounts.
Holders may obtain, free of charge, copies of any of those documents from us
and, as long as notes are listed on the Luxembourg Stock Exchange, from the
paying agent in Luxembourg.
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We will pay any present or future stamp, court or documentary taxes, or any
other excise or property taxes, charges or similar levies which arise in any
jurisdiction from the execution, delivery or registration of the notes or any
other document or instrument referred to in the notes, or the receipt of any
payments on the notes, excluding any taxes, charges or similar levies imposed
by any jurisdiction outside of the Federal Republic of Germany, the United
States of America or any jurisdiction in which a paying agent is located, other
than those resulting from, or required to be paid for the enforcement of the
notes or any other such document or instrument following the occurrence of any
event of default on the notes.
Redemption
Optional Redemption After March 31, 2005
On or after March 31, 2005, we may redeem the notes, in whole or in part,
upon not less than 30 nor more than 60 days' notice in cash at the redemption
prices expressed as percentages of principal amount, presented in the table
below, plus accrued and unpaid interest on the notes to the applicable
redemption date, if redeemed during the twelve-month period beginning on March
31 of the years indicated below:
<TABLE>
<CAPTION>
Date Percentage
---- ----------
<S> <C>
2005............................................................ 105.750%
2006............................................................ 103.833%
2007............................................................ 101.917%
2008 and after.................................................. 100.000%
</TABLE>
Optional Redemption Following Qualified Equity Offerings Before March 31, 2003
Before March 31, 2003, we may on any one or more occasions, upon not less
than 30 nor more than 60 days' notice, use the net cash proceeds of one or more
qualified equity offerings to redeem up to 35% of the aggregate principal
amount of the notes at a redemption price in cash of 111.50% of the principal
amount of the notes, plus accrued and unpaid interest on the notes to the
redemption date; provided that:
. at least 65% of the aggregate principal amount of the notes originally
issued, excluding notes held by us, our affiliates and our subsidiaries,
remains outstanding immediately after the occurrence of the redemption;
and
. the redemption occurs within 60 days of the date of the closing of that
qualified equity offering.
Optional Redemption for Taxation Reasons
We may redeem the notes, in whole but not in part, at any time upon not less
than 30 nor more than 60 days' irrevocable notice at a redemption price equal
to the sum of:
. the principal amount of the notes,
. accrued and unpaid interest to the date fixed by us for tax redemption
and
. additional amounts, if any, to the tax redemption date,
if we determine that, because of
. any change in, or amendment to, the laws or treaties or any regulations
or rulings under the laws or treaties of any relevant taxing
jurisdiction affecting taxation, becomes effective on or after March 28,
2000, or
. any change in or new or different position on the application,
administration or interpretation of those laws, treaties, regulations or
rulings, including a holding, judgment or order by a court of competent
jurisdiction, which becomes effective on or after March 28, 2000,
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we are, or on the next interest payment date would be, required to pay
additional amounts, and we determine that such payment obligation cannot be
avoided by us taking reasonable measures.
We cannot give a redemption notice earlier than 90 days before the earliest
date on which we would be obligated to make tax payment or withholding if a
payment on the notes were then due.
Before we give any redemption notice, we must deliver to the trustee an
opinion of an independent tax counsel of recognized international standing
stating that the circumstances described above exist. The trustee will accept
the opinion as sufficient evidence of the satisfaction of the conditions
precedent described above, and it will be conclusive and binding on the
holders.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select the notes for redemption:
. in compliance with the requirements of the principal securities
exchange, if any, on which those notes are listed, or
. if those notes are not listed, using any method determined by the
trustee to be fair and appropriate, subject to the applicable procedures
of any clearing organization.
We will not partially redeem the notes of euro 1,000 or less.
We will give redemption notices as described in "Notices" at least 30 but
not more than 60 days before the redemption date. Notices of redemption may
not be conditional.
If any note is to be redeemed in part, the notice of redemption that
relates to the note will state the portion of the principal amount of the note
to be redeemed. Upon cancellation of the partially redeemed original note, we
will issue to the holder a new note in principal amount equal to the
unredeemed portion of the note.
Notes called for redemption become due on the date fixed for redemption. On
and after the redemption date, interest will cease to accrue on notes or
portions of the notes called for redemption; provided, that we have deposited
with the paying agent for the notes funds necessary to pay the applicable
redemption price under the indenture.
Mandatory Redemption
There are no mandatory redemption or sinking fund payments for the notes.
Change of Control
Upon the occurrence of a change of control, each holder will have the right
to require that we repurchase all or any part (equal to euro 1,000 in
principal amount and integral multiples of euro 1,000) of the holder's notes
in a change of control offer on the terms described below. As long as the
notes are listed on the Luxembourg Stock Exchange, all services linked to any
repurchase will be available through the office of the paying agent in
Luxembourg.
Within 30 days following any change of control, we will give notice as
explained in "Notices" in which we will describe the transaction or
transactions that constitute the change of control and offer to repurchase the
notes, under the procedures required by the indenture and described in the
notice, on the date specified in the notice. We will not schedule the change
of control payment date earlier than 30 days or later than 60 days from the
date the notice is given.
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We will comply with:
. the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations, including the laws and regulations of
any non-U.S. jurisdiction in which a change of control offer is made,
and
. the requirements of any securities exchange on which the notes are then
listed.
If the provisions of any securities laws or regulations conflict with the
change of control provisions of the indenture, we will comply with the
applicable securities laws and regulations and will not be in breach of our
obligations under the change of control provisions because of that compliance.
On the change of control payment date, we will, if permitted by law:
. accept for payment all notes or portions of notes properly tendered
under the change of control offer;
. deposit with the paying agent an amount equal to the change of control
payment for all notes or portions of notes tendered; and
. deliver or cause to be delivered to the trustee the accepted notes and
an officers' certificate stating the aggregate principal amount of
repurchased notes.
The paying agent will promptly mail to each holder of tendered notes the
change of control payment for the notes. The trustee will promptly authenticate
and deliver new notes in denominations of euro 1,000 or integral multiples of
euro 1,000 equal in principal amount to the unpurchased portion, if any, of the
tendered notes. We will publicly announce the results of the change of control
offer on or as soon as practicable after the change of control payment date.
We will not be required to make a repurchase offer upon a change of control
if a third party:
. makes a change of control offer in the manner, at the times and
otherwise in compliance with the requirements applicable to that change
of control offer otherwise required to be made by us, and
. purchases all notes validly tendered and not withdrawn in that change of
control offer by making the applicable change of control payment.
If any takeover, recapitalization or similar transaction that does not
involve a change of control occurs, we will not be required to offer to
repurchase or to redeem the notes. Our senior credit facilities or new credit
facilities may prohibit us from purchasing any notes before the final maturity
of indebtedness under the facilities. Any senior credit facilities or new
credit facilities may also provide that some change of control events
concerning us would constitute a default under those facilities. Other future
credit or financing agreements or other agreements to which we may become party
may contain similar restrictions and provisions. If a change of control occurs
at a time when we are prohibited from purchasing notes, we could seek the
consent of necessary parties to the purchase of notes or could attempt to
renegotiate, refinance or extinguish the agreements that contain the
prohibition. If we do not obtain the consent or repay the borrowings, we will
remain prohibited from purchasing notes. Our failure to repurchase tendered
notes would constitute an event of default under the indenture and may
constitute a default under our senior credit facilities or any new credit
facility.
The definition of change of control in the indenture includes a phrase
relating to the sale, lease, transfer, conveyance or other disposition of "all
or substantially all" of the assets of us and our restricted subsidiaries taken
as a whole. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. For this reason, the ability of a holder of notes
to require that we repurchase the notes because of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of us and our
restricted subsidiaries taken as a whole to another person or group may be
uncertain.
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The existence of this right to require that we repurchase notes upon a
change of control may deter a third party from acquiring us in a transaction
which constitutes a change of control.
Material Covenants
Asset Sales
We will not, and will not permit any of our restricted subsidiaries to, make
an asset sale unless:
. our board adopts a resolution stating that we or the restricted
subsidiary received consideration at the time of the asset sale at least
equal to the fair market value of the assets or equity interests issued,
sold or otherwise disposed of, and includes the resolution in an
officers' certificate delivered to the trustee; and
. at least 85% of the consideration received by us or the restricted
subsidiary in the asset sale is in the form of cash or cash equivalents.
For purposes of this covenant the amount of:
. any liabilities shown on our or the restricted subsidiary's most recent
balance sheet, other than contingent liabilities and liabilities that
are expressly subordinated in right of payment to the notes, that are
assumed by an unaffiliated third party in the asset sale under
assumption, novation or other similar agreements that release us or the
restricted subsidiary from any and all further liability on these
liabilities; and
. any securities, notes or other obligations received by us or the
restricted subsidiary from an unaffiliated third party in the asset sale
that are contemporaneously, subject only to ordinary settlement periods
not exceeding 10 business days, converted by us or the restricted
subsidiary into cash or cash equivalents;
will be treated as cash or cash equivalents.
Within 270 days after the receipt of any net proceeds from an asset sale, we
will, at our option, apply the net proceeds to:
. repay our senior debt;
. repay any indebtedness, other than indebtedness that is by its terms
subordinated to the notes and, in the case of any revolving
indebtedness, correspondingly permanently reduce revolving borrowing
commitments for that revolving indebtedness;
. the acquisition of a majority of the assets or voting stock of a
permitted business;
. the making of capital expenditures; or
. the acquisition of other assets that are used or useful in a permitted
business.
Pending the final application of any net proceeds, we may temporarily reduce
revolving credit borrowings or otherwise invest the net proceeds in any manner
not prohibited by the indenture. Any net proceeds from asset sales that are not
so applied or invested will be treated as excess proceeds.
On the earlier of:
. the 271st day following an asset sale; or
. the earlier date, if any, on which our board determines not to apply the
net proceeds of the asset sale in the manner described in the preceding
paragraph,
the aggregate excess proceeds which have not been applied as described in
the preceding paragraph will be used to make an asset sale offer on a pro
rata basis to:
. all holders of the notes, and
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. all holders of other indebtedness of us or any restricted subsidiary
that is not by its terms expressly subordinated in right of payment to
the notes to whom an asset sale offer or similar offer is required to be
made under the terms of the instruments governing the other
indebtedness.
We may always defer the asset sale offer until aggregate excess proceeds
exceed euro 5.0 million. If any excess proceeds remain after an asset sale
offer has ended, we may use the excess proceeds for any purpose not otherwise
prohibited by the indenture. If the aggregate principal amount of indebtedness
tendered into the asset sale offer exceeds the amount of excess proceeds, the
trustee will select the notes and other indebtedness to be purchased:
. in compliance with the requirements of the principal securities
exchange, if any, on which the notes are listed, or,
. if the notes are not listed, on a pro rata basis, subject to the
applicable procedures of any clearing organization,
among the holders of notes and, if applicable, the other indebtedness based
upon the aggregate outstanding principal amount or accreted value of the notes
and the other Indebtedness. Upon completion of an asset sale offer, the amount
of excess proceeds will be reset at zero.
Restricted Payments
We will not, and will not permit any of our restricted subsidiaries to,
directly or indirectly, make or pay any restricted payment, unless at the time
of and after giving effect to the restricted payment:
(1) no default or event of default will have occurred and be continuing
or would occur because of the restricted payment; and
(2) we would, at the time of the restricted payment and after giving pro
forma effect to the restricted payment as if the restricted payment had
been made at the beginning of the applicable four quarter period, have been
permitted to incur at least euro 1.00 of additional indebtedness, other
than permitted indebtedness, under the fixed charge coverage ratio test
described in the first paragraph of "Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Equity"; and
(3) the aggregate amount of all restricted payments made after March 28,
2000, including the proposed restricted payment but excluding restricted
payments permitted by clauses (2), (3), (5), (7) and (8) of the second
paragraph of this covenant, is less than the sum, without duplication, of:
(A) 50% of the aggregate amount of our adjusted consolidated net
income (or, if the adjusted consolidated net income is a loss, minus
100% of the amount of the loss) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on the first day
of the first fiscal quarter beginning after March 28, 2000 and ending
on the last day of the most recently ended fiscal quarter for which
internal financial statements are available at the time of the
restricted payment, plus
(B) the aggregate capital stock sale proceeds or other net cash
proceeds:
(1) received since March 28, 2000 from the issue or sale of our
capital stock, other than our disqualified stock, other than to:
(X) our subsidiaries,
(Y) our employee stock ownership plans or similar trusts, or
(Z) our management employees or management employees of any
of our subsidiaries, other than under our bona fide employee
stock option plans; or
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(2) received from the issue or sale of our disqualified stock or
debt securities other than to:
(X) our subsidiaries,
(Y) our employee stock ownership plans or similar trusts, or
(Z) our employees or employees of any of our subsidiaries,
other than under our bona fide employee stock option plans;
provided, that the disqualified stock or debt securities have been
converted after March 28, 2000 into our capital stock, other than
disqualified stock;
in each of those cases, excluding:
. any net cash proceeds from a qualified equity offering used to redeem
the notes under the covenant described in "Redemption--Optional
Redemption After Qualified Equity Offerings" and
. any amounts utilized for any redemption, repurchase, retirement,
defeasance or other acquisition referred to in clause (2) of the second
paragraph of this covenant; plus
(C) if any restricted investment that was made after March 28, 2000
is disposed of or otherwise liquidated or repaid for cash, 100% of the
lesser of:
(1) the net after-tax cash return of capital on that restricted
investment; and
(2) the initial book value of that restricted investment, plus
(D) if any unrestricted subsidiary is redesignated as a restricted
subsidiary after March 28, 2000, the lesser of:
(1) the fair market value of our investment in the subsidiary as
of the date of that redesignation; or
(2) the fair market value of our investment in the subsidiary as
of the date on which the subsidiary was originally designated as an
unrestricted subsidiary.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of its
declaration, if at the date of declaration that payment would have complied
with the provisions of the indenture;
(2) so long as no default or event of default will have occurred and be
continuing immediately after the transaction, the redemption, repurchase,
retirement, defeasance or other acquisition of:
(A) any indebtedness that is by its terms subordinated to the notes;
or
(B) any of our equity interests,
from the capital stock sale proceeds from the substantially concurrent sale
of our capital stock, other than disqualified stock, other than to:
(I) our subsidiaries,
(II) our employee stock ownership plans or similar trusts, or
(III) our management employees or management employees of any of
our subsidiaries, other than under our bona fide employee stock
option plans;
provided, that the amount of the capital stock sale proceeds will be
excluded from clause (3)(B) of the preceding paragraph;
(3) so long as no default or event of default will have occurred and be
continuing immediately after the transaction, the redemption, repurchase,
retirement, defeasance or other acquisition of indebtedness that is by its
terms subordinated to the notes with the net cash proceeds from an
incurrence of permitted refinancing indebtedness that is by its terms
subordinated to the notes;
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(4) so long as no default or event of default will have occurred and be
continuing immediately after the transaction, the redemption, repurchase,
retirement or other acquisition of any indebtedness or preferred stock
following a change of control under:
(A) provisions of the indebtedness or preferred stock substantially
similar to those in the covenant described in "Change of Control";
provided, that we previously have complied with the provisions of the
covenant, or
(B) the covenant described in "Change of Control";
(5) the payment of any dividend by any of our subsidiaries to the
holders of its common equity capital stock in their capacity as its capital
stock holders on a pro rata basis;
(6) so long as no default or event of default will have occurred and be
continuing immediately after the transaction,
(A) the repurchase, redemption or other acquisition or retirement for
value by us, or the distribution by us to any third party of funding to
permit the repurchase, redemption or other acquisition or retirement for
value, of any equity interests of us or any of our subsidiaries held by
any employee or former employee of us or any of our subsidiaries under
any equity subscription agreement, stock option agreement or other
similar agreement; provided that the aggregate price paid for all
repurchased, redeemed, acquired or retired equity interests must not
exceed the sum of:
(W) euro 500,000 in any twelve-month period or euro 2.5 million
in the aggregate, plus
(X) the net cash proceeds of any "key man" life insurance policy
received by us relating to the owner of the employee equity
interests, plus
(Y) the net cash proceeds paid to us for the issuance or exercise
of the employee equity interests, minus
(Z) repurchases of equity interests considered to occur upon
exercise of stock options if the equity interests represent a
portion of the exercise price of the options; and
(B) the making of loans or advances to our or any of our
subsidiaries' employees in the ordinary course of business, up to euro
1.0 million in the aggregate outstanding at any time;
(7) so long as no default or event of default will have occurred and be
continuing immediately after the transaction, investments in joint ventures
or other arrangements in an aggregate amount, measured as of the initial
date those investments are made, at any time not to exceed fifty percent
(50%) of the aggregate capital stock sale proceeds received since March 28,
2000; provided, that the amount of the capital stock sale proceeds will be
excluded from any calculation under clause (3)(B) of the preceding
paragraph or clause (p) of the definition of permitted indebtedness; and
(8) so long as no default or event of default will have occurred and be
continuing immediately after the transaction, any permitted investment.
The amount of any non-cash restricted payment will be the fair market value
on the date of the restricted payment of any asset or property proposed to be
transferred or issued by us or our subsidiary, as applicable, relating to the
restricted payment, as described in an officers' certificate delivered to the
trustee as described below.
Immediately following the date of making any determination of fair market
value required under this covenant, and before the date of making any
restricted payment on the basis of the determination, we will deliver to the
trustee an officers' certificate:
. stating that the restricted payment, if any, is permitted under the
indenture,
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. stating the basis upon which any calculations or determinations required
by the covenant described in "Material Covenants--Restricted Payments"
were made, and
. including a copy of any required resolution of our board and any
required opinion or appraisal issued by an accounting, appraisal or
investment banking firm.
Incurrence of Indebtedness and Issuance of Preferred Equity
We will not, and will not permit any of our subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise (collectively,
"incur"), for, any indebtedness other than permitted indebtedness; and will not
issue any disqualified stock and will not permit any of our subsidiaries to
issue any shares of preferred stock; provided that, if otherwise permitted by
the indenture, we may incur indebtedness other than permitted indebtedness, or
issue shares of disqualified stock, if:
(A) no default or event of default will have occurred and be continuing
or would occur because of that action, and
(B) the fixed charge coverage ratio for our most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which the action is taken would have been
at least 2.00 to 1, determined on a pro forma basis, including a pro forma
application of the net proceeds of the action, as if the action had been
taken at the beginning of that four-quarter period.
We will not incur:
(1) any indebtedness if the indebtedness is subordinate or junior in
ranking in any respect to any other indebtedness, unless the indebtedness
is expressly subordinated in right of payment to the notes, or
(2) any secured indebtedness, other than permitted secured indebtedness,
unless contemporaneously with the incurrence effective provision is made to
secure the notes equally and ratably with the secured indebtedness for so
long as the secured indebtedness is secured by a lien.
We and our restricted subsidiaries will not incur any indebtedness if the
proceeds of the indebtedness are used, directly or indirectly, to refinance our
other indebtedness that is by its terms subordinated in right of payment to the
notes unless the indebtedness is subordinated to the notes to at least the same
extent as the refinanced indebtedness.
We will include:
. accrual of interest,
. accretion or amortization of original issue discount,
. the payment of interest on any indebtedness in the form of additional
indebtedness with the same terms, and
. the payment of dividends on disqualified stock in the form of additional
shares of the same class of disqualified stock
in our fixed charges as accrued, but they will not be treated as an incurrence
of indebtedness or an issuance of disqualified stock for purposes of the
covenant described in "Material Covenants--Incurrence of Indebtedness and
Issuance of Preferred Equity".
If any indebtedness may be included in more than one of the categories
described in the glossary definition of permitted indebtedness or may be
incurred other than as permitted indebtedness under this covenant, we will, in
our discretion, classify and reclassify the indebtedness in any manner that
complies with the requirements of the glossary definition or this covenant.
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Liens
We will not, and will not permit any of our subsidiaries to, directly or
indirectly, create, incur, assume or allow to exist any lien securing
indebtedness or trade payables on any asset, whether owned on or acquired after
March 28, 2000, or any income or profits from that asset, or assign or convey
any right to receive income from that asset, except permitted liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
We will not, and will not permit any of our restricted subsidiaries to,
directly or indirectly, create or otherwise cause or allow to exist or become
effective any encumbrance or restriction on the ability of any restricted
subsidiary to:
. pay dividends or make any other distributions on its capital stock
or for any other interest or participation in, or measured by, its
profits;
. pay any indebtedness owed;
. make loans or advances; or
. transfer any of its properties or assets
to us or any of our restricted subsidiaries.
The restrictions described in the preceding paragraph will not apply to
encumbrances or restrictions existing under or by reason of:
(1) existing indebtedness in effect on March 28, 2000 and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of that
indebtedness; provided that the dividend and other payment restrictions
contained in the amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are no
more restrictive, taken as a whole, than those contained in the existing
indebtedness in effect on March 28, 2000;
(2) our senior credit facilities or any new credit facility permitted
under the indenture, if
(A) either (x) the encumbrance or restriction applies only during
the continuance of any event of default, payment default or default on
a financial covenant contained in the indebtedness or agreement, or (y)
we determine at the time the indebtedness is incurred, and, if
applicable, at the time of any modification of the terms of the
encumbrance or restriction, that the encumbrance or restriction will
not materially affect our ability to make principal or interest
payments on the notes, and
(B) the encumbrance or restriction is not materially more
disadvantageous to the holders of the notes than is customary in
comparable financings or agreements as we determine in good faith;
(3) the indenture and the notes;
(4) applicable law;
(5) any instrument governing indebtedness or capital stock of a person
acquired by us or any of our restricted subsidiaries in effect at the time
of the acquisition, except if the indebtedness was incurred in, or in
contemplation of, that acquisition, if the encumbrance or restriction is
not applicable to any person, or the properties or assets of any person,
other than the person, or the property or assets of the person, that we
acquired; provided that, in the case of indebtedness, incurrence of the
indebtedness was permitted by the terms of the indenture;
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(6) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(7) purchase money indebtedness that imposes restrictions of the nature
described in clause (5) above on the acquired property;
(8) any agreement for the sale of any of our restricted subsidiaries
that restricts distributions by that restricted subsidiary pending its
sale;
(9) permitted refinancing indebtedness; provided that the restrictions
contained in the agreements governing the permitted refinancing
indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the indebtedness being refinanced;
(10) secured indebtedness otherwise permitted to be incurred under the
provisions of the indenture that limits the right of the debtor to dispose
of the assets securing the indebtedness;
(11) provisions for the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered
into in the ordinary course of business;
(12) protective liens filed for sale and leaseback transactions under
the provisions of the covenant described in "Material Covenants--Sale and
Leaseback Transactions;"
(13) purchase money indebtedness or other indebtedness or contractual
obligations incurred in transactions permitted under the provisions of the
covenant described in "Material Covenants--Sales of Accounts Receivable;"
and
(14) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Designations of Unrestricted Subsidiaries
We may designate any of our subsidiaries as an unrestricted subsidiary only
if:
(1) no default or event of default will have occurred and be continuing
at the time of or after giving effect to the designation; and
(2) the designated subsidiary has property or assets with a fair market
value in an amount not exceeding euro 1,000 or we would be permitted under
the indenture to make an investment at the time of and assuming the
effectiveness of the designation in an amount equal to the sum of:
(A) the aggregate fair market value of investments represented by
capital stock and other equity interests of that subsidiary owned by us
and our restricted subsidiaries on that date, and
(B) the aggregate fair market value of our and our restricted
subsidiaries' other investments in that subsidiary on that date; and
(3) we would be permitted to incur euro 1.00 of additional indebtedness,
other than permitted indebtedness, under the fixed charge coverage ratio
test described in the first paragraph of the covenant described in
"Material Covenants--Incurrence of Indebtedness and Issuance of Preferred
Equity" at the time of and assuming the effectiveness of the designation;
and
(4) our subsidiary designated as an unrestricted subsidiary:
(A) does not own any of our or our restricted subsidiaries' equity
interests;
(B) is not party to any agreement, contract, arrangement or
understanding with us or any of our restricted subsidiaries unless the
terms of that agreement, contract, arrangement or understanding are
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no less favorable to us or that restricted subsidiary than those that
might be obtained at the time from persons who are not our affiliates;
(C) has at least one member of its management board or analogous
body that is neither a member of our board or our supervisory board nor
an executive officer of us or any of our restricted subsidiaries and
has at least one executive officer that is neither a member of our
board or our supervisory board nor an executive officer of us or any of
our restricted subsidiaries; and
(D) is not directly or indirectly liable for any indebtedness in
aggregate principal amount exceeding euro 1.0 million, unless the
creditors for that indebtedness have agreed in writing that they have
no recourse, direct or indirect, against us or any of our restricted
subsidiaries for any obligations relating to that indebtedness.
We will not, and will not permit any of our restricted subsidiaries to, at
any time:
(1) provide direct or indirect credit support for or a guarantee of any
indebtedness of any unrestricted subsidiary, including of any undertaking,
agreement or instrument entered into for any indebtedness;
(2) be directly or indirectly liable for any indebtedness of any
unrestricted subsidiary;
(3) have any direct or indirect obligation:
(A) to subscribe for additional equity interests, or otherwise
contribute to the capital, of any unrestricted subsidiary, or
(B) to maintain or preserve in any manner any unrestricted
subsidiary's financial condition, solvency or financial position, or
(C) to cause any unrestricted subsidiary to achieve any specified
levels of operating results or capital; or
(4) be directly or indirectly liable for any indebtedness which permits
the holder, upon notice, lapse of time or both, to declare a default on the
indebtedness, or cause the payment of the indebtedness to be accelerated or
payable before its final stated maturity upon the occurrence of a default
on any indebtedness of any unrestricted subsidiary, including any right to
take enforcement action against the unrestricted subsidiary.
On any designation date we will be treated as if we have made an investment
constituting a restricted payment under the covenant described in "Restricted
Payments" in an amount equal to the greater of euro 1,000 or the sum referred
to in clause (2) of the first paragraph of this covenant for all purposes. The
fair market value of the investment will be determined and documented as
provided for the valuation of non-cash restricted payments under the covenant
described in "Material Covenants--Restricted Payments."
We may revoke any designation of a subsidiary as an unrestricted subsidiary
if:
(1) no default or event of default will have occurred and be continuing
at the time of and after giving effect to the revocation; and
(2) all liens, indebtedness and other obligations of the unrestricted
subsidiary outstanding immediately following the revocation would, if
incurred at that time, be permitted to be incurred by any of our restricted
subsidiaries for all purposes of the indenture.
Upon the revocation, the subsidiary will be treated as one of our restricted
subsidiaries for all purposes of the indenture.
We will file with the trustee a certified copy of the resolution of our
board giving effect to the designation or revocation and an officers'
certificate certifying that the designation or revocation:
(1) complied with the preceding conditions,
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(2) was permitted by the covenant described in "Material Covenants--
Restricted Payments" and
(3) was permitted by the other terms and provisions of the indenture.
If, at any time, any of our unrestricted subsidiaries would fail to meet
the requirements as an unrestricted subsidiary described in clause (4) of the
first paragraph and in the second paragraph of this covenant, it will cease to
be an unrestricted subsidiary for purposes of the indenture and any
indebtedness of the subsidiary will be treated as indebtedness incurred by a
restricted subsidiary as of that date, and, if the indebtedness is not
permitted to be incurred as of that date under the covenant described in
"Material Covenants--Incurrence of Indebtedness and Issuance of Preferred
Equity," we will be in default of the covenant.
Merger, Consolidation, or Sale of Assets
We may not consolidate or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our
properties or assets in one or more related transactions, to another person or
group of persons, unless:
(1) we are the surviving person or the person formed by or surviving
that consolidation or merger, if other than us, or to which the sale,
assignment, transfer, lease, conveyance or other disposition will have been
made is a stock corporation or limited liability company organized or
existing under the laws of the Federal Republic of Germany, the United
Kingdom, the Kingdoms of Denmark, Norway or Sweden, the Republic of Finland
or the United States of America or any State or the District of Columbia;
(2) the entity or person formed by or surviving that consolidation or
merger, if other than us, or the entity or person to which that sale,
assignment, transfer, lease, conveyance or other disposition will have been
made assumes all our obligations under the registration rights agreement,
the notes and the indenture under supplemental agreements in a form
reasonably satisfactory to the trustee;
(3) immediately after the transaction no default or event of default
exists;
(4) except in the case of our merger or consolidation with or into one
of our wholly owned restricted subsidiaries, we or another entity or person
formed by or surviving that consolidation or merger or to which that sale,
assignment, transfer, lease, conveyance or other disposition will have been
made, at the time of that transaction and after giving pro forma effect to
that transaction as if the transaction had occurred at the beginning of the
applicable four-quarter period,
(A) will be permitted to incur at least euro 1.00 of additional
indebtedness, other than permitted indebtedness, under the fixed charge
coverage ratio test of the covenant described in "Material Covenants--
Incurrence of Indebtedness and Issuance of Preferred Equity;" or
(B) will have a fixed charge coverage ratio equal to or greater than
the fixed charge coverage ratio immediately before that transaction;
(5) we will have delivered to the trustee an officers' certificate and
an opinion of counsel, which state that the consolidation, merger or
transfer and the supplemental indenture, if any, comply with the indenture;
and
(6) we will have delivered to the trustee an opinion of tax counsel
reasonably acceptable to the trustee stating that:
(A) note holders will not recognize income, gain or loss for United
States Federal or German income tax purposes because of that
transaction;
(B) our payments of principal, redemption price or purchase price
of, premium, if any, and interest on the notes to a holder after the
consolidation, merger, conveyance, transfer or lease of assets will not
be subject to the taxes described in "Additional Amounts" and
(C) no other taxes on income, including taxable capital gains, will
be payable under the tax laws of any relevant taxing jurisdiction by a
holder who is or who is treated as a non-resident of the
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relevant taxing jurisdiction for the acquisition, ownership or
disposition of the notes, including the receipt of principal of,
premium, if any, and interest paid on those notes.
Clause (4) of the first paragraph of this covenant will not prevent as from
reorganizing as a corporation in the United States of America or any of its
states or the District of Columbia; provided that we must deliver to the
trustee an opinion of counsel confirming that the holders of the notes will not
recognize income, gain or loss for Federal Republic of Germany or United States
Federal income tax purposes as a result of the reorganization and will be
subject to Federal Republic of Germany or United States Federal income tax in
the same manner and at the same times as would have been the case if the
reorganization had not occurred.
Transactions with Affiliates
We will not, and will not permit any of our restricted subsidiaries to, make
any payment to, or sell, lease, transfer or otherwise dispose of any of our or
our restricted subsidiaries' properties or assets to, or purchase any property
or assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any affiliate (each of the preceding, an "affiliate transaction"), unless:
(1) that affiliate transaction is on terms that are no less favorable to
us or the relevant restricted subsidiary than those that would have been
obtained in a comparable transaction by us or that restricted subsidiary
with an unrelated person; and
(2) we deliver to the trustee:
(A) for any affiliate transaction or series of related affiliate
transactions involving aggregate consideration in excess of euro 1.0
million, a resolution of our board included in an officers' certificate
certifying that the affiliate transaction complies with clause (1)
above and that the affiliate transaction has been approved by a
majority of the disinterested members of our board; and
(B) for any affiliate transaction or series of related affiliate
transactions involving aggregate consideration in excess of euro 2.5
million, an opinion on the fairness to the holders of the affiliate
transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of international standing.
The first paragraph of this covenant will not cause the following items to
be treated as affiliate transactions:
(1) any employment agreement entered into by us or any of our restricted
subsidiaries in the ordinary course of business and consistent with our or
the restricted subsidiary's past practice;
(2) transactions between or among us and our restricted subsidiaries, or
between or among our restricted subsidiaries;
(3) payment of reasonable board or supervisory board member fees to
persons who are not otherwise our affiliates and payments for
indemnification obligations owing to members of our board or the
supervisory board, officers or other individuals under our organic
documents or under written agreements with any of those persons;
(4) restricted payments that are expressly permitted under the covenant
described in "Material Covenants--Restricted Payments;"
(5) transactions under agreements entered into or effective before March
28, 2000 and disclosed in "Material Relationships and Related
Transactions," including modifications or amendments to those agreements
entered into after March 28, 2000; provided, that the terms of the modified
or amended agreements are not, in the aggregate, less favorable to us or
the relevant restricted subsidiary than the terms of agreements before the
modification or amendment; and
(6) transactions in compliance with the terms of the covenant described
in "Sales of Accounts Receivable."
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Sale and Leaseback Transactions
We will not, and will not permit any of our restricted subsidiaries to,
enter into any sale and leaseback transaction; provided that we or any of our
restricted subsidiaries may enter into a sale and leaseback transaction if:
(1) we or that restricted subsidiary could have:
(A) incurred indebtedness, other than permitted indebtedness, in an
amount equal to the attributable debt relating to that sale and
leaseback transaction under the fixed charge coverage ratio test
presented in the first paragraph of the covenant described in "Material
Covenants--Incurrence of Additional Indebtedness and Issuance of
Preferred Equity;" and
(B) incurred a lien to secure that indebtedness under the covenant
described in "Material Covenants--Liens;"
(2) the gross cash proceeds of that sale and leaseback transaction are
at least equal to the fair market value, as stated in an officers'
certificate delivered to the trustee, of the property that is the subject
of that sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and we or that restricted subsidiary apply the proceeds of
that transaction in compliance with, the covenant described in "Material
Covenants--Asset Sales."
The first paragraph of this covenant will not cause sale and leaseback
transactions that are not otherwise permitted under the indenture not to be
permitted at any time between:
. us and any of our wholly owned restricted subsidiaries, or
. our wholly owned restricted subsidiaries.
Restrictions on Preferred Stock of Subsidiaries
We will not permit any of our restricted subsidiaries to issue any preferred
stock, or permit any person to own or hold an interest in its preferred stock,
except for preferred stock issued to and held by to us or any of our wholly
owned restricted subsidiaries.
Limitation on Equity Interests in Restricted Subsidiaries
We will not, and will not permit any of our restricted subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any restricted
subsidiary's capital stock to any person, other than to us or any of our wholly
owned restricted subsidiaries, unless:
(1) that transfer, conveyance, sale, lease or other disposition is of
all of that restricted subsidiary's capital stock; and
(2) the net cash proceeds from that transfer, conveyance, sale, lease or
other disposition are applied to finance an asset sale offer as required by
the covenant described in "Material Covenants--Asset Sales."
We will not permit any of our restricted subsidiaries to issue any of its
equity interests, other than shares of its capital stock constituting
directors' qualifying shares or owned by officers or agents of that person
solely in their capacity as its officers or agents, to any person other than to
us or any of our wholly owned restricted subsidiaries.
These restrictions will not apply to any issuance or disposition of shares
of GO Solutions GmbH to some officers of GO Solutions as required under the
agreement between us and GO Solutions as in effect on March 28, 2000.
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Business Activities
We and our restricted subsidiaries may engage only in:
. a permitted business;
. the making of permitted investments and engaging in a business related
to that permitted investment; and
. any other business that is not material to us and our restricted
subsidiaries taken as a whole.
Payments for Consent
We will not, and will not permit or suffer any of our subsidiaries or
affiliates to, directly or indirectly, pay or cause to be paid any
consideration to any holder of any notes for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the indenture
or the notes, unless we offer that consideration to all holders of the notes
and pay to all holders of the notes that consent, waive or agree to amend in
the time period described in the solicitation documents for that consent,
waiver or agreement.
Limitations on Issuances of Guarantees of Indebtedness
We will not permit any restricted subsidiary, directly or indirectly, to
guarantee or pledge any assets to secure the payment of our other indebtedness
unless that subsidiary simultaneously executes and delivers a supplemental
indenture to the indenture providing for the guarantee of the payment of the
notes by that subsidiary, which guarantee must be senior to the subsidiary's
guarantee of or pledge to secure the other indebtedness, unless the other
indebtedness is our senior debt, in which case the guarantee of the notes may
be equal with the guarantee of the senior debt. The guarantee by a subsidiary
of the notes may provide by its terms that it will be automatically and
unconditionally released and discharged upon any sale, exchange or transfer, of
all of our equity interests in, or all or substantially all the assets of, that
restricted subsidiary made in compliance with the applicable provisions of the
indenture to any person who is not our affiliate.
Reports
Whether or not required by the rules and regulations of the SEC, and whether
or not we are subject to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision, we will prepare:
(1) quarterly reports on Form 6-K, or any other applicable form, and
annual reports on Form 20-F, or any other applicable form, that include:
(A) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 20-
F, if we were required to file reports on those forms;
(B) a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and
results of operations of us and our consolidated subsidiaries, showing
in reasonable detail, either on the face of the financial statements or
in the footnotes to the financial statements and in Management's
Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of us and
our restricted subsidiaries separate from the financial condition and
results of operations of any of our unrestricted subsidiaries; and
(C) for the annual information only, a report by our certified
independent accountants; and
(2) current reports on Form 6-K, or any other applicable form,
containing all of the information that would be required to be filed with
the SEC on Form 8-K if we were required to file those reports.
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Whether or not required by the rules and regulations of the SEC, and whether
or not we are subject to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision, we will:
(1) upon effectiveness of the exchange offer file with the SEC (if
permitted by SEC practice and applicable law and regulations) these annual,
quarterly and current reports on or before the dates (the "required filing
dates") by which we are or would have been required to file those
documents; and
(2) within 15 days of each required filing date (whether or not
permitted or required to be filed with the SEC) transmit or cause to be
transmitted by mail to all holders, as their names and addresses appear in
the note register, without cost to the holders, and file with the trustee,
copies of those annual, quarterly and current reports and other documents.
At all times that we do not file these annual, quarterly and current reports
and other documents with the SEC, or if these annual, quarterly and current
reports and other documents do not contain all of the information required to
be delivered under Rule 144A(d)(4), we will make available to any holder of
notes, to securities analysts and to prospective purchasers of the notes, the
information required by Rule 144A(d)(4) under the Securities Act.
For so long as the notes are listed on the Luxembourg Stock Exchange and the
rules of the Luxembourg Stock Exchange so require, reports that we file with
the SEC or that we are required to provide to the holders of the notes under to
the indenture may be obtained at the office of the paying agent in Luxembourg.
Notices
We will publish all notices in:
. a leading newspaper having a general circulation in London, which we
expect to be the Financial Times,
. a leading newspaper having a general circulation in Frankfurt, which we
expect to be the Frankfurter Allgemeine Zeitung and,
. if and so long as the notes are listed on the Luxembourg Stock Exchange
and the rules of the Luxembourg Stock Exchange so require, a leading
daily newspaper having a general circulation in Luxembourg, which we
expect to be the Luxemburger Wort.
Notices will be treated as given on the publication date.
We will also:
. send all notices about the global notes to Euroclear and Clearstream,
with a copy to the trustee; and
. mail all notices about definitive notes to holders, with a copy to the
trustee, by first-class mail at their respective addresses as they
appear on the registration books of the registrar.
Corporate Existence
We will do or cause to be done all things necessary to preserve and keep in
full force and effect:
. our corporate existence and the corporate or other existence of each of
our subsidiaries, in compliance with our and our subsidiaries'
respective organizational documents; and
. our and our subsidiaries' organizational documents and statutory rights,
licenses and franchises.
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The preceding paragraph will not require us to preserve those rights,
licenses or franchises, or the corporate existence of any of those
subsidiaries, if our board determines that:
. the preservation is no longer desirable for the conduct of our and our
subsidiaries' permitted business, taken as a whole, and
. the loss of any of those rights, licenses, franchises or corporate
existence is not adverse in any material respect to the holders of the
notes.
Taxes
We will, and will cause our restricted subsidiaries to, pay and discharge
when due and payable all taxes, levies, imposts, duties or other governmental
charges imposed on us or our restricted subsidiaries or on our respective
income or profits or on any of our respective properties except those taxes,
levies, imposts, duties or other governmental charges which are being contested
in good faith in appropriate proceedings and for which adequate reserves have
been established in compliance with U.S. GAAP.
Limitation on Repayment upon a Change of Control
We will not make an offer to repurchase any of our or our restricted
subsidiaries' indebtedness that is by its terms subordinated to the notes or
any of our preferred stock if we are required to do so in a change of control
under the terms of the indebtedness or preferred stock until at least 91 days
after the occurrence of the change of control. If that change of control
constitutes a change of control under the indenture, we will not make any
payment or deposit for any repurchase of the indebtedness or preferred stock
for 30 days following the change of control payment date relating to the notes
following the change of control.
Sales of Accounts Receivable
We or any of our restricted subsidiaries may occasionally sell accounts and
notes receivable and related assets to an accounts receivable subsidiary;
provided that:
(1) the aggregate consideration received in each of those sales is at
least equal to the aggregate fair market value of the receivables sold;
(2) no less than 85% of the consideration received in each of those
sales consists of:
(A) cash or a promissory note (a "promissory note") which is not
subordinated to any indebtedness or obligation other than any
indebtedness or obligation owing to a financing entity (the
"financier") providing the financing for the accounts receivable
subsidiary for those receivables and related assets; or
(B) an equity interest in the accounts receivable subsidiary;
(3) the initial sale of receivables and related assets includes all of
the receivables and related assets of us and our restricted subsidiaries
that are party to those arrangements that constitute eligible assets under
the arrangements;
(4) the cash proceeds received from the initial sale less reasonable and
customary transaction costs will be treated as net proceeds and will be
applied to finance an asset sale offer as provided in the covenant
described in "Material Covenants--Asset Sales;" and
(5) we and our restricted subsidiaries will sell all receivables and
related assets that constitute eligible assets under those arrangements to
the accounts receivable subsidiary at least weekly.
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We will:
(1) not permit any accounts receivable subsidiary to sell any
receivables and related assets purchased from us or any of our restricted
subsidiaries to any other person, except:
(A) on an arm's-length basis; and
(B) solely for consideration in the form of cash or cash
equivalents;
(2) not permit the accounts receivable subsidiary to engage in any
business or transaction other than the purchase, financing and sale of our
and our restricted subsidiaries' receivables and related assets and
activities directly incidental to those transactions;
(3) not permit any accounts receivable subsidiary to incur indebtedness
in an amount in excess of the book value of the accounts receivable
subsidiary's total assets, as determined under U.S. GAAP;
(4) at least monthly, cause the accounts receivable subsidiary to remit
to us as payment on the outstanding balance of the promissory notes, all
available cash or cash equivalents not held in a collection account pledged
to a financier, to the extent not applied to pay or maintain reserves for
reasonable operating expenses of the accounts receivable subsidiary or to
satisfy reasonable minimum operating capital requirements; and
(5) not, and will not permit any of our subsidiaries to, sell accounts
receivable to any accounts receivable subsidiary upon the occurrence of
some events of bankruptcy or insolvency relating to the accounts receivable
subsidiary.
Events of Default and Remedies
Each of the following constitutes an event of default:
(1) default for 30 days in the payment when due of interest on the
notes, or additional amounts or liquidated damages;
(2) default in payment when due of the principal of or premium, if any,
on the notes;
(3) our or any of our subsidiaries' failure to comply with the
provisions described in "Change of Control," "Material Covenants--Asset
Sales," "Material Covenants--Restricted Payments" or "Material Covenants--
Incurrence of Indebtedness and Issuance of Preferred Equity;"
(4) our or any of our subsidiaries' failure for 60 days after notice to
comply with any other agreements in the indenture or the notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or documented any
indebtedness for money borrowed by us or any of our restricted
subsidiaries, or the payment of which is guaranteed by us or any of our
restricted subsidiaries, whether the indebtedness or guarantee exists now,
or is created in the future, if the default:
(A) is caused by a failure to pay principal of or premium, if any,
or interest on that indebtedness before the expiration of the grace
period provided in that indebtedness on the date of the default (a
"payment default"); or
(B) results in the acceleration of the indebtedness before its
express maturity,
and, the principal amount of the indebtedness, and the principal amount of
any other indebtedness under which there has been a payment default or the
maturity of which has been so accelerated, aggregate euro 5.0 million or
more;
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(6) our or any of our subsidiaries' failure to pay final judgments,
other than those for which insurance coverage or indemnity from an
insurance company with assets in excess of euro 100 million has been
acknowledged in writing, aggregating in excess of euro 5.0 million, if the
judgments are not paid, discharged or stayed for a period of 30 days; and
(7) some bankruptcy or insolvency events relating to us or any of our
significant subsidiaries or any group of restricted subsidiaries that,
taken together, would constitute a significant subsidiary.
If any event of default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the then outstanding notes may declare
all the notes to be due and payable immediately. Upon the declaration, the
principal of, premium, if any, and accrued and unpaid interest on, the notes
will become due and payable immediately. But, if an event of default arises
from some bankruptcy or insolvency events relating to us, any of our
significant subsidiaries or any group of our restricted subsidiaries that,
taken together, would constitute a significant subsidiary, all outstanding
notes will become due and payable without further action or notice. Holders of
the notes may enforce the indenture or the notes only as provided in the
indenture. Subject to limitations, holders of a majority in principal amount of
the then outstanding notes may direct the trustee in its exercise of any trust
or power. The trustee may withhold from holders of the notes notice of any
continuing default or event of default, except a default or event of default
relating to the payment of principal or interest, if it determines that
withholding notice is in their interest.
If any event of default occurs by reason of any willful action or inaction
taken or not taken by us or on our behalf with the intention of avoiding
payment of the premium that we would have had to pay if we then had elected to
redeem the notes under the optional redemption provisions of the indenture, an
equivalent premium will also become and be immediately due and payable if
permitted by law upon the acceleration of the notes.
If an event of default occurs before March 31, 2005, by reason of any
willful action or inaction taken or not taken by us or on our behalf with the
intention of avoiding the prohibition on redemption of the notes before that
date, then the premium specified in the indenture relating to redemption upon
the occurrence of a change of control before that date will also become
immediately due and payable if permitted by law upon the acceleration of the
notes.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing default or event of default and its consequences under
the indenture except a continuing default or event of default in the payment of
interest on, or the principal of, the notes.
We will deliver to the trustee annually a statement about our compliance
with the indenture, and upon becoming aware of any default or event of default,
we will deliver to the trustee a statement specifying the default or event of
default.
Our directors, officers, employees, members and stockholders will not be liable
for our obligations under the notes
Our board members, supervisory board members, officers, employees,
incorporators, members or stockholders, in those capacities, will have no
liability for any of our obligations under the notes, the indenture or for any
claim based on, relating to, or by reason of, those obligations or their
creation. Each holder of notes by accepting a note waives and releases that
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
United States securities laws. The SEC has taken the view that kind of a waiver
is against public policy.
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Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have all of our obligations
discharged relating to the outstanding notes ("legal defeasance"), except for:
. the rights of holders of outstanding notes to receive payments for the
principal of, premium, if any, and interest on the notes when those
payments are due from the trust referred to below,
. our obligations concerning any issuance of temporary notes, registration
of notes, mutilated, destroyed, lost or stolen notes and the maintenance
of an office or agency for payment and money for security payments held
in trust,
. the rights, powers, trusts, duties and immunities of the trustee, and
our obligations relating to those rights, powers, trusts, duties and
immunities, and
. the legal defeasance provisions of the indenture.
We may, at our option and at any time, elect to have our obligations
released for to some covenants that are described in the indenture ("covenant
defeasance") and any subsequent omission to comply with these obligations will
not constitute a default or event of default relating to the notes. If a
covenant defeasance occurs, some events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described in "Events of
Default and Remedies" will no longer constitute an event of default on the
notes.
To exercise either legal defeasance or covenant defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the notes, cash in euros or government
obligations, or a combination of cash and government obligations, in
amounts sufficient, in the opinion of an internationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding notes on March 31, 2010 or on the
applicable redemption date, as appropriate, and we must specify whether the
notes are being defeased to March 31, 2010 or to a particular redemption
date;
(2) for legal defeasance, we must deliver to the trustee an opinion of
counsel in the United States and the Federal Republic of Germany, as
applicable, reasonably acceptable to the trustee confirming that, subject
to customary assumptions and exclusions:
(A) we have received from, or there has been published by, the
United States Internal Revenue Service a ruling, or
(B) since March 28, 2000, there has been a change in applicable
United States Federal income tax law,
stating that, and based on the ruling or change, the holders of the
outstanding notes will not recognize income, gain or loss for Federal
Republic of Germany or United States Federal income tax purposes as a
result of the legal defeasance and will be subject to Federal Republic of
Germany or United States Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case without the
legal defeasance;
(3) for covenant defeasance, we must deliver to the trustee an opinion
of counsel in the United States and the Federal Republic of Germany, as
applicable, reasonably acceptable to the trustee confirming that the
holders of the outstanding notes will not recognize income, gain or loss
for Federal Republic of Germany or United States Federal income tax
purposes as a result of that covenant defeasance and will be subject to
Federal Republic of Germany or United States Federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case without the covenant defeasance;
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(4) no default or event of default will have occured and be continuing
on the date of the deposit, other than a default or event of default
resulting from
. the borrowing of funds to be applied to the deposit, or
. bankruptcy or insolvency events at any time in the period ending on
the 91st day after the date of deposit;
(5) that legal defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indenture, to which we or any of
our subsidiaries are a party or by which we or any of our subsidiaries are
bound;
(6) we must deliver to the trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) we must deliver to the trustee an officers' certificate stating that
the deposit was not made by us with the intent of preferring the holders of
notes over our other creditors with the intent of defeating, hindering,
delaying or defrauding our creditors or others; and
(8) we must deliver to the trustee an officers' certificate and an
opinion of counsel, which state that all conditions precedent provided for
the legal defeasance or the covenant defeasance have been complied with.
Amendment, Supplement and Waiver
Generally:
. we and the trustee may amend or supplement the indenture or the notes,
and
. any existing default or compliance with any provision of the indenture
or the notes may be waived
only with the consent of the holders of a majority in principal amount of the
notes then outstanding, including consents obtained in a purchase of, or tender
offer or exchange offer for, notes.
Without the consent of each affected holder, an amendment or waiver may not,
for any notes held by a non-consenting holder:
. reduce the percentage of the principal amount of notes required for
consent to an amendment, supplement or waiver,
. reduce the principal of or change the fixed maturity of any note or
alter the provisions for the redemption of the notes,
. reduce the rate of or change the time for payment of interest on any
note,
. waive a default or event of default in the payment of principal of or
premium, if any, or interest on the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes or a waiver of the payment
default that resulted from that acceleration,
. make any note payable in the currency other than the euro,
. make any change in the provisions of the indenture relating to waivers
of past defaults or the rights of holders of notes to receive payments
of principal of or premium, if any, or interest on the notes, other than
payments under the covenants described in "Change of Control" or
"Material Covenants--Asset Sales,"
. waive a redemption payment on any note, other than payments under the
covenants described in "Change of Control" or "Material Covenants--Asset
Sales,"
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. make any change in the provisions of the indenture relating to our
obligations or the rights of holders of notes to receive payments under
the covenants described in "Change of Control" or "Material Covenants--
Asset Sales" or "Additional Amounts,"
. amend the terms of the notes or the indenture in a way that would result
in the loss of an exemption from any of the taxes described under the
notes or the indenture or an exemption from any obligation to withhold
or deduct taxes as described under the notes or the indenture unless we
agree to pay additional amounts, if any, for those taxes, or
. make any change in the preceding amendment and waiver provisions.
The preceding two paragraphs will not prevent us and the trustee from
amending or supplementing the indenture or the notes, without the consent of
any holder to:
. cure any ambiguity, defect or inconsistency,
. provide for uncertificated notes along with or in place of certificated
notes,
. provide for the assumption of our obligations to holders of notes if a
merger or consolidation or sale of all or substantially all of our
assets occurs,
. make any change that would provide any additional rights or benefits to
the holders of notes or that does not adversely affect the rights or
benefits under the indenture of any holder,
. comply with requirements of the SEC to cause or maintain the
qualification of the Indenture under the Trust Indenture Act, or
. provide for the issuance of the exchange notes as required by the
registration rights agreement.
Enforceability of Judgments; Consent to Jurisdiction and Service
In an action to enforce the indenture or the notes, service of process upon
us may be obtained within the United States by service upon CT Corporation
System, our designated agent. Since substantial amounts of our assets are
outside the United States, any judgment obtained in the United States against
us may not be collectible within the United States.
You may also find it impossible to:
. serve process within the United States upon our officers and directors
and
. realize in the United States upon judgments against our officers and
directors obtained in courts based upon civil liabilities of our
officers and directors, if those judgments exceed our officers and
directors' United States assets.
Concerning the Trustee
The indenture imposes limitations on the rights of the trustee, should it
become our creditor, to obtain payment of claims, or to realize on our
property. The trustee will be permitted to engage in other transactions, but,
if it acquires any conflicting interest it must eliminate the conflict within
90 days, apply to the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
exceptions. The indenture provides that in case an uncured event of default,
the trustee will be required, in the exercise of its power, to use the degree
of care of a prudent man in the conduct of his own affairs. Subject to those
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of notes,
unless the holder offers to the trustee security and indemnity satisfactory to
the trustee against any loss, liability or expense.
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Governing Law
The indenture and the notes will be governed by, and interpreted under the
laws of the State of New York.
Where You Can Find More Information
You may obtain a copy of the indenture and the registration rights
agreement without charge by writing to us at BROKAT AG, Industriestrasse 3,
D-70565, Stuttgart, Germany, Attention: General Counsel or, as long as the
notes are listed on the Luxembourg Stock Exchange at the office of the paying
agent in Luxembourg.
Glossary
The following are descriptions of various defined terms used in the
"Description of the Notes" section of this prospectus and in the indenture.
Reference is made to the Indenture for a full disclosure of all of these
terms, as well as any other terms used in the "Description of the Notes"
section of this prospectus for which no definition is provided.
"accounts receivable subsidiary" means any of our wholly owned restricted
subsidiaries:
(a) which is formed solely for the purpose of, and which engages in no
activities other than activities related to, financing accounts receivable
and notes receivable, and related assets of us and our restricted
subsidiaries,
(b) which is designated by our board as an accounts receivable
subsidiary under a resolution provided in an officers' certificate and
delivered to the trustee,
(c) which has total assets at the time of the designation with a book
value not exceeding euro 100,000 plus the reasonable fees and expenses
required to establish that accounts receivable subsidiary and any accounts
receivable financing,
(d) no portion of the indebtedness or any other obligation, contingent
or otherwise, of which:
(i) is at any time recourse to or obligates us or any of our
restricted subsidiaries in any way, other than under:
(A) representations, warranties, covenants and indemnities
entered into in the ordinary course of business in the sale of
accounts receivable and notes receivable to that accounts receivable
subsidiary, as applicable or
(B) any guarantee of the accounts receivable financing by us that
is permitted to be incurred under the covenant described in
"Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Equity," or
(ii) subjects any of our or our subsidiaries' property or assets
directly or indirectly, contingently or otherwise, to the satisfaction
of that indebtedness or obligation, other than under:
(A) representations, warranties, covenants and indemnities
entered into in the ordinary course of business in sales of accounts
receivable and notes receivable or
(B) any guarantee of the accounts receivable financing by us that
is permitted to be incurred under the covenant described in
"Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Equity,"
(e) with which neither us nor any of our restricted subsidiaries has any
contract, agreement, arrangement or understanding other than contracts,
agreements, arrangements or understandings entered into in the ordinary
course of business in sales of accounts receivable and notes receivable in
accordance with the description in "Sales of Accounts Receivable", as
applicable, and fees payable in the ordinary course of business in
servicing accounts receivable and notes receivable, and
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(f) for which neither us nor any of our restricted subsidiaries has any
obligation:
(i) to subscribe for additional shares of capital stock or other
equity interests or to make any additional capital contribution or
similar payment or transfer other than in the sale of accounts
receivable and notes receivable to that accounts receivable subsidiary
as described in "Sales of Accounts Receivable", as applicable; or
(ii) to maintain or preserve solvency or any balance sheet item,
financial condition, level of income or results of operations.
"acquired debt" means, for any specified person:
(a) indebtedness of any other person existing at the time the other
person is merged with or into or became a subsidiary of the specified
person, including indebtedness incurred in relation to, or in contemplation
of, the other person merging with or into or becoming a subsidiary of the
specified person, and
(b) indebtedness secured by a lien encumbering any asset acquired by the
specified person.
"additional amounts" means the amount of any deduction or withholding for,
or on account of, any taxes of any relevant taxing jurisdiction which will at
any time be required on any payments we make on the notes.
"adjusted consolidated net income" means, for any person for any period, the
consolidated net income of that person for that period minus any amounts paid
or accrued as dividends on preferred stock for that period, plus the amount of
non-cash stock option expense (excluding the non-cash stock option expense if
it represents an accrual of or reserve for cash expenses in any future period
or amortization of a prepaid cash expense that was paid in a prior period) of
that person and its subsidiaries for the period if the amount of that non-cash
stock option expense was deducted in computing the consolidated net income for
that period.
"affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified person. For purposes of this definition, "control",
including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with", as used for any person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of that person, whether through the ownership of voting
securities, by agreement or otherwise; provided that beneficial ownership of
10% or more of the voting stock of a person will be considered to be control.
"asset sale" means:
(a) the sale, lease, conveyance or other disposition of any assets or
rights, including by way of a sale and leaseback, other than:
(i) in the ordinary course of business consistent with past
practices, or
(ii) sales or other dispositions of accounts receivable and notes
receivable, and related assets to the accounts receivable subsidiary in
accordance with the covenant described in "Sales of Accounts
Receivable";
(b) the issue or sale by us or any of our subsidiaries of equity
interests of any of our restricted subsidiaries:
(i) that have a fair market value in excess of euro 1.0 million or
(ii) for net proceeds in excess of euro 1.0 million;
should either clause (a) or (b) occur, whether in a single transaction or a
series of related transactions.
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The preceding paragraph will not prevent,
(a) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of us and our subsidiaries taken as a whole
from being governed by the provisions of the indenture described in "Change
of Control" and the provisions described in "Merger, Consolidation or Sale
of Assets" and not by the provisions of the asset sale covenant; and
(b) the following items from not being treated as asset sales:
(i) a transfer of assets by us to any of our wholly owned restricted
subsidiaries or by our wholly owned restricted subsidiary to us or to
another wholly owned restricted subsidiary;
(ii) an issuance of equity interests by any of our wholly owned
restricted subsidiaries to us or to another wholly owned restricted
subsidiary;
(iii) a restricted payment that is permitted by the covenant
described in "Material Covenants--Restricted Payments";
(iv) any disposition of damaged, worn out or otherwise obsolete
property in the ordinary course of business, so long as the property is
no longer necessary for the proper conduct of a permitted business;
(v) any disposition in one or more transactions of business
operations no longer necessary for the proper conduct of a permitted
business; provided, that the aggregate fair market value of the
dispositions since March 28, 2000 does not exceed euro 5.0 million in
the aggregate;
(vi) any sale or discount without recourse, other than recourse for
a breach of a representation or warranty, of accounts receivable
arising in the ordinary course of business, but only related to the
collection or compromise of those accounts; and
(vii) the incurrence of any permitted lien and the disposition of
assets under that permitted lien by any secured party under that
permitted lien.
"asset sale offer" means an offer to purchase notes and other indebtedness
with excess proceeds, at an offer price in cash equal to 100% of the principal
amount or accreted value of the notes and the other indebtedness, plus accrued
and unpaid interest on the notes and the other indebtedness to the date of
repurchase, in accordance with the procedures described in the indenture.
"attributable debt" relating to a sale and leaseback transaction means, at
the time of determination, the present value, discounted at the rate of
interest implicit in that transaction, determined under U.S. GAAP, of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in that sale and leaseback transaction, including any period
for which that lease has been extended or may, at the option of the lessor, be
extended.
"board" means:
(a) if we are a stock corporation at the relevant time, our board of
directors, management board or analogous body,
(b) if we are a limited liability company at the relevant time, our
management board or analogous body, if we have that body, and if we do not,
our management board or analogous body of our manager,
(c) if we are neither a corporation nor a limited liability company at
the relevant time, our management board or analogous body.
"borrowing base" means, as of the date of determination, an amount equal to
the sum, without duplication, of 50% of the net book value of our and our
restricted subsidiaries' accounts receivable which are not more than 60 days
past due. The net book value of those items will be determined on a
consolidated basis under U.S. GAAP and will be that reflected on our
consolidated balance sheet for the most recent fiscal quarter
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ending before the date of determination for which financial results are
available, but in no event ending more than 135 days before the date of
determination, provided the accounts receivable of an acquired business may be
included if the acquisition has been completed on or before the date of
determination.
"capital lease obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with U.S. GAAP. The amount of indebtedness represented
by a capital lease obligation will be the capitalized amount of the liability
for that obligation determined in accordance with U.S. GAAP, and the maturity
of that obligation will be the date of the last scheduled payment of rent or
any other amount due under the relevant lease before the first date upon which
that lease may be terminated by the lessee without payment of a penalty.
"capital stock" means:
(a) for a corporation, corporate stock,
(b) for an association or business entity, any and all shares,
interests, participations, rights or other equivalents, however designated,
of corporate stock,
(c) for a partnership or limited liability company, partnership or
membership interests, whether general or limited, and
(d) for any person, any other interest or participation that confers the
right to receive a share of the profits or losses of, or distributions of
assets of, the issuing person;
but excluding any debt security that is convertible into, or exchangeable for,
capital stock.
"capital stock sale proceeds" means the aggregate net cash proceeds received
by us from any common equity capital contribution or any issuance or sale of
any class of our capital stock after March 28, 2000.
"cash equivalents" means:
(a) securities having maturities of one year or less from the date of
acquisition issued or directly and fully guaranteed or insured by the
Federal government of the Federal Republic of Germany or by the Federal
government of the United States of America or any of their agencies or
instrumentalities, provided that the full faith and credit of the Federal
Republic of Germany or the United States of America is pledged in support
of those securities,
(b) certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition, bankers' acceptances with
maturities of one year or less from the date of acquisition and overnight
bank deposits with any commercial bank established under the laws of the
Federal Republic of Germany or the United States of America or any
subdivision of it having combined capital and surplus in excess of euro
500.0 million and a Thompson Bank Watch Rating or comparable rating of "B"
or better,
(c) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (a) or (b) above
entered into with any financial institution meeting the qualifications
specified in clause (b) above,
(d) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and with
maturities of one year or less from the date of acquisition, and
(e) money market funds at least 95% of the assets of which constitute
cash equivalents of the kinds described in clauses (a) through (d) of this
definition.
"change of control offer" means the offer to repurchase the notes required
under the covenant described in "Change of Control."
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"change of control payment" means a cash payment of a purchase price equal
to 101% of the principal amount of all notes purchased in a change of control
offer, plus accrued and unpaid interest, if any, on those notes to the date of
the repurchase.
"change of control payment date" means the date specified for payment in the
notice of a change of control required to be given under the covenant described
in "Change of Control."
"change of control" means:
(a) the sale, lease, transfer, conveyance or other disposition other
than by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all of the assets of us and our
restricted subsidiaries taken as a whole to any "person" as that term is
used in Section 13(d)(3) of the Exchange Act, other than any principal or
principals;
(b) the adoption of a plan relating to our liquidation or dissolution;
(c) any transaction, including any merger or consolidation, the result
of which is that any "person" as that term is used in Section 13(d)(3) of
the Exchange Act other than any principal or principals becomes directly or
indirectly the "beneficial owner" of more than 50% of our voting stock,
measured by voting power rather than number of shares;
(d) the first day on which a majority of the members of our board are
not continuing board members; or
(e) the amalgamation, merger or consolidation of us with another person
in which the holders of the capital stock representing our common equity
capital immediately before the amalgamation, merger or consolidation, would
not beneficially own, immediately after the amalgamation, merger or
consolidation, capital stock entitling those holders to 50% or more of all
votes, without consideration of the rights of any class of capital stock to
elect members of the management board or other analogous body by a separate
class vote, to which all holders of the capital stock of the person issuing
cash or securities in the amalgamation, merger or consolidation would be
entitled in the election of members of the management board or other
analogous body or in which members of our board, immediately before the
amalgamation, merger or consolidation, would not, immediately after the
amalgamation, merger or consolidation constitute a majority of the
management board or other analogous body of the person issuing cash or
securities in the amalgamation, merger or consolidation.
For purposes of this definition, "beneficial owner" has the meaning given in
Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
considered to have "beneficial ownership" of all securities that the person has
the right to acquire, whether that right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition.
"common depositary" means, for the notes issued in the form of one or more
global securities, the person designated as the common depositary by Euroclear
or Clearstream, which will initially be The Bank of New York, London Branch.
"consolidated cash flow" means, for any person for any period, the
consolidated net income of that person for that period minus non-cash items
increasing the consolidated net income for that period, plus, without
duplication:
(a) an amount equal to any extraordinary loss plus any net loss realized
in an asset sale, if the losses were deducted in computing the consolidated
net income,
(b) provision for taxes based on income or profits of that person and
its subsidiaries for that period, if the provision for taxes was included
in computing the consolidated net income,
(c) fixed charges of that person and its restricted subsidiaries for
that period,
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(d) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding the
non-cash expense if it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of that person and its subsidiaries for
that period if those depreciation, amortization and other non-cash expenses
were deducted in computing the consolidated net income,
on a consolidated basis and determined under U.S. GAAP.
The provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a subsidiary of a
person will be added to consolidated net income to compute consolidated cash
flow only to the extent and in the same proportion that the net income of the
subsidiary was included in calculating the consolidated net income of the
person and only if a corresponding amount would be permitted at the date of
determination to be distributed in the form of a dividend to the person by the
subsidiary without prior approval that has not been obtained, under the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that subsidiary or
its stockholders.
"consolidated net income" means, for any person for any period, the
aggregate of the net income of that person and its subsidiaries for that
period, on a consolidated basis, determined under U.S. GAAP; provided that:
(a) the net income, but not loss, of any person that is not a restricted
subsidiary or that is accounted for by the equity method of accounting will
be included only to the extent of the amount of dividends or distributions
paid in cash to the person or a restricted subsidiary of the person,
(b) the net income of any subsidiary will be excluded to the extent that
the declaration or payment of dividends or similar distributions by that
subsidiary of that net income is not at the date of determination permitted
without any prior governmental approval that has not been obtained or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that subsidiary or its stockholders,
(c) the net income of any person acquired in a pooling of interests
transaction for any period before the date of that acquisition will be
excluded, and
(d) the cumulative effect of a change in accounting principles will be
excluded.
"continuing board member" means, as of any date of determination, any member
of our board who:
(a) was a member of our board on March 28, 2000; or
(b) was nominated for election or elected to our board with the approval
of a majority of the continuing board members who were members of our board
at the time of that nomination or election.
"default" means any event that is or with the passage of time or the giving
of notice or both would be an event of default.
"disqualified stock" means any capital stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder of that capital stock, or upon the
happening of any event, matures or is mandatorily redeemable, under a sinking
fund obligation or otherwise, or is redeemable at the option of the holder of
that capital stock, in whole or in part, on or before the date that is 91 days
after March 31, 2010; provided however, that any capital stock that would
constitute disqualified stock solely because the holders of that capital stock
have the right to require the issuers of that capital stock to repurchase that
capital stock upon the occurrence of an event substantially similar to those
described in the definitions of change of control or asset sale will not be
treated as disqualified stock if the terms of that capital stock provide that
the issuers may not repurchase or redeem that capital stock under those
provisions unless the
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repurchase or redemption complies, if applicable, with the covenant described
in "Material Covenants--Restricted Payments."
"equity interests" means capital stock and all warrants, options or other
rights to acquire capital stock, but excluding any debt security that is
convertible into, or exchangeable for, capital stock.
"existing indebtedness" means our and our subsidiaries' indebtedness in
existence on March 28, 2000 after giving effect to the use of proceeds
contemplated by this prospectus, until those amounts are repaid.
"fair market value" means, for any asset or property, the price (after
taking into account any liabilities relating to those assets or property) which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of which is
under any compulsion to complete the transaction; provided, that the fair
market value of that asset or property will be determined conclusively by our
board acting in good faith, as shown by a resolution of our board delivered to
the trustee; and further provided, that any determination of fair market value
by our board required under the indenture will be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
international standing if the fair market value exceeds euro 5.0 million.
"fixed charges" means, for any person for any period, the sum, without
duplication, of:
(a) the consolidated interest expense of that person and its restricted
subsidiaries for that period, whether paid or accrued and whether or not
capitalized, including amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
related to capital lease obligations, the imputed interest on the
attributable debt, commissions, discounts and other fees and charges
incurred under letter of credit, bankers' acceptance or similar financings,
and net payments, if any, under hedging obligations,
(b) any interest expense on indebtedness of another person that is
guaranteed by that person or one of its restricted subsidiaries or secured
by a lien on assets of that person or one of its restricted subsidiaries,
whether or not that guarantee or lien is called upon, and
(c) all cash dividend payments or other distributions, and non-cash
dividend payments if a person is a subsidiary, on any class or series of
preferred stock of that person, on a consolidated basis,
in compliance with U.S. GAAP.
"fixed charge coverage ratio" means for any person for any period, the ratio
of the consolidated cash flow of that person for that period to the fixed
charges of that person for that period. In the event that the person or any of
its restricted subsidiaries incurs, assumes, guarantees or redeems any
indebtedness, other than revolving credit borrowings, or issues or redeems
preferred stock following the beginning of the period for which the fixed
charge coverage ratio is being calculated but before the date on which the
event for which the calculation of the fixed charge coverage ratio is made (the
"calculation date"), then the fixed charge coverage ratio will be calculated
giving pro forma effect to that incurrence, assumption, guarantee or redemption
of indebtedness, or that issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation:
(a) any acquisition made by us or any of our restricted subsidiaries,
including through mergers or consolidations and including any related
financing transactions, during the four-quarter reference period or
subsequent to this reference period and on or before the calculation date,
will be treated as if it occurred on, and will be given pro forma effect
from, the first day of the four-quarter reference period;
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(b) consolidated cash flow for that reference period will be calculated
without giving effect to clause (c) of the proviso provided in the
definition of consolidated net income;
(c) consolidated cash flow for that reference period will be calculated
giving pro forma effect to cost savings resulting from the acquisition if:
(i) the cost savings could then be reflected in pro forma financial
statements included in a registration statement complying with the
Securities Act, Regulation S-X and any interpretations of Regulation S-
X by the SEC;
(ii) we reasonably determine the cost savings are probable based
upon specifically identified actions that we have determined to take;
and
(iii) we deliver to the trustee:
(A) a certified copy of a resolution of our board approving the
determination, the specific actions to be taken and the delivery to
the trustee of the certification; and
(B) an officers' certificate signed by our chief financial
officer certifying that the savings have reasonably been determined
to be probable and explaining in reasonable detail the specific
actions to be taken, the cost savings to be achieved from each
action, and the amount, if any, of any related reduction in
consolidated cash flow resulting from the actions reasonably
determined to be probable;
(d) the consolidated cash flow attributable to discontinued operations,
as determined under U.S. GAAP, and operations or businesses disposed of
before the calculation date, will be excluded; and
(e) the fixed charges attributable to discontinued operations, as
determined under U.S. GAAP, and operations or businesses disposed of prior
to the calculation date, shall be excluded, but only to the extent that the
obligations giving rise to the fixed charges will not be obligations of the
person or any of its restricted subsidiaries following the calculation
date.
"government obligation" means direct non-callable obligations of, or non-
callable obligations guaranteed by (a) any member nation of the European Union
for the payment of which obligation or guarantee the full faith and credit of
the nation is pledged; provided, that the nation has a credit rating at least
equal to that of the highest rated member nation of the European Economic Area,
under the Oporto Agreement on the European Economic Area dated May 2, 1992 as
revised, or (b) the United States of America for the payment of which
obligation or guarantee the full faith and credit of the United States of
America is pledged.
"guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including by way of a pledge of assets or through
letters of credit or reimbursement agreements related to letters of credit, of
all or any part of any indebtedness.
"hedging obligations" means, for any person, the obligations of that person
under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements or other agreements or arrangements
designed to protect that person against fluctuations in interest rates, and
(2) currency exchange contracts, currency swap agreements or other
similar agreements or arrangements designed to protect that person against
fluctuations in currency exchange rates,
provided that those obligations are entered into solely to protect that person
against fluctuations in interest rates or currency exchange rates and not for
purposes of speculation.
"holders" means the holders of the notes.
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"indebtedness" means, for any person, without duplication:
(a) all indebtedness of that person for borrowed money,
(b) all indebtedness of that person documented by bonds, debentures,
notes or other similar instruments,
(c) all capital lease obligations and attributable debt of that person,
(d) all obligations of that person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement,
(e) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar instrument,
(f) guarantees and other contingent obligations for indebtedness
referred to in clauses (a) through (e) above and clauses (g) through (h)
below,
(g) all obligations of any other person of the type referred to in
clauses (a) through (f) which are secured by any lien on any property or
asset of that person, the amount of the obligation being valued as the
lesser of (i) the fair market value of that property or asset or (ii) the
amount of the secured obligation,
(h) all obligations under hedging obligations or other currency
agreements and interest swap agreements of that person, and
(i) all disqualified stock issued by that person with the amount of
indebtedness represented by the disqualified stock being equal to the
greater of its voluntary or involuntary liquidation preference and its
maximum fixed repurchase price, but excluding accrued dividends, if any.
For purposes of this definition, the "maximum fixed repurchase price" of
any disqualified stock which does not have a fixed repurchase price will be
calculated in accordance with the terms of the disqualified stock as if the
disqualified stock were purchased on any date on which indebtedness will be
required to be determined under the indenture, and if the price is based
upon, or measured by, the fair market value of the disqualified stock;
except, the balance that constitutes an accrued expense or trade payable, if
and to the extent any of the preceding, other than letters of credit,
attributable debt and hedging obligations, would appear as a liability upon a
balance sheet of the person prepared in compliance with U.S. GAAP.
The amount of any indebtedness outstanding as of any date will be:
(a) the accreted value of the indebtedness, should there be any
indebtedness issued with original issue discount, and
(b) the principal amount of the indebtedness, together with any interest
on the indebtedness that is more than 30 days past due, if there is any
other indebtedness.
"indenture" means the indenture governing the notes.
"investments" means, for any person, all investments by that person in other
persons, including affiliates of that person, in the forms of direct or
indirect loans, including guarantees of indebtedness or other obligations,
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of indebtedness, equity
interests or other securities and all items that are or would be classified as
investments on a balance sheet prepared in compliance with U.S. GAAP. If we or
any of our subsidiaries sell or otherwise dispose of any equity interests of
any of our direct or indirect subsidiaries so that, after giving effect to that
sale or disposition, the person is no longer our subsidiary, we will be treated
as if we have made an investment on the date of the sale or disposition equal
to the fair market value of the equity interests of the subsidiary not sold or
disposed of in an amount determined and documented as provided for valuation of
non-cash restricted payments under the covenant described in "Material
Covenants--Restricted Payments."
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"lien" means, for any asset, any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind relating to that asset, whether or not
filed, recorded or otherwise perfected under applicable law, including any
conditional sale or other title retention agreement, any lease in the nature of
it, any option or other agreement to sell or give a security interest in and
any filing of or agreement to give any financing statement under the Uniform
Commercial Code or equivalent statutes of any jurisdiction.
"liquidated damages" means all liquidated damages then owed to holders under
the registration rights agreement.
"management investors" means the members of our board and our or our
subsidiaries' officers and employees who owned our capital stock on March 28,
2000.
"net income" means, for any person for any period, the net income or loss of
that person, determined under U.S. GAAP and before any reduction for dividends
on preferred stock, but excluding any gain, but not loss, with any related
provision for taxes on that gain, but not loss, realized on:
(i) any asset sale, including dispositions related to sale and leaseback
transactions,
(ii) the disposition of any securities by that person or any of its
restricted subsidiaries or the extinguishment of any indebtedness of that
person or any of its restricted subsidiaries, and
(iii) any extraordinary or nonrecurring gain, but not loss, with any
related provision for taxes on that extraordinary or nonrecurring gain, but
not loss, of that person for that period.
"net proceeds" means the aggregate proceeds received by us or any of our
restricted subsidiaries for any asset sale, including any cash received upon
the sale or other disposition of any non-cash consideration received in any
asset sale, net of the direct costs for that asset sale, including legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result of that asset sale, any taxes paid or
payable as a result of that asset sale, after taking into account any available
tax credits or deductions and any tax sharing arrangements, and any reserve for
adjustment relating to the sale price of that asset or assets established under
U.S. GAAP.
"new credit facility" means, for us, at any time, any credit facility or
commercial paper facility between us and any lender, whether in place of or
along with our senior credit facilities or any new credit facility and
providing for indebtedness:
(a) incurred in compliance with clause (a) of the definition of
permitted indebtedness and
(b) providing for revolving credit loans, term loans, receivables
financing, including through the sale of receivables to those lenders or to
special purpose entities formed to borrow from those lenders against those
receivables, or letters of credit.
"non-recourse debt" means, for any person, indebtedness or that portion of
indebtedness:
(a) for which the specified person:
(i) provides no credit support of any kind, including any
undertaking, agreement or instrument that would constitute
indebtedness,
(ii) is not directly or indirectly liable as a guarantor or
otherwise, or
(iii) does not constitute the lender; and
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(b) no default for which, including any rights that the holders of the
indebtedness may have to take enforcement action against an unrestricted
subsidiary, would permit, upon notice, lapse of time or both, any holder of
any other indebtedness, other than the notes, of the specified person to
declare a default on the other indebtedness or cause the payment of the
other indebtedness to be accelerated or payable before its stated maturity;
and
(c) for which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the specified person.
"obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any indebtedness.
"officers' certificate" means a certificate signed by any two members of our
board.
"opinion of counsel" means a written opinion from legal counsel who is
acceptable to the trustee and who may be an employee of or counsel to us or the
trustee.
"permitted business" means any of the businesses and any other businesses
ancillary or complementary to the businesses engaged in by us and our
respective restricted subsidiaries on March 28, 2000.
"permitted indebtedness" means:
(a) the incurrence by us or any restricted subsidiary of indebtedness
under a term or revolving credit facility or letters of credit (with
letters of credit valued at a principal amount equal to the maximum
potential liability of us and our subsidiaries under those letters of
credit), under our senior credit facilities or a new credit facility;
provided, that the aggregate principal amount of all indebtedness
outstanding under all those facilities after giving effect to the
incurrence does not exceed the greater of euro 25.0 million or the
borrowing base;
(b) the incurrence by us and our subsidiaries of existing indebtedness;
(c) the incurrence by us of indebtedness represented by the notes;
(d) the incurrence by us or any of our restricted subsidiaries of
indebtedness represented by capital lease obligations or purchase money
indebtedness, at any time outstanding in an aggregate principal amount,
including all permitted refinancing indebtedness incurred to refund,
refinance or replace any indebtedness incurred under this clause (d), not
to exceed euro 3.0 million;
(e) the incurrence by us or any of our restricted subsidiaries of
permitted refinancing indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace indebtedness, other than
intercompany indebtedness, that was permitted by the indenture to be
incurred under the covenant described in "Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Equity" or clauses (b), (c), (d),
(e), (h) or (p) of this paragraph;
(f) the incurrence by us or any of our restricted subsidiaries of
indebtedness owing to and held by any of our wholly owned restricted
subsidiaries or owing to and held by us; provided that
(i) if we are the obligor on that indebtedness, the indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations on the notes; and
(ii) (A) any subsequent issuance or transfer of equity interests
that results in that indebtedness being held by a person other than us
or any of our wholly owned restricted subsidiaries will be treated as
an incurrence of the indebtedness by us or the restricted subsidiary
that was not permitted by this clause (f); and
(B) any transfer of any interest in that indebtedness to a person
other than us or any of our wholly owned restricted subsidiaries
will be treated as an incurrence of the indebtedness by us or the
restricted subsidiary that was not permitted by this clause (f);
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(g) the incurrence by us or any of our restricted subsidiaries of
hedging obligations incurred for any indebtedness or obligation that is
permitted to be outstanding by the terms of the indenture;
(h) the incurrence by us or any restricted subsidiary of additional
indebtedness in an aggregate principal amount or accreted value, as
applicable, at any time outstanding, including all permitted refinancing
indebtedness incurred to refund, refinance or replace any indebtedness
incurred under this clause (h), not to exceed euro 5.0 million;
(i) the incurrence by our unrestricted subsidiaries of indebtedness that
is non-recourse debt to us and our restricted subsidiaries; provided, that
upon the occurrence of any event that causes that indebtedness to cease to
be non-recourse debt to us and our restricted subsidiaries, that event will
be treated as an incurrence of the indebtedness by our restricted
subsidiary that was not permitted by this clause (i);
(j) the incurrence of indebtedness of us and our restricted
subsidiaries, including letters of credit, relating to performance bonds,
bankers' acceptances, letters of credit, performance, bid, surety or appeal
bonds or similar bonds and completion guarantees provided by us and our
restricted subsidiaries in the ordinary course of their business and
consistent with past practices and which do not secure other indebtedness;
(k) indebtedness of us and our restricted subsidiaries arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, incurred in the disposition of any business, assets or
any of our subsidiaries, other than guarantees of indebtedness incurred by
any person acquiring all or any portion of the business, assets or
subsidiary for the purpose of financing that acquisition, in an aggregate
principal amount not to exceed the gross proceeds actually received by us
or any of our restricted subsidiaries in the disposition;
(l) indebtedness of us or a restricted subsidiary owed to any person,
including letters of credit obligations for the benefit of that person,
related to workers' compensation, health, disability or other employee
benefits or property, casualty or liability insurance provided by that
person to us or the restricted subsidiary, under reimbursement or
indemnification obligations to that person, incurred in the ordinary course
of business and consistent with past practices;
(m) the guarantee by us or any restricted subsidiary of indebtedness of
us or any of our subsidiaries that was permitted to be incurred by another
provision of the covenant described in "Material Covenants--Incurrence of
Indebtedness and Issuance of Preferred Equity;"
(n) indebtedness incurred in a transaction permitted under the covenant
described in "Sales of Accounts Receivable;"
(o) indebtedness of us or any of our restricted subsidiaries convertible
into our capital stock issued to our employees or employees of the
restricted subsidiary in an amount not to exceed euro 500,000 in the
aggregate; and
(p) our indebtedness in an aggregate amount, including all permitted
refinancing indebtedness incurred to refund, refinance or replace any
indebtedness incurred under this clause (p), not to exceed the amount of
capital stock sale proceeds received since March 28, 2000 from the issuance
and sale of our capital stock, other than disqualified stock; provided,
that the amount of those capital stock sale proceeds utilized to support
the incurrence of indebtedness under this clause (p) will be excluded from
any calculation under clause (3)(B) of the first paragraph or clause (7) of
the second paragraph of the covenant described in "Material Covenants--
Restricted Payments."
"permitted investments" means:
(a) any investment in us or in any of our restricted subsidiaries that
is engaged in a permitted business;
(b) any investment in cash or cash equivalents;
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(c) any investment by us or any of our restricted subsidiaries in a
person, if because of or related to that investment:
(i) person becomes our restricted subsidiary and is engaged in a
permitted business; or
(ii) that person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, us or any of our restricted subsidiaries and is
engaged in a permitted business;
(d) any investment made as a result of the receipt of non-cash
consideration from an asset sale that was made in compliance with the
covenant described in "Material Covenants--Asset Sales" or from a sale that
was made in compliance with the requirements described in "Sales of
Accounts Receivable";
(e) any acquisition or any portion of any acquisition of assets or
property made solely in exchange for the issuance of our equity interests,
other than disqualified stock;
(f) any investment by us or any of our wholly owned restricted
subsidiaries involving the contribution of assets to a wholly owned
restricted subsidiary in exchange for the incurrence by the wholly owned
restricted subsidiary of indebtedness owed to us or any wholly owned
restricted subsidiary;
(g) investments in an accounts receivable subsidiary made relating to
the formation of the accounts receivable subsidiary;
(h) investments in the form of intercompany indebtedness permitted under
clause (f) of the definition of permitted indebtedness;
(i) investments in existence on March 28, 2000; and
(j) other investments having an aggregate fair market value, measured on
the date that investment was made and without giving effect to subsequent
changes in value, when taken with all other investments made under this
clause (j) that are at the time outstanding, not to exceed euro 15.0
million.
"permitted liens" means:
(a) liens on assets or property of us or any of our restricted
subsidiaries to secure senior debt of us or that restricted subsidiary
incurred under clauses (a), (g) and (j) of the definition of permitted
indebtedness;
(b) liens in favor of us or any of our restricted subsidiaries;
(c) liens on assets or property of a person existing at the time that
person is merged into or consolidated with one of us or any of our
subsidiaries; provided, that those liens were in existence before the
contemplation of that merger or consolidation and do not extend to any
assets or property other than those of the person merged into or
consolidated with us or any of our subsidiaries;
(d) liens on assets or property existing at the time of acquisition of
those assets or property by us or any of our subsidiaries; provided, that
those liens were in existence before the contemplation of that acquisition;
(e) liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(f) liens to secure indebtedness represented by capital lease
obligations or purchase money indebtedness permitted by clause (d) of the
definition of permitted indebtedness; provided, that those liens cover only
assets or property acquired with that indebtedness;
(g) liens existing on March 28, 2000;
(h) liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided, that any reserve or other appropriate provision as will be
required in conformity with U.S. GAAP will have been made for those taxes
assessments or claims;
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(i) liens on assets or property of unrestricted subsidiaries that secure
indebtedness of unrestricted subsidiaries that is non-recourse debt to us
and our restricted subsidiaries;
(j) liens incurred by us or any of our restricted subsidiaries in the
ordinary course of our or the restricted subsidiary's business for
obligations that do not exceed euro 2.5 million at any one time outstanding
that:
(i) are not incurred relating to the borrowing of money or the
obtaining of advances or credit, other than trade credit in the
ordinary course of business, and
(ii) do not in the aggregate materially detract from the value of
the assets or property or materially impair the use of the assets or
property in the operation of business of us or that subsidiary;
(k) liens relating to workers' compensation obligations and general
liability exposure of us or any of our restricted subsidiaries;
(l) liens arising by reason of any judgment, decree or court order, if
not otherwise resulting in an event of default;
(m) liens arising by reason of easements, rights of way, zoning
restrictions, leases or subleases to a third party and other similar
charges or encumbrances on real property, not interfering in any material
respect with the ordinary conduct of the business of us or any of our
restricted subsidiaries;
(n) liens imposed by law, including carriers', warehousemen's,
materialmen's and mechanics' liens, for sums not yet due or being contested
in good faith by appropriate proceedings if a reserve or any other
provision required under U.S. GAAP will have been made; and
(o) liens arising by operation of law in favor of depositary banks and
collecting banks, incurred in the ordinary course of business.
"permitted refinancing indebtedness" means any indebtedness of us or any of
our restricted subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
indebtedness, other than intercompany indebtedness, of us or any of our
restricted subsidiaries that was permitted to be incurred by the indenture;
provided, that:
(a) the principal amount or accreted value, if applicable, of that
permitted refinancing indebtedness does not exceed the principal amount or
accreted value, if applicable, of, plus accrued interest on, the extended,
refinanced, renewed, replaced, defeased or refunded indebtedness plus the
amount of reasonable expenses paid related to the incurrence of the
permitted refinancing indebtedness;
(b) the permitted refinancing indebtedness has a final maturity date
later than the final maturity date of, and has a weighted average life to
maturity equal to or greater than the weighted average life to maturity of,
the extended, refinanced, renewed, replaced, defeased or refunded
indebtedness;
(c) if the extended, refinanced, renewed, replaced, defeased or refunded
indebtedness is subordinated in right of payment to the notes, the
permitted refinancing indebtedness is subordinated in right of payment to
the notes on terms at least as favorable to the holders of the notes as
those included in the documentation governing the extended, refinanced,
renewed, replaced, defeased or refunded indebtedness; and
(d) the indebtedness is incurred only by persons who are the obligors on
the extended, refinanced, renewed, replaced, defeased or refunded
indebtedness.
"permitted secured indebtedness" means any indebtedness of us or any of our
restricted subsidiaries permitted to be incurred or outstanding under the
indenture which is secured by a permitted lien.
"preferred stock" as applied to the capital stock of any person, means
capital stock of any class or classes, however designated, which is preferred
for the payment of dividends, or for the distribution of assets upon any
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voluntary or involuntary liquidation or dissolution of that person, over shares
of capital stock of any other class of that person.
"principals" means:
(a) Stefan Roever, Boris Anderer, Michael Janssen, Achim Schlumpberger,
Angelo Maestrini, Michael Schumacher and the management investors;
(b) any related party of a person referred to in clause (a); and
(c) any person or group of persons which holds, directly or indirectly,
equity interests in any person so long as a majority of the voting stock in
that person is beneficially owned by the persons referred to in clauses (a)
and (b).
"purchase money indebtedness" means our and our restricted subsidiaries'
indebtedness incurred in the normal course of business for the purpose of
financing all or any part of the purchase price, or the cost of installation,
construction or improvement, of property or equipment.
"qualified equity offering" means any private or public offering of our
equity interests, other than our disqualified stock; provided, that the net
cash proceeds of that offering:
. are included as, or contributed to us as, our common equity capital; and
. exceed euro 75.0 million, for a public offering, or euro 50.0 million
for a private offering.
"registration rights agreement" means the registration rights agreement
relating to the notes between us and West LB Panmure Limited, as the initial
purchaser for the benefit of the initial purchaser and the holders of notes, as
it may be amended or modified in compliance with its terms.
"related party" means for any principal:
(a) the principal, any direct or indirect wholly owned subsidiary of the
principal, and any officer, director or employee of the principal or any
wholly owned subsidiary of the principal; or
(b) any member of the "immediate family" as that term is used in Rule
16a-1(e) under the Exchange Act of the principal or the officers, directors
and employees referred to in clause (a) above; or
(c) any trust, corporation or partnership 100%-in-interest of the
beneficiaries, stockholders or partners of which consists of one or more of
the persons described in clause (a) or (b) above.
"relevant taxing jurisdiction" means the Federal Republic of Germany or any
jurisdiction in which we are or any successor to us is organized or is
otherwise resident for tax purposes or any political subdivision of Germany or
that jurisdiction or any authority having power to tax in Germany or that
jurisdiction or any jurisdiction from or through which payment is made.
"restricted investment" means an investment other than a permitted
investment permitted under clause (8) of the second paragraph of the covenant
described in "Material Covenants--Restricted Payments."
"restricted payment" means to:
. declare or pay any dividend or make any other payment or distribution on
account of our or our subsidiaries' equity interests, including any
payment related to any merger or consolidation or to the direct or
indirect holders of Equity Interests in their capacity as such, other
than dividends, payments or distributions payable:
. in our equity interests, other than our disqualified stock,
. to us, or
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. to any of our restricted subsidiaries;
. purchase, redeem or otherwise acquire or retire for value, including in
any merger or consolidation, any of our or our direct or indirect
parent's equity interests;
. make any payment on or relating to, or purchase, redeem, defease or
otherwise acquire or retire for value any indebtedness that is by its
terms subordinated to the notes (other than the purchase, repurchase or
other acquisition of that indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, due
within one year of the date of that purchase, repurchase or
acquisition), except a payment of interest or principal at stated
maturity; or
. make any restricted investment.
"restricted subsidiary" of a person means any subsidiary of that person that
is not an unrestricted subsidiary.
"senior credit facilities" means:
. the credit agreement dated as of July 27, 1999 between us and Deutsche
Bank AG providing for up to DM 60.0 million revolving credit borrowings,
including any related notes, guarantees, collateral documents,
instruments and agreements executed in that agreement,
. the credit agreement in effect on March 28, 2000, by and between us and
Kreissparkasse Boblingen, providing for up to DM 5.5 million revolving
credit borrowings and other loans, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
that agreement,
. the credit agreement dated as of December 20, 1999, by and between us
and Volksbank AG im Kreis Boblingen, providing for up to DM 5.0 million
revolving credit borrowings and other loans, including any related
notes, guarantees, collateral documents, instruments and agreements
executed in that agreement, and
. the credit agreement in effect on March 28, 2000 between us and Dresdner
Bank AG, providing for up to DM 5.0 million revolving credit borrowings
and other loans including any related notes, guarantees, collateral
documents, instruments and agreements executed in that agreement.
as they may be amended, modified, renewed, refunded, replaced or refinanced.
"senior debt" means:
. all indebtedness outstanding under our senior credit facilities or any
new credit facility and all hedging obligations related to that
indebtedness,
. any other indebtedness permitted to be incurred under the terms of the
indenture, unless the instrument under which that indebtedness is
incurred expressly provides that it is not superior, or is subordinated,
in right of payment to the notes, and
. all obligations related to the preceding.
Senior debt will not include:
. any indebtedness or obligation which is subordinate or junior in any
respect, other than as a result of the indebtedness being unsecured, to
any other indebtedness or obligation,
. any liability for taxes owed or owing,
. any of our indebtedness to any of our subsidiaries or other affiliates
or any indebtedness of any of our subsidiaries or other affiliates to
us,
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. any account payable or other liability to trade creditors arising in the
ordinary course of business,
. any indebtedness that is incurred in violation of the indenture, or
. any capital stock.
"significant subsidiary" means any subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, as that
Regulation is in effect on March 28, 2000.
"stated maturity" means, with for any payment of interest or principal on
any indebtedness, the date on which that payment of interest or principal was
scheduled to be paid in the original documentation governing that Indebtedness,
excluding any contingent obligations to repay, redeem or repurchase that
interest or principal before the date originally scheduled for the making of
that payment.
"subsidiary" means, for any person:
. any corporation, association or other business entity of which more than
50% of the total voting power of shares of capital stock entitled to
vote in the election of directors, managers or trustees of that person
is at the time owned or controlled, directly or indirectly, by that
person and one or more of the other subsidiaries of that person as
applicable, and
. any partnership:
. the sole general partner or the managing general partner of which is
that person or a subsidiary of that person, or
. the only general partners of which are that person and of one or
more subsidiaries of that person, as applicable.
"unrestricted subsidiary" means any of our direct or indirect subsidiaries
that is designated as our unrestricted subsidiary in compliance with the
covenant described in "Material Covenants--Designations of Unrestricted
Subsidiaries."
"U.S. GAAP" means, at any date of determination, generally accepted
accounting principles as in effect in the United States of America on the date
of determination, consistently applied for all periods.
"voting stock" of any person as of any date means the capital stock of that
person that is at the time entitled to vote in the election of the management
board or analogous body of that person.
"weighted average life to maturity" means, when applied to any indebtedness
at any date, the number of years obtained by dividing:
. the sum of the products obtained by multiplying:
. the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, by:
. the number of years, calculated to the nearest one-twelfth, that
will elapse between that date and the making of that payment; by:
. the then outstanding principal amount of that indebtedness.
"wholly owned restricted subsidiary" of any person means a restricted
subsidiary of that person all of the outstanding capital stock or other
ownership interests of which, other than directors' qualifying shares and
capital stock or other ownership interests owned by officers or agents of that
person solely in their capacity as its officers or agents, is at the time owned
by that person or by that person and one or more wholly owned restricted
subsidiaries of that person.
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FORM OF THE NOTES, CLEARANCE AND SETTLEMENT
The exchange notes will be represented by one or more notes in registered,
global form, or global notes deposited with The Bank of New York, London
Branch, as the common depositary for Morgan Guaranty Trust Company of New York,
Brussels office, as the Euroclear operator of Euroclear and Clearstream, and
registered in the name of a nominee of the common depositary. The notes will
not be eligible for clearance through The Depository Trust Company. Except in
the limited circumstances described below, notes in certificated form will not
be issued.
Depositary Procedures
We understand that Euroclear and Clearstream hold securities for their
account holders and facilitate the clearance and settlement of securities
transactions by electronic book-entry transfer between their own account
holders, thereby eliminating the need for physical movements of certificates
and any risk from lack of simultaneous transfers of securities. Euroclear and
Clearstream provide various services including:
. safekeeping;
. administration;
. clearance and settlement of internationally traded securities; and
. securities lending and borrowing.
Euroclear and Clearstream can settle securities transactions in more than 30
currencies, including the euro. Euroclear and Clearstream also deal with
domestic securities markets in several countries through an established
electronic bridge between their two systems across which their account holders
may settle trades with each other. Account holders in both Euroclear and
Clearstream are world-wide financial institutions including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to both Euroclear and Clearstream is available to
other institutions that clear through or maintain a custodial relationship with
an account holder of either system. An account holder's overall contractual
relations with either Euroclear or Clearstream are governed by the rules and
operating procedures of Euroclear or Clearstream and any applicable laws. Both
Euroclear and Clearstream act under these rules and operating procedures only
on behalf of their account holders, and have no record of or relationship with
any persons who are not direct account holders.
Investors who hold accounts with the Euroclear operator or Clearstream may
acquire, hold and transfer security entitlements in each global note against
the Euroclear operator or Clearstream and its property by book-entry to
accounts with the Euroclear operator or Clearstream, which have accounts with
the common depositary and subject at all times to the procedures and
requirements of Euroclear or Clearstream, as applicable. Security entitlement
means the rights and property interests of an account holder against its
securities intermediary under the applicable law in or relating to a security,
including any ownership, co-ownership, contractual or other rights.
Investors who do not have accounts with the Euroclear operator or
Clearstream may acquire, hold and transfer security entitlements relating to a
global note against the securities intermediary and its property with which the
investors hold accounts by book-entry to accounts with the securities
intermediary, which in turn, may hold a security entitlement related to the
global note through the Euroclear operator or Clearstream.
Investors electing to acquire security entitlements relating to a global
note through an account with the Euroclear operator or Clearstream or some
other securities intermediary must follow the settlement procedures of their
securities intermediary for the settlement of new issues of securities.
Security entitlement relating to a global note to be acquired through an
account with the Euroclear operator or Clearstream will be credited to that
account as of the settlement date against payment in euro for value as of the
settlement date.
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Investors electing to acquire, hold or transfer security entitlements
relating to a global note through an account with the Euroclear operator,
Clearstream or some other securities intermediary other than in the initial
distribution of the notes must follow the settlement procedures of their
securities intermediary relating to the settlement of secondary market
transaction in securities.
Except as described below, owners of interests in the global notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners of
holders of notes. So long as the common depositary is the registered owner or
holder of a global note, that party will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
indenture and the notes. Each person owning a beneficial interest in a global
note must rely on the procedures of Euroclear and Clearstream and their account
holders to exercise any rights and remedies of a holder of notes under the
indenture governing the notes. Payments of principal and interest on the global
notes will be made to the common depositary on behalf of Euroclear and
Clearstream as the registered owners of the global notes.
The laws of some countries and some states in the United States require that
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a global note to
those people may be limited to that extent. Because Euroclear and Clearstream
can act only on behalf of their account holders, the ability of a person having
beneficial interests in a global note to pledge those interests to persons or
entities that do not participate in the relevant clearing system, take any
actions relating to those interests, may be affected by the lack of a physical
certificate documenting those interests.
Payments on the Global Notes
Payments for the principal of, premium, if any, and interest (including
Additional Amounts, if any) on a global note will be made through a paying
agent appointed in compliance with the indenture governing the notes and will
be payable to the common depositary on behalf of Euroclear and Clearstream,
each in its capacity as the registered holder of the notes under the indenture.
Under the terms of the indenture governing the notes, BROKAT and the Trustee
will treat the persons in whose names the notes, including the global notes,
are registered as the owners of the notes for the purpose of receiving payments
and for any and all other purposes. Consequently, none of BROKAT, the initial
purchaser, the Trustee, or any agent of BROKAT, the initial purchaser or the
Trustee has or will have any responsibility or liability for
. any aspect or accuracy of the records of the relevant clearing system or
the holders of accounts in that clearing system, relating to payments
made on account of beneficial ownership interests in the global notes,
or for maintaining, supervising or reviewing any records of that
clearing system or account holder relating to beneficial ownership
interests in the global notes, or
. any other manner relating to the actions and practices of the relevant
clearing system or the holders of accounts in that clearing system.
Euroclear or Clearstream upon receipt of a payment, will immediately credit
the accounts of their own relevant account holders, with payments in amounts
proportionate to their holdings in principal amount of beneficial interest in
the relevant global note, as shown on the records of Euroclear or Clearstream.
We expect that payments by those account holders to the beneficial owners of
global notes will be governed by standing instructions and customary practices
and will be the responsibility of those account holders. Neither BROKAT nor the
Trustee will have responsibility or liability for the payment of amounts owing
for beneficial interests in the global notes held by the common depositary on
behalf of Euroclear and Clearstream.
Transfers of Global Securities and Interests in Those Transfers
Unless definitive securities are issued, the global notes may be
transferred, in whole and not in part, only by Euroclear and Clearstream to the
common depositary or by the common depositary to Euroclear or Clearstream, as
applicable, or to another nominee or successor of each of them or a nominee of
that successor.
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Transfers of beneficial interests in the global notes will be subject to the
applicable rules and procedures of Euroclear and Clearstream and their own
account holders and intermediaries. Any secondary market-trading activity in
beneficial interests in the global notes is expected to occur through the
account holders and intermediaries or Euroclear and Clearstream, and the
securities custody accounts of investors will be credited with the holdings
against payment in same-day funds on the settlement date.
No service charge will be made for any registration of transfer or exchange
of notes, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable relating to the registration of
transfer or exchange of notes.
Although Euroclear and Clearstream have agreed to follow procedures to
facilitate transfers of interests in the global notes among account holders in
Euroclear and Clearstream, they are under no obligation to perform or to
continue to perform those procedures, and those procedures may be discontinued
at any time. None of BROKAT, the initial purchaser, the Trustee, nor our agent,
the initial purchaser or the Trustee has or will have any responsibility for
the nonperformance or misperformance--because of insolvency, mistake,
misconduct--by Euroclear or Clearstream or their account holders or
intermediaries of their obligations under the rules and procedures governing
their operations.
We understand that under existing industry practices, if either we request
or the Trustee requests any action of holders of notes, or if an owner of a
beneficial interest in a global note desires to give instructions or take an
action that a holder is entitled to give or take under the indenture governing
the notes, Euroclear or Clearstream would authorize their account holders
owning the relevant beneficial interest to give instructions or take that
action, and those account holders would authorize intermediaries to give
instructions or take that action, or would otherwise act upon the instructions
of the intermediaries.
We understand that, under the existing practices of Euroclear or
Clearstream, if less than all of the class of notes are to redeemed at any
time, Euroclear or Clearstream will credit their own account holders' accounts
on a proportionate basis, with adjustments to prevent fractions, or on any
other basis as Euroclear or Clearstream determines to be fair and appropriate,
provided that no beneficial interests of less than (Euro) 1,000 may be redeemed
in part.
Certificated Notes
Beneficial interests in a global note are exchangeable for definitive notes
in registered certificated form only if:
. Euroclear and Clearstream are unwilling or unable to continue as
depositary for the global note and, upon that occurrence, BROKAT fails
to appoint a successor depositary within 90 days; or
. there shall have occurred and be continuing a default or an Event of
Default relating to the notes. Certificated notes delivered in exchange
for any global note or beneficial interest therein will be registered in
the names, and issued in any approved denominations, requested by or on
behalf of Euroclear or Clearstream in conformity with their customary
procedures. The notes may not be issued in bearer form.
If there is an issuance of certificated notes in the limited circumstances
described above, the holder of a certificated note may transfer the note by
surrendering it at our offices or agencies maintained for this purpose within
the City and State of New York and London, England, and at the offices of the
transfer agents in Luxembourg. Until otherwise designated by us, our office or
agency in the City and State of New York and London, England, will be the
offices of the Trustee and London Paying Agent maintained for this purpose.
If there is a partial transfer of a holding of notes, represented by one
certificate, or partial redemption of a holding represented by one certificate,
a new certificate shall be issued to the transferee for the part transferred or
redeemed. A further new certificate for the balance of the holding not
transferred or redeemed will be issued
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to the transferor, provided that no certificate in denominations less than
(Euro)1,000 will be issued. Each new certificate to be issued will be available
for delivery within ten business days at the office of the Trustee or the
transfer agent in Luxembourg. The cost of preparing, printing, packaging and
delivering the certificated notes will be borne by us.
BROKAT will not be required to register the transfer or exchange of
certificated notes for a period of 15 days preceding
. the due date of any payment of principal of or interest on the notes or
. a selection of notes to be redeemed.
Also, BROKAT is not required to register the transfer or exchange of any
notes selected for redemption. If any certificated note is transferred, the
Trustee may require a holder to furnish appropriate endorsements and transfer
documents, and BROKAT may require a holder to pay any taxes and fees required
by law and permitted by the indenture and the notes.
If certificated notes are issued, and a holder of a certificated note claims
that the note has been lost, destroyed or wrongfully taken or if the note is
mutilated and surrendered to the Trustee or, for so long as the notes are
listed on the Luxembourg Stock Exchange, at the specified offices of the
transfer agents in Luxembourg, BROKAT will issue and the Trustee will
authenticate a replacement note if the Trustee's and BROKAT's requirements are
met. If required by the Trustee or BROKAT, an indemnity bond must be sufficient
in the judgment of both to protect BROKAT, the Trustee or any paying agent or
authenticating agent appointed under the indenture from any loss which any of
them may suffer if a note is replaced. BROKAT may charge for its expenses in
replacing a note.
If any mutilated, destroyed, lost or stolen note has become or is about to
become due and payable, or is about to be redeemed or purchased by BROKAT under
the provisions of the indenture governing the notes, BROKAT in its discretion
may, instead of issuing a new note, pay, redeem or purchase that note.
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TAXATION
United States Federal Income Taxation
The following describes the material United States federal income tax
consequences that may be relevant to the purchase, ownership and disposition of
notes by a holder. This summary is not a comprehensive description of all of
the tax considerations that may be relevant to a decision to purchase the
notes. In particular, the following discussion deals only with U.S. holders who
purchase the notes at the issue price as part of the initial distribution and
will hold the notes as capital assets. The discussion does not address the tax
treatment of holders that are subject to special tax rules, such as banks, tax-
exempt entities, insurance companies, dealers in securities or currencies,
traders in securities electing to mark the securities to market, persons that
hold notes as part of an integrated investment, including a straddle, comprised
of notes and one or more other positions, and persons that have a "functional
currency" other than the U.S. dollar. The discussion also applies only to a
holder who is a citizen or resident of the United States or a United States
corporation or that otherwise is subject to United States taxation on a net
income basis for the notes.
The summary is based on laws, regulations, rulings and decisions in effect
on the date of this filing which are subject to change. Prospective purchasers
should consult their own advisers about the tax consequences of an investment
in the notes in light of their particular circumstances, including the effect
of any other federal, state, local or other non-U.S. law that might apply.
Interest
Interest on the notes will be includable in a U.S. holder's income at the
time the interest is accrued or received, based on the holder's method of tax
accounting.
A U.S. holder that uses the cash method of accounting for tax purposes will
realize interest income equal to the U.S. dollar value of the interest payment,
based on the spot rate of exchange on the date of receipt, regardless of
whether the payment in fact is converted into U.S. dollars. The U.S. holder
will not have exchange gain or loss on the interest payment but may have
exchange gain or loss when it disposes of any foreign currency received.
A U.S. holder that uses the accrual method of accounting for tax purposes
will determine the amount of interest income allocable to an accrual period in
the relevant foreign currency and then will translate that amount into U.S.
dollars at the average exchange rate in effect during the interest accrual
period (or portion of it within the U.S. holder's taxable year), unless the
holder has made the election described below. An accrual basis holder may make
an election (which must be applied consistently to all debt instruments from
year to year and may not be revoked without the consent of the Internal Revenue
Service) to translate accrued interest income at the spot rate of exchange on
the last day of the accrual period (or the last day of the taxable year within
that accrual period if the accrual period includes more than one taxable year),
or at the spot rate on the date of receipt if that date is within five business
days of the last day of the accrual period.
A U.S. holder who uses the accrual method of accounting for tax purposes
will recognize foreign currency gain or loss on the receipt of an interest
payment if the spot rate in effect on the date the payment is received differs
from the rate applicable to an accrual of that interest. This foreign currency
gain or loss will be treated as ordinary income or loss, and generally will not
be treated as an adjustment to interest income.
Sale and Other Dispositions of the Notes
Upon the sale, exchange, retirement or other taxable disposition of a note,
a U.S. holder generally will recognize gain or loss equal to the difference
between the amount realized less any accrued interest, which will be taxable as
interest income and the holder's tax basis in that note. If a U.S. holder
receives foreign currency relating to the sale, exchange or retirement of a
note, the amount realized will be the U.S. dollar equivalent of the amount
received, calculated at the spot rate in effect at the time of the sale,
exchange or retirement. If
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notes are traded on an established securities market, a cash basis taxpayer,
and if it elects, an accrual basis taxpayer, will determine the U.S. dollar
equivalent of the amount realized by translating that amount at the spot rate
on the settlement date of the sale, exchange or retirement. If an accrual
method taxpayer makes this election, the election must be applied consistently
to all debt instruments from year to year and may not be changed without the
consent of the IRS.
Except as discussed below for foreign currency gain or loss, gain or loss
recognized by a U.S. holder on the sale, exchange or retirement of a note
generally will be long-term capital gain or loss if the U.S. holder has held
the note for more than one year at the time of disposition. A U.S. holder's
ability to offset capital losses against ordinary income is limited. Long-term
capital gain recognized by an individual holder generally is subject to
taxation at a maximum rate of 20%.
Gain or loss that is attributable to changes in the exchange rate for a
foreign currency will be treated as ordinary income or loss, and generally will
not be treated as an adjustment to interest income. This foreign currency gain
or loss will be taken into account only based upon the total gain or loss
realized on the sale, exchange or retirement of the note.
Foreign Tax Credit
For U.S. foreign tax credit purposes, interest on the notes will be treated
as foreign-source income and generally will be subject to the separate foreign
tax credit limitation for passive income. However, if this interest were to
become subject to a withholding tax at a rate of five percent or more, it would
be segregated in the separate foreign tax credit basket for high withholding
tax interest. If this interest were received by a U.S. holder engaged in the
active conduct of a banking, insurance, financing or similar business, the
income may be segregated in the separate foreign tax credit basket for
financial services income. If we pay additional amounts due to the imposition
of German withholding taxes, you will be treated as if you actually received
the amount of German taxes withheld by us and then paid over the withheld taxes
to the German taxing authorities. For this reason, for a particular interest
payment you may be required to include more interest in gross income than the
amount of cash you actually receive.
Gain or loss realized on the sale, exchange, retirement or other disposition
of a note, including foreign currency gain or loss, generally will be treated
as U.S.-source income or loss for foreign tax credit purposes.
Exchange Offer
An exchange of the original notes for the exchange notes under the exchange
offer will not be a taxable event for U.S. federal income tax purposes.
Consequently, a U.S. holder will not recognize taxable gain or loss as a result
of exchanging the original notes for the exchange notes. If BROKAT fails to
comply with some of its obligations under the registration rights agreement,
additional interest may become payable on the notes. A U.S. holder will not be
required to take account of the additional interest in determining its income
for U.S. federal income tax purposes unless the events giving rise to the
obligation to pay this interest have occurred.
Non-U.S. Holders
If you are not a U.S. holder, payments of interest to you on a note
generally will not be subject to U.S. withholding tax. If payments of interest
are effectively connected with your conduct of a trade or business in the
United States, the interest will be subject to the U.S. federal income tax that
applies to U.S. persons generally, and for corporate holders engaged in a U.S.
trade or business through a branch, the branch profits tax).
Subject to the discussion below of information reporting and backup
withholding, if you are not a U.S. holder, any gain you realize on a sale or
exchange of a note will not be subject to U.S. federal income tax,
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including withholding tax, unless (i) this gain is effectively connected with
your conduct of a trade or business in the United States or (ii) if you are an
individual, you are present in the United States for 183 days or more in the
taxable year of sale, and the sum of all of your capital gains from U.S.
sources exceeds the sum of all of your capital losses from U.S. sources.
Information Reporting and Backup Withholding
Interest on the notes, and payments of the proceeds of a sale of notes, that
are paid within the United States or through a United States-related financial
intermediary are subject to information reporting and may be subject to backup
withholding at a 31% rate unless the holder (i) is a corporation or other
exempt recipient or (ii) provides a taxpayer identification number and
certifies that no loss of exemption from backup withholding has occurred.
Holders that are not United States persons generally are not subject to
information reporting or backup withholding. However, a holder may be required
to provide a certification to establish its non-U.S. status relating to
payments received within the United States or from certain U.S.-related payors.
German Taxation
General
The following describes German income tax consequences relating to holders
for the purchase, ownership and disposition of the notes. This summary is not a
comprehensive description of all of the tax considerations that may be relevant
to a decision to purchase the notes. In particular, it does not cover foreign
tax consequences for foreign holders.
This summary is based on the laws currently in force and as applied in
practice on the date of this filing, which are subject to change, possibly with
retroactive effect. Prospective purchasers of the notes are advised to consult
their own tax advisors about the German or other tax consequences of the
purchase, ownership and disposition of the notes in light of their particular
circumstances, including the effect of any state, local or other national laws.
The taxable treatment of over-the-counter transactions diverges from
noncertificated notes. Over-the-counter transactions means that interest
payments are made anonymously upon presentation of coupons or of a note in
certificated form.
Interest Income derived from the Notes--Resident Holders
In general, for "resident holders" the income earned from the notes is
taxable according to sec. 20 (1) no. 7 Income Tax Act (EStG) as income from
investments. If the notes are business properties then the income is taxable as
business income.
Interest payments under the notes are subject to tax in Germany at regular
German tax rates if payments are:
. made to a holder of a note who, for tax purposes, is an individual
resident in Germany (that is, a person whose residence or customary
place of abode is located in Germany);
. made to a corporation that maintains its statutory seat or principal
place of management in Germany; or
. attributable to a permanent establishment maintained by, or a fixed
place of business available to,
. a holder of a note who is an individual not resident in Germany for
tax purposes; or
135
<PAGE>
. a corporation that does not maintain its statutory seat or principal
place of management in Germany.
Besides taxation of interest based on the notes, according to sec. 43 (1)
no. 7 lit. b EStG, a withholding tax is levied on the interest payments. This
tax is fully credited against individual and corporate income taxes.
Generally, the withholding tax rate on interest income is 30% of the interest
income. Interest payments from over-the-counter transactions are taxed at a
rate of 35%. Additionally a 5.5% solidarity surcharge on withholding tax is
levied, a tax rate 31.65% instead of 30% and 36.925% instead of 35%. The tax
is levied by the domestic German paying agent.
According to sec. 20 (4) EStG, a tax free allowance for investment income
exists for private individuals. The amount of interest received that can be
excluded from taxable income is DM 3.0 thousand, or DM 6.0 thousand for
married couples for all investment income including interest on bonds,
interest on bank deposits and dividends. Besides the lump-sum deduction for
investment expenses (sec. 9 a no. 2 EStG), the amount excludible from taxable
income amounts to DM 3.1 thousand (DM 6.2 thousand). However, these tax free
allowances only apply to private investors. For corporate investors the income
from the interest on the notes does not qualify as investment income but as
business income. Thus the allowance for investment income can not be
considered.
If the income earned from the notes are also trade or business income, the
interest may be subject to a municipal trade tax. Trade tax rates are
determined according to the locality in which the business is conducted and
typically range between 15 and 20%, by which the trade tax is deductible as a
business expense in computing the income which is subject to income or
corporation tax.
Interest Income derived from the Notes--Non-Resident Holders
In general, for non-resident holders the income earned from the notes is
not subject to German taxation.
Non-residents are natural or juridical persons who have neither a
residence, habitual abode, nor place of management or headquarters in Germany.
Non-residents are exempt from German withholding taxes. In other words, any
foreigner, who for tax purposes, is a non-resident of Germany, receiving
interest payments from a German bank, excluding over-the-counter transactions,
is exempt from the German withholding tax on interest payments, irrespective
of the nationality of the non-resident.
However, the tax exemption on interest payments for non-residents does not
apply to over-the-counter transactions. In these cases, a withholding tax is
levied and a refund of the German withholding tax may be available according
to tax treaties.
Sale of Notes
In the sale of a note, a gain or loss equal to the difference between the
amount realized less any accrued interest which is taxable as interest income,
including the German withholding taxes and the original purchase price will be
recognized.
Generally, gains or losses realized from the sale of the note by resident
holders are subject to tax at the standard German tax rate. A German
withholding tax does not exist for gains on sale. However, if the notes are
held in private property, the gain on sale is not subject to German tax,
provided the note is held for at least one year. Gains or losses realized from
the sale of the note by non-resident holders are not subject to taxation in
Germany.
Proposed European Union Withholding Tax Directive
A proposal currently under consideration by the European Union would oblige
each EU member state either (1) to require a paying agent established in the
EU member state to withhold tax on payments of interest,
136
<PAGE>
discount to premium to an individual beneficial owner who is a tax resident in
another EU member state, unless the recipient establishes that it has reported
the payment in its state of residence or (2) to require a paying agent
established in the EU member state to supply information concerning the payment
to the EU member state where the recipient is a tax resident. If adopted, this
proposal would be expected to come into effect on January 1, 2001. It is
impossible to predict whether, or in what form, the proposal will be adopted.
Prospective purchasers of the notes should seek independent tax advice.
137
<PAGE>
PLAN OF DISTRIBUTION
Based on positions taken by the SEC staff in no-action letters issued to
Exxon Capital Holdings Corp. and Morgan Stanley & Co. Inc., among others, we
believe that the exchange notes issued in the exchange offer in exchange for
the original notes may be offered for resale, resold and otherwise transferred
by holders of these notes, other than any holder which is:
. our affiliate within the meaning of Rule 405 under the Securities Act,
. a broker-dealer who acquired notes directly from us, or
. broker-dealers who acquired notes as a result of market-making or other
trading activities,
without compliance with the registration and prospectus delivery provisions for
the Securities Act, as long as:
. the exchange notes are acquired in the ordinary course of the holders'
business and
. these holders are not engaged in, and do not intend to engage in, and
have no arrangement or understanding with any person to participate in,
a distribution of the exchange notes, provided that broker-dealers
receiving exchange notes in the exchange offer will be subject to a
prospectus delivery requirement for the resales of the exchange notes.
The SEC staff has taken the position that participating broker-dealers may
fulfill their prospectus delivery requirements for transactions involving an
exchange of securities such as the exchange in the exchange offer, other than a
resale of an unsold allotment from the sale of the original notes to the
initial purchasers, with this prospectus. Under the registration rights
agreement, we have agreed to permit participating broker-dealers and other
persons, if any, subject to similar prospectus delivery requirements to use
this prospectus in permitted resales of the exchange notes. We have agreed
that, for a period of one year after the exchange offer has taken place, we
will make this prospectus, and any amendment or supplement, available to any
broker-dealer upon request.
Each holder of original notes who wishes to exchange its original notes for
exchange notes in the exchange offer will be required to make representations
to us as described in "Exchange Offer." Each holder who is a broker-dealer and
who receives exchange notes for its own account in exchange for original notes
that were acquired by it as a result of market-making activities or other
trading activities, will also be required to acknowledge that it will deliver a
prospectus in any resale by it of those exchange notes.
Holders who tender original notes in the exchange offer with the intention
to participate in a distribution of the exchange notes may not rely upon the
Exxon Capital Holdings Corp., the Morgan Stanley & Co. Inc. or similar no-
action letters.
We will not receive any proceeds from any sale of exchange notes by broker-
dealers. Exchange notes received by broker-dealers for their own account in the
exchange offer may be sold in one or more transactions:
. in the over-the-counter market,
. in negotiated transactions,
. through the writing of options on the exchange notes or
. a combination of these methods of resale,
at market prices prevailing at the time of resale, at prices related to the
prevailing market prices or at negotiated prices.
These resales may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from the broker-dealer or the purchasers of these exchange notes. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be considered to admit that it is an
underwriter within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers. We will indemnify
holders of the original notes, including any broker-dealers, against certain
liabilities, including liabilities under the Securities Act, as described in
the registration rights agreement.
138
<PAGE>
LEGAL MATTERS
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, New York, New York, has rendered an
opinion for us on the validity of the exchange notes under New York law. Haver
& Mailaender, Stuttgart, Germany, has rendered an opinion for us on German law
matters related to the validity of the exchange notes.
EXPERTS
The consolidated financial statements of:
. Brokat AG as of December 31, 1999 and June 30, 1999 and 1998 and for the
six months ended December 31, 1999 and for each of the three years in the
period ended June 30, 1999; and
. MeTechnology AG and its predecessor, ESD
Vermoegensverwaltungsgesellschaft mbH as of December 31, 1998 and 1997
and for the years then ended;
included in this prospectus and elsewhere in the registration statement to the
extent and for the periods indicated in their reports have been audited by
Arthur Andersen Wirtschaftspruefungsgesellschaft Steuerberatungsgesellschaft
mbH, independent public accountants, and are included in this registration
statement in reliance upon the authority of said firm as experts in giving the
reports.
The audited consolidated financial statements of Transaction Software
Technologies, Inc. included in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports dated January 21, 2000 and appearing on page F-44 with respect thereto,
and are included in this registration statement in reliance upon the authority
of said firm as experts in accounting and auditing in giving the reports.
The consolidated financial statements of Blaze Software, Inc. at March 31,
2000 and 1999, and for the three years in the period ended March 31, 2000
appearing in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, upon the authority of said
firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited GemStone Systems,
Inc.'s consolidated financial statements at December 31, 1999 and 1998, and for
each of the two years in the period ended December 31, 1999, as provided in
their report. GemStone's financial statements are included in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
GENERAL INFORMATION
Listing
We listed the original notes and expect to make an application to list the
exchange notes on the Luxembourg Stock Exchange. We deposited our articles of
association and the legal notice relating to the issue of the notes with the
registrar of the district court in Luxembourg (Greffier en Chef du Tribunal
d'Arrondissement a Luxembourg), where these documents are available for
inspection and where copies of these documents can be obtained upon request.
As long as the notes are listed on the Luxembourg Stock Exchange, we will
maintain a listing, paying and transfer agent in Luxembourg. According to
Chapter VI, Article 3, point A/11/2 of the Rules and Regulations of the
Luxembourg Stock Exchange, the notes will be freely transferable and for that
reason, no transaction made on the Luxembourg Stock Exchange will be cancelled.
139
<PAGE>
Authorizations
We have obtained all necessary consents, approvals and authorizations for
the issue of the notes. The issue of the notes was authorized by resolutions of
our management board passed on February 7, 2000 and by resolutions of our
supervisory board passed on February 21, 2000.
No Material Change
Except as disclosed in this prospectus, there has been no material change in
our and our subsidiaries' financial position since December 31, 1999.
Litigation
Neither we nor any of our subsidiaries or affiliates are involved in any, or
aware of any pending or threatened, litigation or arbitration proceedings which
relate to claims or amounts that are material in the context of the issue of
the notes or that may have, or have had during the 12 months preceding the date
of this prospectus, a material adverse effect on our financial position.
Documents
Copies of the following documents may be inspected at the specified offices
of our listing, paying and transfer agent in Luxembourg:
. our articles of association;
. the purchase agreement and registration rights agreement relating to the
notes; and
. the indenture dated as of March 28, 2000 relating to the notes, which
includes the forms of the note certificates.
Copies of the most recent consolidated financial statements of BROKAT for
the preceding financial year, and any interim quarterly financial statements
published by BROKAT, will also be available at the specified offices of the
paying and transfer agents in Luxembourg for so long as the notes are listed on
the Luxembourg Stock Exchange. BROKAT publishes only consolidated financial
statements.
Clearing Systems
The notes have been accepted for clearance through the facilities of
Euroclear and Clearstream. Relevant trading information is presented below.
<TABLE>
<CAPTION>
ISIN Common Code
---- -----------
<S> <C> <C>
Original Notes
Rule 144A............................................ XS0109534999 010953499
Regulation S......................................... XS0109534643 010953464
Exchange Notes......................................... XS0117755438 011775543
</TABLE>
Exchange Offer
For the exchange offer referred to under "Exchange Offer; Registration
Rights," application will be made to list the new notes on the Luxembourg Stock
Exchange. The new notes will be accepted for clearance through the accounts of
Euroclear and Clearstream and they will have a new Common Code and a new ISIN
number, which will be transmitted to the Luxembourg Stock Exchange. All
documents prepared for the exchange offer will be available at the office of
the listing agent in Luxembourg and all necessary actions and services for the
exchange offer may be done at the office of the listing agent in Luxembourg.
140
<PAGE>
All notices relating to the exchange offer will be published according to
the notice provisions of the applicable indenture. See "Description of the
Notes--Notices." So long as the notes are listed on the Luxembourg Stock
Exchange and the rules of the exchange so require: before the start of the
exchange offer, notice of the exchange offer will be given to the Luxembourg
Stock Exchange and will be published in a newspaper having a general
circulation in Luxembourg which we expect to be the Luxembourg Wort. This
notice will provide details of the conditions to, and the starting date and
expected completion date of, the exchange offer.
So long as the notes are listed on the Luxembourg Stock Exchange and the
rules of the exchange so require, notice of the results of the exchange offer
will be given to the Luxembourg Stock Exchange and will be published in a
newspaper having a general circulation in Luxembourg, which we expect to be the
Luxembourg Wort.
141
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
BROKAT Infosystems AG
Report of Independent Public Accountants................................... F-3
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 1999, June 30, 1999, and
June 30, 1998........................................................... F-4
Consolidated Statements of Operations for the six months ended
December 31, 1999 and for the years ended June 30, 1999, June 30, 1998,
and June 30, 1997....................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the six
months ended December 31, 1999 and for the three years ended June 30,
1999.................................................................... F-6
Consolidated Statements of Cash Flows for the six months ended
December 31, 1999 and for the years ended June 30, 1999, June 30, 1998,
and June 30, 1997....................................................... F-7
Notes to the Consolidated Financial Statements........................... F-8
Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 2000.......................... F-38
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and June 30, 1999.................................................. F-39
Consolidated Statements of Operations for the three months ended June 30,
2000 and 1999 and for six months ended June 30, 2000 and 1999........... F-40
Notes to Condensed Consolidated Financial Statements..................... F-41
Transaction Software Technologies, Inc.
Report of Independent Public Accountants................................... F-45
Consolidated Balance Sheets as of September 30, 1998 and 1997.............. F-46
Consolidated Statements of Operations for the years ended September 30,
1998 and 1997............................................................. F-47
Consolidated Statements in Shareholders' Equity for the years ended
September 30, 1998 and 1997............................................... F-48
Consolidated Statements of Cash Flows for the years ended September 30,
1998 and 1997............................................................. F-49
Notes to the Financial Statements.......................................... F-50
MeTechnology AG
Reports of Independent Public Accountants.................................. F-56
Consolidated Balance Sheets as of December 31, 1998 and 1997............... F-58
Consolidated Statements of Operations for the years ended December 31, 1998
and 1997.................................................................. F-59
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998 and 1997.......................................... F-60
Consolidated Statements of Cash Flows for the years ended December 31, 1998
and 1997.................................................................. F-61
Notes to Consolidated Financial Statements................................. F-62
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Blaze Software, Inc.
Report of Independent Accountants........................................ F-71
Audited Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and 1999.............. F-72
Consolidated Statements of Operations for the years ended March 31,
2000, 1999 and 1998................................................... F-73
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended March 31, 2000, 1999 and 1998................................... F-74
Consolidated Statements of Cash Flows for the years ended March 31,
2000, 1999 and 1998................................................... F-76
Notes to the Consolidated Financial Statements......................... F-77
Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and March 31,
2000.................................................................. F-95
Condensed Consolidated Statements of Operations for the three months
ended June 30, 2000
and 1999.............................................................. F-96
Condensed Consolidated Statements of Cash Flows for the three months
ended June 30, 2000
and 1999.............................................................. F-97
Notes to Condensed Consolidated Financial Statements................... F-98
GemStone Systems, Inc.
Report of Independent Auditors........................................... F-102
Consolidated Balance Sheets as of December 31, 1999 and 1998 and June 30,
2000.................................................................... F-103
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998 and the six months ended June 30, 2000 and 1999........... F-104
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1999
and 1998 and the six months ended June 30, 2000......................... F-105
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and the six months ended June 30, 2000 and 1999........... F-106
Notes to the Consolidated Financial Statements........................... F-107
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Brokat Infosystems Aktiengesellschaft:
We have audited the accompanying consolidated balance sheets of Brokat
Infosystems Aktiengesellschaft and subsidiaries (the "Company") as of December
31, 1999, June 30, 1999, and June 30, 1998 and the related consolidated
statements of operations, cash flows and shareholders' equity for the six month
period ended December 31, 1999 and for each of the three years in the period
ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in Germany and the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Brokat Infosystems Aktiengesellschaft and subsidiaries as of December 31,
1999, June 30, 1999, and June 30, 1998 and the results of their operations and
their cash flows for the six month period ended December 31, 1999 and for each
of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles in the United States.
Arthur Andersen
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Dr. Schmidt Schupeck
Wirtschaftsprufer Wirtschaftsprufer
Stuttgart, Germany
February 14, 2000, except for Note 20
as to which the date is August 21, 2000
F-3
<PAGE>
BROKAT INFOSYSTEMS AG
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------- December 31,
Note 1998 1999 1999
---- ------- ------- ------------
(DM in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. 1,832 7,141 6,963
Accounts receivable (less allowance for
doubtful accounts of DM 1,575,000,
DM 2,270,000 and DM 283,000 at December
31, 1999, June 30, 1999, and June 30,
1998, respectively)...................... 10,716 35,076 36,187
Cost and estimated earnings in excess of
billings on uncompleted contracts........ (4) 1,806 2,499 1,965
Advances on purchase commitments.......... (19) 0 0 3,000
Prepaid expenses and other current
assets................................... (5) 1,015 3,923 6,795
------- ------- --------
Total current assets...................... 15,369 48,639 54,910
------- ------- --------
Property and equipment, at cost............
Computer equipment......................... 3,941 9,696 12,813
Furniture and fixtures..................... 1,022 4,891 5,296
Less: accumulated amortization............. (1,502) (6,264) (8,607)
------- ------- --------
3,461 8,323 9,502
------- ------- --------
Goodwill................................... (6) 0 212,948 188,887
Other intangible assets.................... (6) 496 8,033 8,448
Less: accumulated amortization............. (6) (223) (4,320) (20,547)
------- ------- --------
273 216,661 176,788
------- ------- --------
Investments in associated companies........ (3) 0 0 4,139
Other long-term investments................ (3) 0 0 1,013
Deferred income taxes...................... (14) 577 1,447 2,333
------- ------- --------
Total assets.............................. 19,680 275,070 248,685
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt to banks.................. (7) 0 3,226 42,271
Other short-term debt..................... (8) 0 3,438 5,665
Accounts payable, trade................... 2,322 8,939 5,043
Payroll-related accruals.................. 1,935 4,229 5,296
Tax-related accruals...................... 501 847 2,150
Billings in excess of cost and estimated
earnings on uncompleted contracts........ (4) 970 857 1,818
Other accrued expenses and current
liabilities.............................. (9) 1,499 5,962 6,264
Deferred income........................... 1,107 3,430 3,579
Deferred income taxes..................... (14) 577 1,447 2,377
------- ------- --------
Total current liabilities................. 8,911 32,375 74,463
======= ======= ========
Long-term debt to banks.................... (10) 2,000 2,000 2,000
Long-term debt to shareholders............. (11) 4,555 4,000 0
Other long-term debt....................... (12) 7,005 18,356 1,850
------- ------- --------
Total liabilities......................... 22,471 56,731 78,313
------- ------- --------
Minority interest.......................... 0 400 426
------- ------- --------
Shareholders' equity: (15)
Common Stock.............................. 0 44,748 52,512
GmbH Capital.............................. 158 0 0
Additional paid-in capital................ 10,567 271,751 343,260
Accumulated deficit....................... (13,549) (57,587) (109,064)
Deferred compensation..................... (16) 0 (39,261) (113,376)
Accumulated other comprehensive income
(loss)................................... 33 (1,712) (3,386)
------- ------- --------
Total shareholders' equity................ (2,791) 217,939 169,946
------- ------- --------
Total liabilities and shareholders'
equity................................... 19,680 275,070 248,685
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
BROKAT INFOSYSTEMS AG
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
June 30, December 31,
Note 1997 1998 1999 1999
-------- --------- --------------------------- ----------------
(DM in thousands, except share data and per share data)
<S> <C> <C> <C> <C> <C>
Revenue................. (18) 12,101 29,571 62,487 51,287
Cost of Sales (exclusive
of DM 4,298.0 thousand
and DM 6,794.0 thousand
of non-cash charges
from stock option
grants in the six
months ended December
31, 1999 and the year
ended June 30, 1999)... (7,971) (15,493) (31,325) (22,937)
--------- ---------- ------------- -------------
Gross profit............ 4,130 14,078 31,162 28,350
--------- ---------- ------------- -------------
Selling expenses
(exclusive of DM
3,524.0 thousand and DM
6,070.0 thousand of
non-cash charges from
stock option grants in
the six months ended
December 31, 1999 and
the year ended June 30,
1999).................. (3,118) (16,636) (38,848) (27,714)
General and
administrative expenses
(exclusive of DM
1,552.0 thousand and DM
1,580.0 thousand of
non-cash charges from
stock option grants in
the six months ended
December 31, 1999, and
the year ended June 30,
1999).................. (1,332) (4,305) (10,639) (12,643)
Research and development
expenses (exclusive of
DM 2,866.0 thousand and
DM 1,896.0 thousand of
non-cash charges from
stock option grants in
the six months ended
December 31, 1999, and
the year ended June 30,
1999).................. (1,450) (4,917) (8,733) (12,769)
Amortization of goodwill
and other intangible
assets from
acquisitions........... 0 0 (3,686) (15,797)
Non-cash charges
associated with stock
option grants.......... (16) 0 0 (16,340) (12,240)
--------- ---------- ------------- -------------
Total operating
expenses............... (5,900) (25,858) (78,246) (81,163)
--------- ---------- ------------- -------------
Operating loss.......... (1,770) (11,780) (47,084) (52,813)
--------- ---------- ------------- -------------
Interest income......... 5 150 1,528 35
Interest expense........ (157) (454) (960) (867)
Other, net.............. 198 239 2,565 2,298
--------- ---------- ------------- -------------
Loss before income taxes
and extraordinary
items.................. (1,724) (11,845) (43,951) (51,347)
--------- ---------- ------------- -------------
Income tax benefit
(expense).............. (14) 10 0 (113) (104)
Minority interest....... 0 0 90 (26)
--------- ---------- ------------- -------------
Loss before
extraordinary items.... (1,714) (11,845) (43,974) (51,477)
Extraordinary loss on
early extinguishment of
debt................... 0 0 (64) 0
--------- ---------- ------------- -------------
Net loss................ (1,714) (11,845) (44,038) (51,477)
========= ========== ============= =============
Basic and diluted loss
per share:
Loss before
extraordinary items.... (2.23) (1.92)
Extraordinary loss...... (0.01) 0.00
Net loss................ (2.24) (1.92)
============= =============
Weighted average number
of common shares
outstanding............ 19,694,650 26,848,773
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BROKAT INFOSYSTEMS AG
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Other
Compre- Total Compre-
Preferred Stock Common Stock Additional Accumulated hensive Stock- hensive
------------------ ----------------- GMBH Paid-in Earnings Deferred Income holders Income
Shares Amount Shares Amount Capital Capital (Deficit) Compensation (Loss) Equity (Loss)
--------- ------- ---------- ------ ------- ---------- ----------- ------------ ------- ------- -------
(DM in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June
30, 1996........ 0 0 0 0 62 0 107 0 0 169
Dividends....... 0 0 0 0 0 0 (97) 0 0 (97)
Capital
increases....... 0 0 0 0 65 591 0 0 0 656
Net income...... 0 0 0 0 0 0 (1,714) 0 0 (1,714) (1,714)
-------
Comprehensive
loss............ (1,714)
--------- ----- ---------- ------ ---- ------- -------- -------- ------ ------- -------
Balance, June
30, 1997........ 0 0 0 0 127 591 (1,704) 0 0 (986)
--------- ----- ---------- ------ ---- ------- -------- -------- ------ -------
Capital
increases....... 0 0 0 0 31 9,976 0 0 0 10,007
Net loss........ 0 0 0 0 0 0 (11,845) 0 0 (11,845) (11,845)
Foreign currency
translation
adjustment...... 0 0 0 0 0 0 0 0 33 33 33
-------
Comprehensive
loss............ (11,812)
--------- ----- ---------- ------ ---- ------- -------- -------- ------ ------- -------
Balance, June
30, 1998........ 0 0 0 0 158 10,567 (13,549) 0 33 (2,791)
--------- ----- ---------- ------ ---- ------- -------- -------- ------ -------
Shares issued in
connection with
the conversion
from GmbH to
AG.............. 30,780 51 64,200 107 (158) 0 0 0 0 0
Conversion of
preferred stock
to common
stock........... (30,780) (51) 30,780 51 0 0 0 0 0 0
Shares issued
upon conversion
of debt......... 0 0 1,419 2 0 7,484 0 0 0 7,486
Shares issued in
IPO, net of
issuance cost... 0 0 24,000,000 40,000 0 34,066 0 0 0 74,066
Shares issued
after IPO....... 0 0 420,000 700 0 8,260 0 0 0 8,960
Shares issued
for acquisition
of
MeTechnology.... 0 0 2,332,374 3,888 0 155,773 0 0 0 159,661
Non-cash
compensation
from issuance of
stock options to
employees....... 0 0 0 0 0 55,601 0 (55,601) 0 0
Amortization of
deferred stock
option
compensation.... 0 0 0 0 0 0 0 16,340 0 16,340
Net loss........ 0 0 0 0 0 0 (44,038) 0 0 (44,038) (44,038)
Foreign currency
translation
adjustment...... 0 0 0 0 0 0 0 0 (1,745) (1,745) (1,745)
-------
Comprehensive
loss............ (45,783)
--------- ----- ---------- ------ ---- ------- -------- -------- ------ ------- -------
Balance, June
30, 1999........ 0 0 26,848,773 44,748 0 271,751 (57,587) (39,261) (1,712) 217,939
--------- ----- ---------- ------ ---- ------- -------- -------- ------ -------
Adjustment to
reflect change
in par value.... 0 0 0 7,764 0 (7,764) 0 0 0 0
Change in
deferred
compensation for
variable stock
options to
employees on
previous stock
option grants... 0 0 0 0 0 35,431 0 (35,431) 0 0
Non-cash
compensation on
stock options
granted to
employees under
ME-Plan......... 0 0 0 0 0 0 0 (7,082) 0 (7,082)
Non-cash
compensation
from issuance of
stock options to
employees under
1999 Plan....... 0 0 0 0 0 43,842 0 (43,842) 0 0
Amortization of
deferred stock
option
compensation.... 0 0 0 0 0 0 0 12,240 0 12,240
Net loss........ 0 0 0 0 0 0 (51,477) 0 0 (51,477) (51,477)
Foreign currency
translation
adjustment...... 0 0 0 0 0 0 0 0 (1,674) (1,674) (1,674)
-------
Comprehensive
loss............ (53,151)
--------- ----- ---------- ------ ---- ------- -------- -------- ------ ------- -------
Balance,
December 31,
1999............ 0 0 26,848,773 52,512 0 343,260 (109,064) (113,376) (3,386) 169,946
========= ===== ========== ====== ==== ======= ======== ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
BROKAT INFOSYSTEMS AG
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended
------------------------ December 31,
1997 1998 1999 1999
------ ------- ------- ------------
(DM in thousands)
<S> <C> <C> <C> <C>
Cash flow from Operating Activities:
Net loss............................... (1,714) (11,845) (44,038) (51,477)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss..................... 0 0 64 0
Minority interest...................... 0 0 (90) 26
Depreciation and amortization.......... 734 1,374 6,705 18,892
Gain on disposal of property and
equipment............................. 29 (1) (2) 0
Deferred income taxes.................. (10) 0 0 44
Non-cash charges associated with stock
option grants......................... 0 0 16,340 12,240
Changes in operating assets and
liabilities:
Accounts receivable................... (3,113) (6,960) (23,377) (1,111)
Net changes in cost and estimated
earnings in excess of billings....... (1,576) 740 3,718 1,495
Prepaid expenses and other current
assets............................... (148) (833) (1,442) (5,872)
Accounts payable, trade............... 1,504 613 4,750 (3,896)
Payroll and tax related accruals...... 572 1,153 2,050 2,370
Other accrued expenses and
liabilities.......................... 348 1,363 (564) (340)
Deferred income....................... 160 947 200 149
------ ------- ------- -------
Net cash used in operating activities.. (3,214) (13,449) (35,686) (27,480)
------ ------- ------- -------
Cash flow from Investing Activities:
Acquisitions of intangible assets...... (282) (159) (5,628) (443)
Purchases of property and equipment.... (1,466) (3,710) (5,207) (3,891)
Purchases of investments............... 0 0 0 (4,526)
Acquisitions, net of cash acquired..... 0 0 (29,431) (30)
Proceeds from sale of property and
equipment............................. 4 106 293 0
------ ------- ------- -------
Net cash used in investing
activities........................... (1,744) (3,763) (39,973) (8,890)
------ ------- ------- -------
Cash flow from Financing Activities:
Net change in short-term debt.......... 2,995 (1,129) 0 37,746
Proceeds from debt issuances........... 1,516 10,130 0 0
Issuances of share capital............. 551 10,007 83,025 0
Dividends paid......................... (97) 0 0 0
------ ------- ------- -------
Net cash provided by financing
activities........................... 4,965 19,008 83,025 37,746
------ ------- ------- -------
Effect of Exchange Rate Differences on
Cash................................... 0 20 (2,057) (1,554)
Increase (decrease) in Cash and Cash
Equivalents............................ 7 1,816 5,309 (178)
Cash and Cash Equivalents:
At the beginning of the period......... 9 16 1,832 7,141
------ ------- ------- -------
At the end of the period............... 16 1,832 7,141 6,963
====== ======= ======= =======
Supplemental Disclosure of Cash flow
Information:
Cash paid for:
Interest............................... 105 330 930 636
Income taxes........................... 9 0 0 240
</TABLE>
Supplemental Disclosures of Non-Cash Transactions:
In the year ended June 30, 1999, the Company acquired MeTechnology AG,
Leipzig, in exchange for common shares of the Company with a fair value of DM
159,661.0 thousand. Also during that year, approximately DM 7,486.0 thousand of
debt was converted into equity.
In the six months period ended December 31, 1999, the change in deferred
compensation related to stock options of DM 86,355.0 thousand was credited to
additional paid-in capital in the amount of DM 79,273.0 thousand and goodwill
in the amount of DM 7,082.0 thousand. In the same period long-term debt
recorded in connection with the acquisition of MeTechnology of DM 16,980.0
thousand was forgiven and charged to goodwill (see Note 12).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Brokat Infosystems AG (formerly: Brokat Informationssysteme GmbH),
Stuttgart, Germany, was founded on September 17, 1994. The Company and its
subsidiaries develop and market cross-channel software for the integration of
existing IT systems and applications into various electronic channels such as
Internet, mobile radio or call centers. The Company's main customers are banks
and other institutions which offer and process services through electronic
channels.
By a shareholders' resolution of April 1, 1998, the parent company was
converted from a limited liability company (Gesellschaft mit beschrankter
Haftung, "GmbH") to a stock corporation (Aktiengesellschaft, "AG"). Under a
GmbH the equity interests of the shareholders in the company are not
represented by a specific number of shares. Under the stock corporation
structure, shares are issued to the shareholders and the number of shares
issued corresponds to the share capital of the company. The change in capital
structure was registered with the commercial register in Stuttgart on July 3,
1998.
On September 17, 1998, the Company completed an initial public offering
("IPO") of its share capital in Germany and listed its shares on the Neuer
Markt, a German stock exchange. The listing of these shares and the IPO,
itself, involved a series of transactions that immediately preceded the initial
public offering. These transactions are discussed in the following paragraphs.
The purpose of these transactions was to increase the number of shares
outstanding immediately prior to the IPO, without effecting a stock split, as
well as comply with German law that requires existing shareholders to have a
pre-emptive right to purchase newly issued shares before outside shareholders
may purchase these shares.
On September 15, 1998, existing shareholders of the Company (the "Existing
Shareholders") participated in a rights offering, whereby existing shareholders
were issued 248.97 rights for each share of stock owned. Each right allowed
shareholders to purchase one share of the Company's common stock for a price of
DM 3.33 per share. In aggregate, 24,000,000 rights were issued to shareholders.
Immediately upon issuance, the shareholders sold 3,750,000 of their rights
to Banque Paribas, Frankfurt am Main ("Paribas"), an entity which acted as an
investment banker for the Company. Paribas acquired these rights for a cash
consideration of DM 18.00 per right. This value was determined based upon the
difference between the Company's initial public offering price of DM 21.33 per
share (see below) and the exercise price of the right of DM 3.33 per share.
Upon acquisition, Paribas then immediately exercised all of the rights and
purchased 3,750,000 shares of the Company's common stock for cash proceeds
totaling DM 12,500,000, excluding underwriter discounts and commissions.
Using the consideration received from the sale of the 3,750,000 conversion
rights, the Existing Shareholders then exercised their rights and purchased
20,250,000 shares of the Company's common stock for cash proceeds totaling DM
67,500,000. In total, the Company received DM 80,000,000 from the sale of the
stock rights.
The remaining 3,750,000 shares then held by the bank were issued to the
public at an offering price of DM 21.33 per share. All proceeds from the
issuance of these shares were retained by Paribas to offset initial funding
requirements to obtain and exercise the 3,750,000 rights.
F-8
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes cash proceeds and expenditures by the
parties to all of the transactions:
<TABLE>
<CAPTION>
Cash received/(expended)
---------------------------------------------------
Existing New
Bank Shareholders Shareholders Company
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Sale of rights to
Paribas................ (67,500,000) 67,500,000 -- --
Exercise of rights by
Paribas................ (12,500,000) -- -- 12,500,000
Exercise of rights by
Existing Shareholders.. -- (67,500,000) -- 67,500,000
Sale of shares to new
shareholders........... 80,000,0000 -- (80,000,000) --
----------- ----------- ----------- ----------
-- -- (80,000,000) 80,000,000
=========== =========== =========== ==========
</TABLE>
In connection with the rights offering, the Existing Shareholders of the
Company remained in the same economic position both immediately before and
after the offering. Net proceeds to the Company as a result of the
transactions described above was DM 74,066,000, consisting of gross proceeds
of DM 80,000,000 less underwriters' discounts, commissions and other offering
expenses of DM 5,934,000. Additionally, the Company raised DM 8,960,000 from
the exercise of the over-allotment option in October 1998, resulting in total
net proceeds from the offering of approximately DM 83,000,000.
Note 2. Summary of Significant Accounting Policies
Basis of consolidation
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles ("US-GAAP"). The assets, liabilities and results of operations of
entities in which the Company has a controlling interest have been
consolidated. Investments in which the Company exercises significant
influence, but which it does not control (generally 20-50% ownership interest)
are accounted for under the equity method of accounting. Investments in which
the Company has less than a 20% ownership interest are accounted for under
cost method of accounting. All significant intercompany accounts and
transactions have been eliminated. Minority interest represents the 49%
separate ownership of the German subsidiary Go-Solutions GmbH.
Basis of presentation
The accompanying consolidated financial statements are stated in thousands
of Deutsche Marks.
The Company's fiscal year previously ended on June 30. In November, 1999,
the Shareholders Meeting approved management's plan to change the Company's
fiscal year to a calendar year ending on December 31. In 1999, the transition
year, the Company's fiscal year begins July 1, 1999, and ends December 31,
1999. Beginning July 1, 1999, international operating subsidiaries, which had
generally been included in the consolidated financial statements based on
interim financial statements for fiscal years ending June 30, are now included
in the consolidated financial statements based on fiscal years ending December
31.
The consolidated statements of operations, shareholders' equity, and cash
flows are presented for the six months ended December 31, 1999, and for each
of the three years ended June 30, 1999, June 30, 1998, and June 30, 1997.
F-9
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For comparative purposes only, the following table presents the condensed
results of operations for the six months ended December 31, 1999 and 1998.
Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------
1998 1999
--------------- --------------
(Unaudited) (Audited)
(DM in thousands, except per
share data)
<S> <C> <C>
Revenue................................. 19,671 51,287
Cost of Sales........................... (10,371) (22,937)
-------------- --------------
Gross Profit............................ 9,300 28,350
-------------- --------------
Other costs and expenses................ (21,745) (79,697)
-------------- --------------
Loss before income taxes................ (12,445) (51,347)
-------------- --------------
Income taxes............................ 0 (104)
Minority Interest....................... 0 (26)
Extraordinary loss on early
extinguishment of debt................. (64) 0
-------------- --------------
Net loss................................ (12,509) (51,477)
============== ==============
Basic and diluted loss per share before
extraordinary items.................... (0.63) (1.92)
============== ==============
Basic and diluted loss per share........ (0.63) (1.92)
============== ==============
</TABLE>
Use of estimates
The preparation of financial statements in conformity with US-GAAP requires
management of the Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Foreign currency translation
The Company's financial statements are prepared in Deutsche Mark. The
functional currency of each of the Company's subsidiaries is the local currency
in which each subsidiary is located. Assets and liabilities denominated in
foreign currencies are translated at rates of exchange in effect at the balance
sheet date. Revenues and expenses are translated at average rates of exchange
in effect during the year. Differences arising from the translation are
recorded to accumulated other comprehensive income. Transactions in foreign
currencies are translated at the exchange rate in effect at the date of each
transaction. Differences in exchange rates during the period between the date a
transaction denominated in a foreign currency is consummated and the date on
which it is either settled or translated for inclusion in a consolidated
balance sheet are recognized in the statement of operations and are included in
"Other, net" for that period. The foreign currency exchange gain (loss)
recognized in the statement of operations for the six months period ended
December 31, 1999, and the years ended June 30, 1999, June 30, 1998, and June
30, 1997 was DM 2,250.0 thousand, DM 2,177.0 thousand, DM (215.0) thousand and
DM 0 thousand, respectively.
Cash and cash equivalents
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents. The carrying amounts of cash and
cash equivalents approximates fair value due to the short maturity of these
investments.
F-10
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trade accounts receivable
Receivables with recognizable risks are provided for by adequate allowances,
while uncollectible receivables are written off. Trade accounts receivable are
expected to be settled within one year of the origination of the receivable.
Advances on purchase commitments
Advances on purchase commitments represent prepayments on software licenses
purchased from a related party (see Note 19).
Accounting for long-lived assets
The Company, at each balance date, evaluates the recoverability of the
carrying amount of its long-lived assets in accordance with Statement of
Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of". Whenever events
or changes in circumstances indicate that the carrying amounts of those assets
may not be recoverable over the remaining amortization period, the Company will
compare undiscounted net cash flows estimated to be generated by those assets
to the carrying amount of those assets. To the extent that these cash flows are
less than the carrying amounts of the assets, the Company will record
impairment losses to write the asset down to fair value. As of December 31,
1999, management believes that no such impairment exists.
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets, ranging from
3 years for computer hardware and 5 to 10 years for furniture and fixtures.
Cost includes major expenditures and replacements which extend useful lives
or increase capacity and interest cost associated with significant capital
additions. For all periods presented, interest costs allocable to these
projects have been insignificant and have not been capitalized. When assets are
sold or retired, their cost and related accumulated depreciation are removed
from the appropriate accounts. Any gains or losses on disposition of such
assets are recorded as other income or expense. Maintenance and minor repairs
are charged to operations as incurred.
Purchased software is stated at cost and depreciated using the straight-line
method over the estimated useful life of the software.
Goodwill and purchased intangible assets are capitalized and amortized on a
straight line basis over their estimated periods to be benefited. This
amortization period is determined individually for each asset and ranges from 3
to 7 years.
Income taxes
The Company utilizes the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes". Under the
liability method, deferred taxes are determined based on the differences
between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Earnings (loss) per share information
In accordance with SFAS No. 128, "Earnings per Share" basic earnings per
share are calculated using income available to common shareholders divided by
the weighted average of common shares outstanding
F-11
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
during the year. Diluted earnings per share are similar to basic earnings per
share except that the weighted average of common shares outstanding is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares, such as options, had
been issued. For all periods presented, no potentially dilutive securities have
been included in the calculation of diluted loss per share as such amounts
would be antidilutive in periods in which a loss has been reported. The
aggregate number of potential common share equivalents that have been excluded
from the diluted loss per share calculation was 2,409,639 and 1,204,818 as of
December 31, 1999, and June 30, 1999, respectively, and related entirely to
stock options.
As described in Note 1, the Company changed its corporate structure from a
"GmbH" to "AG". Under a GmbH the equity interest of the shareholders in the
company are not represented by a specific number of shares. Accordingly there
is no per share amount assignable to the Company before fiscal year June 1999.
Stock splits
In July 1998 and December 1999, the Company effected a ten-for-one and a
three-for-one stock split, respectively. All share and per-share amounts in the
accompanying consolidated financial statements have been restated to give
effect to both splits.
Software development costs
The Company accounts for its software development costs in accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed". Capitalization of software development costs begins
upon establishment of technological feasibility and ends upon general release
of the software to the public. In accordance with SFAS No. 86, the Company has
defined technological feasibility as the completion of the working model.
Research and development costs are incurred during the completion of the
preliminary design and conception phase and prior to the technical and economic
feasibility of the product being established. These costs are immediately
expensed as research and development costs when incurred.
Advertising costs
Advertising costs are expensed as incurred. Advertising costs were DM
2,595.0 thousand, DM 3,367.0 thousand, DM 2,011.0 thousand and DM 420.0
thousand for the six months ended December 31, 1999, and for the years ended
June 30, 1999, June 30, 1998, and June 30, 1997, respectively.
F-12
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue recognition
The Company generates revenues from the installation and licensing of the
rights to use its software products to end users. The Company also generates
revenues from sales of professional services, including consulting, training,
and maintenance.
Cost of sales per revenue line (unaudited)
<TABLE>
<CAPTION>
Six months ended Fiscal year ended Fiscal year ended
December 31, 1999 June 30, 1999 June 30, 1998
------------------ ------------------ ------------------
KDM % of rev. KDM % of rev. KDM % of rev.
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Software licensing
fees................. 19,141 37.3% 21,056 33.7% 7,231 24.5%
Professional services
fees................. 22,630 44.1% 21,913 35.1% 16,529 55.9%
Customer support
fees................. 5,709 11.1% 5,970 9.6% 1,397 4.7%
Product sales......... 3,558 6.9% 13,492 21.6% 4,414 14.9%
Other fees............ 249 0.5% 56 0.1% 0.0%
------- -------- ------- ------- ------- -------
Total revenue....... 51,287 100.0% 62,487 100.0% 29,571 100.0%
======= ======== ======= ======= ======= =======
Cost of sales
Cost of software
licensing fees....... (200) (1.0)% (200) (0.9)% (100) (1.4)%
Cost of professional
services fees........ (15,510) (68.5)% (14,770) (67.4)% (10,467) (63.3)%
Cost of customer
support fees......... (3,510) (61.5)% (4,198) (70.3)% (961) (68.8)%
Cost of product
sales................ (3,717) (104.5)% (12,157) (90.1)% (3,965) (89.8)%
Cost of other fees.... 0 0.0% 0 0.0%
------- -------- ------- ------- ------- -------
Total cost of
sales.............. (22,937) (44.7)% (31,325) (50.1)% (15,493) (52.4)%
======= ======== ======= ======= ======= =======
Gross Profit
Gross Profit from
software licensing
fees................. 18,941 99.0% 20,856 99.1% 7,131 98.6%
Gross Profit from
professional service
fees................. 7,120 31.5% 7,143 32.6% 6,062 36.7%
Gross Profit from
customer support
fees................. 2,199 38.5% 1,772 29.7% 436 31.2%
Gross Profit from
product sales........ (159) (4.5)% 1,335 9.9% 449 10.2%
Gross Profit from
other fees........... 249 100.0% 56 100.0%
------- -------- ------- ------- ------- -------
Total gross
profits............ 28,350 55.3% 31,162 49.9% 14,078 47.6%
======= ======== ======= ======= ======= =======
</TABLE>
Revenues from software license agreements are recognized upon delivery of
the software if among other things (1) persuasive evidence of an arrangement
exists, (2) collection is probable, (3) all license payments are due within one
year, (4) the license fee is otherwise fixed and determinable and (5) vendor
specific evidence exists to allocate the total fee to all elements of the
arrangement.
Software licenses are sold directly to end users as well as to distributors
or valued-added resellers ("VARs"). These distributors and VARs then attempt to
sell the related licenses, along with other services, to other end users. These
distributors will often buy multiple licenses that allow the software to be
installed on a fixed number of hardware platforms, such as five licenses each
for IBM, MacIntosh and Sun Microsystems equipment. The distributor may, at its
option during the license period, exchange one or more licenses for one
computer platform for those of another platform. However, the distributor can
never obtain more licenses than
F-13
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
total number originally purchased, unless separate license arrangements are
contracted. No right of return exists associated with any installed or unused
licenses. In connection with software licenses sold to distributors and VARs,
the Company recognizes revenues based on the same factors previously indicated.
The Company may sell software licenses together with other services.
Service revenue is primarily related to implementation and installation
services performed under separate service arrangements. Revenues from
consulting, training and maintenance services are recognized as the services
are performed.
Billings on software license agreements and services provided by the Company
are generally made at the time the license is delivered or the services are
completed. Billings are generally payable by customers within 30 days after
issuance of the invoice. Certain license agreements with distributors allow for
the distributors to pay for the license over a period that is longer than 30-45
days. In no circumstances, though, do these terms extend beyond twelve months
from the date the software license has been delivered.
Sometimes, a license agreement includes both software and service elements.
Typically, these services include installation and customization of software,
and postcontract maintenance services. The revenues to be generated from
postcontract maintenance services embedded in the agreement are separately
identified and accounted for as described in the following paragraph. Revenues
from the remaining facets of the contract, including the licensing,
customization and installation of the software, are deferred and recognized
under the percentage of completion method of accounting as services are
performed. Due to the long-term nature of these projects, percentage of
completion is measured by the labor cost incurred to total estimated labor cost
method. Billings issued to, and cash payments received from customers are not
shown as sales revenue but deducted without effect on income from cost in
excess of billings on uncompleted contracts or added to billings in excess of
costs on uncompleted contracts. Billings are generally payable by customers
within 30 days of the issuance of an invoice.
Sales revenues from maintenance agreements are recorded as revenue ratably
over the term of the contract. Revenues from maintenance agreements, which are
embedded into sale and installation agreements are estimated based on the price
the customer will be required to pay when these services are sold separately
(i.e., the renewal rate) and recognized over the term of the agreement. Any
unrecognized revenues are recorded on the accompanying balance sheets as
deferred income. The Company bills for maintenance agreements on a monthly
basis and payments are due within 30-45 days after the billing.
Changes in job conditions may result in revisions to previously recorded
costs and revenues for a particular project. These changes are recognized in
the period in which the revisions are determined; this occurs when formal
change orders are signed between the Company and the customer. Furthermore,
provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Sometimes in connection with the installation of customized software,
customers separately will request that the Company provide hardware on which
the software will reside. The Company will purchase this hardware from third
party vendors, and typically those vendors will deliver and install directly
the hardware for the customer. In all cases, the Company takes title to the
hardware, acts as a principal in the transaction with the vendor and bears
collection risk from the customer. Accordingly, the Company recognizes revenues
from the sale of hardware on a gross basis, at the time the hardware is
delivered to a customer, persuasive evidence of an arrangement exists, the
revenues are fixed or determinable and collectibility is probable.
New accounting standards
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires companies to report comprehensive
income, which is defined as all changes in equity during a
F-14
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
Net income and other comprehensive income, including foreign currency
translation adjustment, minimum pension liability and unrealized gains and
losses on investments are to be reported, net of their related tax effect, to
arrive at comprehensive income. The Standard requires only additional
disclosure in the financial statements and does not affect the Company's
financial position or results of operations. Prior years financial statements
have been restated to conform to the requirements of SFAS No. 130.
Effective July 1, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an enterprise and related Information". The Company operates in one
business segment, the licensing of software products. Therefore the adoption of
SFAS No. 131 had no impact on the Company's financial position or results of
operations.
In March 1998 the Accounting Standards Executive Committee of the AICPA
approved Statement of Position (SOP) 98-1. This SOP governs the accounting of
internally used, acquired or internally developed software and requires the
capitalization of certain associated costs. SOP 98-1 is applicable for
financial years beginning after December 15, 1998. Effective July 1, 1998, the
Company adopted SOP 98-1. In accordance with the capitalization criteria of SOP
98-1 the Company capitalized internally developed, self-used software of DM 0
thousand and DM 437.0 thousand during the six months ended December 31, 1999,
and the year ended June 30, 1999.
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under this statement,
accounting for changes in fair value of a derivative depends on its intended
use and designation. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of SFAS No. 133". SFAS No. 137 amends the effective date of SFAS No. 133.
SFAS No. 133 will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company is currently assessing the potential
effects of this new standard. Based on the current and expected levels of
derivative instruments used by the Company, the adoption of this new standard
is not expected to have a material effect on the Company's results of
operations or financial position.
Note 3. Acquisitions
Transaction Software Technologies, Inc., Atlanta, USA
On May 9, 1999, the Company acquired Transaction Software Technologies,
Inc., Atlanta, USA, (TST), for DM 34.9 million in cash (including direct
acquisition costs), of which DM 1,665.0 thousand was to be paid twelve months
after closing and another DM 1,665.0 thousand was to be paid 24 months after
closing, with no interest due. Complementing the Company's existing software
business, TST has been a leader in the development and implementation of cash
management systems in U.S. banking institutions. The acquisition was accounted
for using the purchase method. Accordingly, the purchase price was allocated to
the assets acquired and the liabilities assumed, based on the completion of the
evaluation of the fair values of TST's assets and liabilities at the date of
acquisition. The following is a summary of the purchase price allocation:
<TABLE>
<CAPTION>
DM
(in thousands)
--------------
<S> <C>
Current assets and other tangible assets...................... 5,345
Liabilities assumed........................................... (6,703)
Customer list................................................. 4,015
Goodwill...................................................... 31,969
------
34,626
======
</TABLE>
F-15
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquired customer list is being depreciated over a period of 5 years.
Acquired goodwill is being amortized over a period of 7 years. The operating
results of TST have been included in the consolidated income statements from
the date of acquisition.
MeTechnology AG, Leipzig
On May 21, 1999, the Company acquired MeTechnology AG, Leipzig, for the
issuance of 2,332,374 shares of Brokat common stock having a value of DM 159.7
million on that date, based on the closing price of the Company's common stock
as quoted on the Neuer Market. Additionally, DM 1.2 million direct acquisition
cost were paid in cash. Complementing the Company's existing software business,
MeTechnology AG has been a leader in the development and implementation of
online banking software in Germany. The acquisition was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed, based on the evaluation of the fair
values of MeTechnology AG's assets and liabilities at the date of acquisition.
The following is a summary of the purchase price allocation:
<TABLE>
<CAPTION>
DM
(in thousands)
--------------
<S> <C>
Current assets and other tangible assets...................... 8,876
Liabilities assumed........................................... (30,324)
Customer list................................................. 1,307
Goodwill...................................................... 180,980
-------
160,839
=======
</TABLE>
The acquired customer list is being depreciated over a period of 5 years.
Acquired goodwill is being amortized over a period of 7 years. The operating
results of MeTechnology AG have been included in the consolidated income
statements from the date of acquisition.
In July 1999, and based on provisions described in the acquisition agreement
the sellers of MeTechnology AG agreed to grant 135,150 of the total shares of
2,332,374 that they received in consideration for MeTechnology AG in the form
of options to employees of MeTechnology AG. The strike price of these options
was DM 21.33 and such options had the same terms as the general stock option
plan for the employees of Brokat. The assignment of the employee shares was
performed in the six months ended December 31, 1999, as described in Note 16.
In the six months ended December 31, 1999, goodwill was decreased by DM
7,082.0 thousand due to the grant of the option rights as well as in the amount
of DM 16,980.0 thousand due to the revision of management's estimates in
relation to the fair value of liabilities assumed. Specifically, convertible
debt and other long-term liabilities previously thought to be assumed by Brokat
were actually repaid by the former shareholders of MeTechnology AG as described
in Note 12.
The following unaudited pro forma financial information presents results as
if the acquisition of TST and MeTechnology AG had occurred at the beginning of
the respective periods:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999
------------- -------------
(unaudited) (unaudited)
(DM in thousands, except
per share data)
<S> <C> <C>
Pro forma revenue.............................. 39,731 71,653
Pro forma net loss............................. (50,721) (94,887)
Pro forma loss per share before extraordinary
items......................................... -- (4.81)
Pro forma loss per share....................... -- (4.82)
</TABLE>
F-16
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization expense as a result
of goodwill arising from the purchase and interest expense on acquisition debt.
The pro forma results are not necessarily indicative of the results of
operations which actually would have resulted had the purchase been in effect
at the beginning of the respective periods or of future results.
Bremen Online Services Entwicklungs- und Betriebsgesellschaft mbH & Co. KG,
Bremen
Bremen Online Services Entwicklungs- und Betriebsgesellschaft mbH & Co. KG,
Bremen, was founded by the articles of association dated July 16, 1999. Brokat
has a 5% interest in the capital of the company at a cost of DM 1,000.0
thousand, of which DM 334.0 thousand had to be paid immediately and DM 666.0
thousand is to be paid in two equal installments by March 31, 2000, and March
31, 2001, with no interest due. This investment is being accounted for
utilizing the cost method of accounting. The purpose of the company is the
development, operating and marketing of the Bremen Online Services
infrastructure including the online applications from public administration and
business who wish to use this safe infrastructure and the initiation and
performance of other projects in this area.
GEKA Beteiligungs AG, Frankfurt
On September 6, 1999, the Company acquired 100% of the outstanding common
stock of GEKA-Beteiligungs AG, Frankfurt, for DM 130.0 thousand GEKA
Beteiligungs AG does not yet have an operating business. The organization cost
of DM 30.0 thousand was expensed in the current period.
LexLinkLine AG, Dusseldorf
On October 18, 1999, the Company acquired 12.5% of the outstanding common
stock of LexLinkLine AG, Dusseldorf, for DM 39.0 thousand. This investment is
being accounted for using the cost method of accounting. LexLinkLine AG will
develop and market "Web&Voice" technologies. As part of its product range
LexLinkLine will market the "Internet Communication Center" for Brokat which
connects the Internet and the Call-Center.
Fernbach Financial Software S.A., Luxembourg
On December 20, 1999, the Company acquired 25.1% of the outstanding common
stock of Fernbach Financial Software S.A., Luxembourg, for DM 4.0 million in
cash (and additional direct acquisition costs of DM 154.0 thousand). The excess
of the purchase price over the company's proportionate share of the fair value
of net assets acquired of DM 4,075.0 thousand is being amortized on a straight-
line basis over a period of 7 years. This investment is being accounted for
using the equity method of accounting.
Fernbach Financial Software S.A., Luxembourg, holds 100% interests in
Fernbach Software S.A, Luxembourg, in Fernbach Software AG, Deutschland, and in
Fernbach-Software AG, Switzerland. Fernbach companies develop and market
software and hardware solutions for the handling of transactions, particularly
in the area of bank software.
The purchase agreement gave Brokat an option to acquire the remaining shares
of Fernbach Financial Software S.A. until June 30, 2000. Brokat can exercise
the options as of December 31, 1999, March 31, or June 30, 2000. The option
purchase price is variable and depends on weighted sales, profit and order
backlog values that have been achieved as proxies for the fair value of
Fernbach on each date the option can be exercised. Brokat is also obligated to
exercise the option as of June 30, 2000, provided the consolidated financial
statements of the Fernbach companies show a positive pre-tax result as of the
option date June 30,
F-17
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000, for the period from January 1 to June 30, 2000, after the elimination of
any special charges. No value was assigned to this option at the time of the
acquisition of Fernbach Financial Software S.A., as the option allows for the
purchase of the remaining interest in Fernbach at fair value and is based on
Fernbach's past and expected future near-term operating losses (see also Note
20).
Note 4. Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts
Cost and estimated earnings on uncompleted contracts
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues have been recorded but the amounts cannot be billed under
the terms of the contracts. Such amounts are recoverable from customers upon
various measures of performance, including achievement of certain milestones,
completion of specified units or completion of the contract. Cost and estimated
earnings contains directly allocable costs (labor cost and cost of services
provided by third parties) as well as the appropriate portion of overheads
including pro rata administrative expenses.
Costs and estimated earnings on uncompleted contracts and related amounts
billed are as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
--------------- December 31,
1998 1999 1999
------ ------- ------------
(DM in thousands)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts........ 1,930 6,613 5,379
Estimated earnings............................. 3,147 8,082 6,161
------ ------- -------
5,077 14,695 11,540
------ ------- -------
Less billings to date.......................... (4,241) (13,053) (11,393)
------ ------- -------
836 1,642 147
====== ======= =======
</TABLE>
Such amounts are included in the accompanying Consolidated Balance Sheets
under the following captions:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
------------ December 31,
1998 1999 1999
----- ----- ------------
(DM in thousands)
<S> <C> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 1,806 2,499 1,965
Billings in excess of cost and estimated
earnings on uncompleted contracts............. (970) (857) (1,818)
----- ----- ------
836 1,642 147
===== ===== ======
</TABLE>
F-18
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are generally accounted for at
nominal value and have a residual term of up to one year.
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
----------- December 31,
1998 1999 1999
----- ----- ------------
(DM in thousands)
<S> <C> <C> <C>
Prepaid taxes....................................... 204 704 2,130
Deferred charges.................................... 413 478 917
Other............................................... 398 2,741 3,748
----- ----- -----
1,015 3,923 6,795
===== ===== =====
</TABLE>
The other prepaid expenses and current assets mainly contain rent deposits,
receivables from employees and other prepayments.
Note 6. Goodwill and Other Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
------------ December 31,
1998 1999 1999
---- ------- ------------
(DM in thousands)
<S> <C> <C> <C>
Goodwill........................................... 0 209,406 170,095
Customer list...................................... 0 5,181 4,649
Software........................................... 273 2,074 2,044
--- ------- -------
273 216,661 176,788
=== ======= =======
</TABLE>
Intangible assets are amortized over the following periods:
<TABLE>
<CAPTION>
Useful
life
---------
<S> <C>
Goodwill........................................................... 7 years
Customer list...................................................... 5 years
Software........................................................... 3-5 years
</TABLE>
All intangible assets are amortized using the straight-line method.
Note 7. Short-Term Debt to Banks
At December 31, 1999, the Company had DM 75,500.0 thousand (June 30, 1999:
DM 16,300.0 thousand; June 30, 1998: DM 1,500.0 thousand) general purpose lines
of credit with several banks. Under the Credit Arrangements, the Company has
the option to borrow amounts at various interest rates, payable in Deutsche
Mark. Use of the borrowing is unrestricted, with the exception of the
borrowings under the line of credit with Deutsche Bank AG, Stuttgart, and the
borrowings are unsecured.
F-19
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the Company had outstanding debt borrowings under the
Credit Arrangements amounting to DM 42,271.0 thousand (June 30, 1999: DM
3,226.0 thousand, June 30, 1998: DM 0 thousand).
Included in the lines of credit is an overdraft credit of DM 60 million
granted initially by Deutsche Bank AG, Stuttgart, to Brokat until December 31,
1999. The funds are to be used exclusively for operating purposes. The current
interest rate is computed at 6% per annum. An extension of the line of credit
has been agreed under certain fulfilled conditions until June 30, 2000.
The interest rate on short-term borrowings outstanding at December 31, 1999,
was between 4.08% and 6.0% (June 30, 1999: between 5.5%-8.25%, June 30, 1998:
no outstanding balances).
Note 8. Other Short-Term Debt
Other short-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
---------- December 31,
1998 1999 1999
---- ----- ------------
(DM in thousands)
<S> <C> <C> <C>
tbg.................................................. 0 0 4,000
Short-term loan...................................... 0 1,773 0
Debt from purchase price commitments................. 0 1,665 1,665
---- ----- -----
0 3,438 5,665
==== ===== =====
</TABLE>
Regarding the short-term debt against Technologie-Beteiligungs-Gesellschaft
mbH of the Deutsche Ausgleichsbank, Bonn (also referred to as "tbg") (see Note
11).
The short-term loans were granted by a former shareholder of MeTechnology
AG, Leipzig, and were repaid during the six months ended December 31, 1999.
The debt from the purchase price obligation resulted from the purchase of
Transaction Software Technologies, Inc., Atlanta, USA, and is due in May 2000.
Note 9. Other Accrued Expenses and Current Liabilities
Other accrued expenses and current liabilities mainly contain provisions for
interest payments, outstanding invoices, as well as potential losses from
customer projects.
Note 10. Long-Term Debt to Banks
By contract dated May 23, 1997, Kreissparkasse Boblingen provided Brokat
with a line of credit of DM 2,000.0 thousand. The loan has a term of ten years.
Interest is to be paid on the loan at 7% per annum. Furthermore, the creditor
receives profit-based remuneration of 20% per annum of the net profit for the
year, but not exceeding 3% of the stated value of the loan. Repayment shall be
made in one sum at the end of the term. As of December 31, 1999, all of the
loan had been utilized.
The credit agreement contains conditions and events of default, the failure
to comply with, or occurrence of, would generally give the lender the right to
terminate the credit agreement and require the repayment of the outstanding
borrowings under the credit agreement. The most restrictive of such conditions
include the approval of the bank to certain legal transactions. Those
transactions are among others: (1) an amendment or a
F-20
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
change of the Company's statutes, (2) sale of the Company or a part of the
Company as well as the acquisition or the sale of other companies or the shares
in other companies as well as the foundation of subsidiaries, (3) the
signing/changing/termination of contracts with shareholders, relatives of
shareholders except for the case when the modified contracts will meet arm's-
length-principle. The Company is not in compliance with certain of these
covenants but such non-compliance has been waived by the bank. Specifically,
the company had entered into certain contracts prior to obtaining approval from
the lenders. On February 3rd, 2000 the lenders approved the signing of the
contracts and waived the non-compliance with the covenants.
Note 11. Long-Term Debt to Shareholders
Long-term debt to shareholders are as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
----------- December 31,
1998 1999 1999
----- ----- ------------
(DM in thousands)
<S> <C> <C> <C>
tbg................................................ 4,000 4,000 0
AET (at present value, imputed interest rate 5%)... 420 0 0
Other.............................................. 135 0 0
----- ----- ----
4,555 4,000 0
===== ===== ====
</TABLE>
As of June 30, 1999, and 1998, tbg has three "silent participations" in the
parent company totaling DM 4,000.0 thousand. With its first silent
participation on December 2, 1996, tbg invested DM 1,000.0 thousand in the
Company. The investment had an initial term until June 30, 2006. By contract
dated September 19, 1997, a second silent participation of DM 1,000.0 thousand
was consummated; this loan expires on December 31, 2007. By supplementary
agreements of August 1, 1998, both participations were converted into loans
with an annual interest rate of 10.5% and the condition, that the loans can be
terminated no earlier than September 30, 1999. By contract dated September 19,
1997, a third silent participation of DM 2,000.0 thousand was concluded; this
expires on December 31, 2007. By side agreement of August 1, 1998, the annual
interest amounts to 11.5% and the loans can be terminated no earlier than
September 30, 1999.
The tbg agreements contain conditions and events of default, the failure to
comply with, or occurrence of, would generally give the lender the right to
terminate the credit agreement and require the repayment of the outstanding
borrowings under the credit agreement. The most restrictive of such conditions
include the approval of the silent partner to certain legal transactions. Those
transactions are among others: the ratification of amendments or changes of the
Company's statutes.
By side agreements dated August 27, 1999, all three loans in the amount of
DM 4,000.0 thousand have been converted into short-term debt, due June 30,
2000. The annual interest amounts have been changed to 6.0% beginning of
October 1, 1999.
As of July 1, 1998, a loan payable of DM 486.0 thousand was due to the
shareholder Advanced European Technologies N.V., ED Heiloo, Netherlands (also
referred to here as "AET"). The loan was originally callable on October 31,
2001, and was subject to interest at a rate of 5% per annum, with the first
five years being free of interest. Accordingly, the note was recorded at a
discounted amount and interest was imputed at a rate of 5% equivalent to
Company's estimated cost of borrowing for loans with similar characteristics.
In case of an Initial Public Offering ("IPO") of the Company or if all shares
in the Company are sold to a third party the loan is callable at once.
F-21
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Company's IPO the entire loan was contributed on
August 4, 1998, by AET as a contribution in kind in return for 90 shares of
common stock in Brokat. The excess of the value of the common stock issued of
DM 486.0 thousand over the carrying value of the debt was recorded as an
extraordinary loss. By resolution the amount exceeding the calculated share in
the common stock was transferred to the additional paid-in capital.
Note 12. Other Long-Term Debt
Other long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
June 30, Ended
------------ December 31,
1998 1999 1999
----- ------ ------------
(DM in thousands)
<S> <C> <C> <C>
Debt from purchase price commitment.............. 0 1,451 1,529
Silent participations............................ 0 9,950 0
Junior loan...................................... 0 3,530 0
Convertible debt................................. 7,000 3,425 0
Other (at present value, due March 2001, imputed
interest rate 5%)............................... 5 0 321
----- ------ -----
7,005 18,356 1,850
===== ====== =====
</TABLE>
Debt from purchase price commitment
The liability from the purchase price commitment resulted from the purchase
of Transaction Software Technologies, Inc., Atlanta, USA, and is due in May
2001. The liability is free of interest. The recognized imputed interest rate
was 5% per annum, and was determined based on debt with similar
characteristics.
Silent participation and junior loan
A silent participation is a form of loan whereby the note holder receives
interest based on a stated rate in the loan agreement and/or based on the level
of profits (and losses) of the company. Despite receiving interest based on the
earnings of the company, the silent partners do not hold voting rights in the
company and cannot influence operating decisions.
By contract dated December 6, 1996, and amendment agreement of May 29, 1998,
SBF Sachsische Beteiligungsfonds GmbH, Leipzig (also referred to as "SBF"),
invested a total of DM 9,950.0 thousand as silent shareholder in ESD
Information Technology Entwicklungs GmbH, Leipzig, the predecessor of
MeTechnology GmbH. The silent participation expires on December 31, 2001. The
shareholder has a 20% share in the profit, but does not share in the loss of
the Company. SBF also receives annual servicing compensation of 2% of the
investment amount.
By contract dated February 13, 1996, GSM Industriebeteiligungen GmbH, Munich
(also referred to as "GSM"), granted ESD a junior loan of DM 3,530.0 thousand.
The loan arrangement will mature on December 31, 2005, and bears interest at an
annual rate of 8%.
Due to uncertainties as to whether the Company assumed these liabilities in
connection with its purchase of MeTechnology AG, the fair value of this debt
was recorded as part of the purchase price allocation and reflected in the
consolidated balance sheet as of June 30, 1999. During the six months ended
December 31,
F-22
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999, SBF and GSM received full repayment of the described debts from the
former shareholders of MeTechnology AG and consequently waived all rights under
the debt instrument. Accordingly, during the six months ended December 31,
1999, the Company eliminated the estimated liability associated with these debt
instruments and reduced goodwill by DM 13,480.0 thousand, as prescribed by APB
16 of the Accounting Principles Board and related interpretations.
Convertible debt
By contract dated September 19, 1997, tbg invested DM 7,000.0 thousand in a
silent participation in the Company. Payment was made on December 2, 1997. The
investment was originally scheduled to mature on December 21, 2007. Under the
silent participation agreement tbg participated proportionately in the losses
of the Company. However, the agreement did not allow for tgb to participate
proportionately in any gains of the Company. Instead, tbg had the right to
convert its silent participation into equity interests in the Company with a
value of DM 7,000.0 thousand only in the event that the Company completes an
initial public offering of its common stock or if a change in control in the
Company, as defined, occurs. Accordingly, as tbg had the right to convert its
interest into equity at the same amount of its original investments during all
periods presented, the Company did not recognize any loss participations in
relation to this silent participation.
As a result of the Company's initial public offering of common shares, tbg
exercised its right to convert its silent participation into equity of the
Company and was issued common shares with a value of DM 7,000.0 thousand on
August 4, 1998. As this conversion was in accordance with the terms of original
agreement, there was no gain or loss recognized in relation to this conversion.
By contract dated November 12, 1998, and prior to the acquisition by the
Company of MeTechnology AG, Private Equity Investment Ltd., Grand Cayman (also
referred to as "PEB") invested DM 3,500.0 thousand in MeTechnology AG, Leipzig,
in the form of a convertible bond. The participation entitles PEB until October
31, 2000, to convert at any time a nominal amount of the convertible bond of DM
500 into one share of MeTechnology AG. The convertible bond is interest free
until January 31, 2000. That part of the convertible bond which has not yet
been converted is repayable on October 31, 2000.
Due to uncertainties as to whether Brokat assumed this liability in
connection with its purchase of MeTechnology AG, the fair value of such debt
was recorded as part of the purchase price allocation and is reflected in the
consolidated balance sheet at June 30, 1999.
During the six months ended December 31, 1999, PEB received repayment of the
bond from the former shareholders of MeTechnology AG and consequently waived
all its rights under the convertible bond.
Accordingly, during the six months ended December 31, 1999, the Company
eliminated the estimated liability associated with this debt instrument and
reduced goodwill by DM 3,500.0 thousand, as prescribed by APB 16 and related
interpretations.
Note 13. Fair Value of Financial Instruments
Financial assets and liabilities with carrying values approximating fair
value include cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and short-term debt. The fair value of financial
instruments for which quoted market prices are available are based on such
market prices. Long-term financial investments are reflected at carrying value
because it is not practical to estimate fair value as quoted market prices do
not exist. Fair value of long-term debt is based on discounted cash flow
analyses using interest rates at which similar loans would be made to borrowers
with similar credit ratings.
F-23
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the carrying amounts and the estimated fair
values of financial instruments at December 31, 1999, June 30, 1999, and June
30, 1998, respectively.
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended
------------------------------- December 31,
1998 1999 1999
--------------- --------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- ------ -------- ------ --------- --------
(DM in thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Instruments
Assets
Long-term investments... 0 0 0 0 1,013 1,013
Liabilities
Long-term debt.......... 13,560 17,362 24,356 28,271 3,850 3,850
</TABLE>
Note 14. Income Tax Benefit (Expense)
The benefit (provision) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended
----------------------- December 31,
1997 1998 1999 1999
------ ------ ------- ----------------
(DM in thousands)
<S> <C> <C> <C> <C>
Current taxes
Germany........................... 0 0 0 0
Foreign........................... 0 0 (113) (60)
------ ------ ------- ----
0 0 (113) (60)
------ ------ ------- ----
Deferred taxes
Germany........................... 0 0 0 0
Foreign........................... 10 0 0 (44)
------ ------ ------- ----
10 0 0 (44)
------ ------ ------- ----
10 0 (113) (104)
====== ====== ======= ====
</TABLE>
German corporate tax law applies a split-rate with regard to the taxation of
the income of a corporation. In accordance with the tax law in effect for the
six months ended December 31, 1999 income is initially subject to a federal
corporate tax rate of 40% (1998: 45%, 1997: 45%) plus surcharge of 5.5% (1998:
5.5%, 1997: 7.5%) on federal taxes payable. Including the impact of the
surcharge the federal corporate income tax rate amounts to 42.2% (1998: 47.5%,
1997: 48.4%).
F-24
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income taxes determined using the German corporate
income tax rate of 42.2% plus a federal tax rate for trade taxes on income of
10.6% for a combined statutory rate of 52.7% in 1999 (1998: 57.1%, 1997:
57.8%) is as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended
----------------------- December 31,
1997 1998 1999 1999
------ ------ -------- ------------
(DM in thousands)
<S> <C> <C> <C> <C>
Expected benefit for corporate income
taxes............................... 996 6,763 23,208 27,074
Foreign tax rate differential........ 0 (898) (4,743) (1,520)
Changes in valuation allowance on
deferred tax assets................. (809) 7,955 (10,243) (12,848)
Non-tax-deductible stock option
expenses............................ 0 0 (8,611) (6,450)
Amortization of non-tax-deductible
goodwill............................ 0 0 (1,943) (8,325)
Income not subject to tax............ 0 1,857 488 0
Deferred cost related to capital
issuance............................ 0 0 2,845 691
Other................................ (177) 233 (1,114) 1,274
----- ------ -------- -------
Actual benefit (provision) for income
taxes............................... 10 0 (113) (104)
===== ====== ======== =======
</TABLE>
Deferred income tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended
--------------------- December 31,
1998 1999 1999
--------- ---------- ------------
(DM in thousands)
<S> <C> <C> <C>
Tax loss carryforwards................. 7,361 30,325 42,752
Unrecognized losses on foreign currency
transactions.......................... 123 0 0
Inventories............................ 0 0 1,200
Convertible debt....................... 1,857 0 0
Valuation allowance.................... (8,764) (28,616) (41,472)
--------- ---------- -------
Total deferred tax assets.............. 577 1,709 2,480
--------- ---------- -------
Other intangible assets................ 0 262 190
Unrecognized gains on foreign currency
transactions.......................... 0 1,147 2,334
Inventories............................ 577 300 0
--------- ---------- -------
Total deferred tax liabilities......... 577 1,709 2,524
--------- ---------- -------
Net deferred tax assets (liabilities).. 0 0 (44)
========= ========== =======
Deferred tax assets and liabilities are reflected on the Company's
consolidated balance sheets as follows:
<CAPTION>
Six Months
Year Ended June 30, Ended
--------------------- December 31,
1998 1999 1999
--------- ---------- ------------
(DM in thousands)
<S> <C> <C> <C>
Noncurrent deferred tax assets......... 577 1,447 2,333
Current deferred tax liabilities....... (577) (1,447) (2,377)
--------- ---------- -------
Net deferred tax assets (liabilities).. 0 0 (44)
========= ========== =======
</TABLE>
At December 31, 1999, the Group had tax loss carryforwards amounting to DM
97,836.0 thousand (June 30, 1999: DM 68,163.0 thousand, June 30, 1998: DM
14,727.0 thousand). Of the tax loss carryforward as
F-25
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of December 31, 1999, DM 1,895.0 thousand expire within 6 years and DM 22,030.0
thousand expire within 15 years. Tax loss carryforwards in the amount of DM
73,911.0 thousand do not expire.
The Company has provided valuation allowances on the portion of deferred tax
assets for which it is not more likely than not that such assets will be
realized. As of December 31, 1999, as well as in the prior years' valuation
allowances have been recorded on all deferred tax assets due to the continued
losses sustained by the Company.
Note 15. Shareholders' Equity
Common stock and additional paid-in capital
The Company has been listed at the Frankfurt Stock Exchange in the market
segment Neuer Markt since September 17, 1998.
As of July 1, 1998, the GmbH capital of Brokat Informationssysteme GmbH,
Stuttgart, amounted to DM 158.3 thousand and has developed since then as
follows:
As a result of the conversion of the Company into Brokat Infosystems AG, in
July 1998, the capital of the Company was initially divided, pursuant to sec. 4
of the articles of association, into 6,420 common shares and 1,758 preferred
shares in series A and 1,320 preferred shares in series B of DM 16.66 each
which are made out to the bearer and which were taken over by the former
shareholders.
By a resolution of April 1, 1998, which also changed the articles of
association, the shareholders' meeting of Brokat Informationssysteme GmbH,
decided to reduce the par value of the shares of the future Brokat, Stuttgart,
to DM 1.66 and to divide the common stock into 94,980 shares with a par value
of DM 1.66 each. The amendment of the articles of association was filed with
the Commercial Register on July 3, 1998.
By shareholders' resolution taken on August 17, 1998, the common stock of
the Company was increased by DM 2,365.00 to DM 160,665.00. The capital increase
was made by contribution in kind by the contribution of a loan of DM 486,300.00
of AET and a silent contribution with a nominal value of DM 7.0 million worth
DM 2,822,151.62 after loss absorption, of tbg in return for a total of 1,419
shares with a share in the common stock of DM 1.66 each (see Notes 11 and 12).
In addition, by shareholders' resolution of August 17, 1998, the common
stock was increased by issuing 24,000,000 new shares in the Company's IPO. See
Note 1 for a description of this transaction.
Additionally, by resolution of the board of management taken on October 1,
1998 the capital was increased by issuing 420,000 shares of common stock.
On May 20, 1999, the Company issued 2,332,374 shares of common stock in
exchange of 100% of the share capital of MeTechnology AG (see Note 3).
As of June 30, 1999, the number of shares authorized amounts to 36,823,620
of which 26,848,773 shares were issued and outstanding. Shares issued and
outstanding have an equivalent par value of DM 1.66.
According to the shareholders' meeting on November 18, 1999, the common
stock of the Company was converted to Euros ((Euro)) using the official
translation rate. Additionally the Company increased its common stock by DM
7,763,681 (3,969,507 Euro). The capital increase is effected without issuing
new shares by converting additional paid-in capital to common stock.
F-26
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, the number of shares authorized amounts to
42,658,412 of which 26,848,773 shares were issued and outstanding. Shares
issued and outstanding have an equivalent par value of DM 1.96 (the equivalent
of 1 Euro).
On November 7, 1999, the Company also passed a resolution to increase
capital by issuing 279,573 new shares with an equivalent value of (Euro) 10
million (DM 19,558.0 thousand) with Intel Atlantic, Inc., Santa Clara, USA. The
Company is entitled to the funds once the capital increase has been entered in
the trade register. This had not been done in the six months ended December 31,
1999.
Note 16. Stock Option Plans
Accounting policy
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in APB 25, "Accounting for Stock Issued to
Employees". Compensation cost for stock options is measured as the excess of
the quoted market price of the Company's stock on the measurement date over the
amount an employee must pay to acquire the stock and is recognized over the
vesting period. The intrinsic value of the options is measured on the basis of
the current market value of the Company's stock at the end of each period.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. The Company has elected
to retain its current method of accounting as described above, and has adopted
the disclosure requirements of SFAS No. 123.
Stock option plans
The Company has issued two stock option plans to employees of the Company.
The objectives of these plans include attracting and retaining personnel and
promoting the success of the Company by providing employees the opportunity to
acquire common stock.
Under the 1998 stock option plan (the "1998 Plan"), the Company is
authorized to issue and has issued 1,204,818 option rights for the subscription
of Brokat shares to employees of Brokat and its affiliated companies on
September 16, 1998. The option rights entitle the bearer to purchase shares in
the Company at a price of DM 21.33 and vest in three installments approximately
after two, three and four years.
The options can only be exercised, if at certain specified dates the
increase in the value of Brokat stock--based on the average price of the share
during the last five trading days before the first exercise period against the
IPO price--at least equals the performance of the Neuer Markt index.
Under the 1999 stock option plan (the "1999 Plan") the Company is authorized
to issue and has issued 1,204,821 option rights for the subscription of Brokat
shares to employees of Brokat and its affiliated companies on December 15,
1999. The option rights entitle the bearer to purchase shares in the Company at
a price of DM 65.85 (the average of the last 5 trading days in October when the
program was initiated) and vest in three installments approximately after two,
three and four years.
The options can only be exercised if at certain specified dates the increase
in the value of Brokat stock--based on the average price of the shares during
the last five trading days before the first exercise period against the strike
price of the options--at least equals the performance of the Neuer Markt index.
F-27
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Moreover, principal investors of the Company have issued 200,460 option
rights for the purchase of Brokat shares from their private holdings to several
senior employees of the Brokat group ("Private Plan"). These rights entitle the
bearer to purchase shares at DM 4.15 per share. The options were negotiated in
February 1998, granted in August 1998 and vest ratably at the end of each of
the next four years following the date of grant. There is no performance
criteria for these options.
Former shareholders of MeTechnology have issued options for a portion of the
Brokat shares received in consideration of all of their shares of the
affiliated company ("Me Plan"). These options have been issued to the present
employees of the affiliated company on July 26, 1999, and entitle the bearer to
purchase up to 135,150 shares of Brokat from these shareholders at a purchase
price of DM 21.33. The options vest ratably after approximately 1.5, 2.5 and
3.5 years and can only be exercised if performance criteria similar to the
"1998 Plan" are met.
The options expire within 3.5 to 4.5 years from date of grant.
The status of the Company's stock option plans is summarized below as of
December 31, 1999:
<TABLE>
<CAPTION>
Private
1998 Plan 1999 Plan Me-Plan Plan
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1998........... 0 0 0 0
Granted.............................. 1,204,818 0 0 200,460
Exercised............................ 0 0 0 (50,115)
Forfeited............................ 0 0 0 0
--------- --------- ------- -------
Outstanding at June 30, 1999........... 1,204,818 0 0 150,345
Granted.............................. 0 1,204,821 135,150 0
Exercised............................ 0 0 0 0
Forfeited............................ 0 0 0 (60,138)
--------- --------- ------- -------
Outstanding at December 31, 1999....... 1,204,818 1,204,821 135,150 90,207
========= ========= ======= =======
</TABLE>
None of the outstanding options as of December 31, 1999, are exercisable.
All options vest between March 2000 and June 2004.
Additional stock option awards are anticipated in future years. Moreover, as
the measurement dates for the 1998 plan, the 1999 plan and the ME plan have not
been reached yet, future changes in stock price of the Brokat shares will lead
to future adjustments in the total compensation from these programs (variable
stock option plans).
In prior years, Brokat management has used graded vesting to amortize
compensation from stock option programs. During the six months ended December
31, 1999, management has decided to employ the straight line method for
amortizing this expense, since this method is a more preferable way to better
match the expenses associated with these options with the service period of
optionholders.
The change in accounting principle, which totaled DM 131, has been recorded
as an adjustment to operating expenses during the six months ended December 31,
1999. Had the Company applied the straight-line method to amortize compensation
during the year ended June 30, 1999, the loss for the year then ended would
have been decreased by 5.740.0 thousand and basic and diluted loss per share
would have been decreased by DM 0.29.
F-28
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversely, had the Company continued to apply the graded vesting method to
amortize compensation, including on new plans entered into during the six
months ended December 31, 1999, the loss for the six months ended December 31,
1999, would have been increased by DM 6, 557.0 thousand and basic and diluted
loss per share would have been increased by DM 0.24.
The weighted average fair value of options granted during the six months
ended December 31, 1999, and the year ended June 30, 1999, was approximately
DM 93.96 and DM 13.55 per share, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 1999 and 1998: risk-
free interest rates ranging from 5.03% to 6.24%; expected lives ranging from
3.5 to 4.5 years; expected forfeiture rate of 10 to 15%; expected dividend
yield of zero percent; and expected volatility ranging from 79% to 90%.
The following table summarizes information about the Company's stock
options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- ---------------------
Weighted Weighted
Average Average Weighted
Remaining Exercise Average
Range of Exercise Number Life Price Number Exercise Price
----------------- --------- ---------- -------- ------ --------------
<S> <C> <C> <C> <C> <C>
1998 Plan
DM 21.33.............. 1,204,818 1.92 Years DM 21.33 0 0
1999 Plan
DM 65.85.............. 1,204,821 3.42 Years DM 65.85 0 0
Me Plan
DM 21.33.............. 135,150 1.92 Years DM 21.33 0 0
Private Plan
DM 4.15.............. 90,207 1.17 Years DM 4.15 0 0
</TABLE>
Had compensation cost for these grants been determined consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net loss
would have been decreased by approximately DM 9,152.0 thousand for the six
months ended December 31, 1999, and DM 13,402.0 thousand for the twelve months
ended June 30, 1999, respectively. Loss per share would have been decreased by
DM 0.34 and DM 0.68 for the six months ended December 31, 1999, and the twelve
months ended June 30, 1999, respectively.
Note 17. Commitments and Contingencies
Operating leases
The group companies have entered into lease and rental agreements for
various facilities and vehicles. The annual minimum payments from these
agreements amount to DM 7,556.0 thousand for the financial year 2000, DM
6,704.0 thousand for 2001, DM 5,773.0 thousand for 2002, DM 5,264.0 thousand
for 2003 and DM 4,879.0 thousand for the financial year 2004. Thereafter,
commitments of at least DM 6,086.0 thousand will be incurred.
Total rental expense under operating leases amounted to DM 2,809.0 thousand
for the six months ended December 31, 1999, DM 3,502.0 thousand for the year
ended June 30, 1999, DM 252.0 thousand for the year ended June 30, 1998 and DM
236.0 thousand for the year ended June 30, 1997.
Contingencies
The Company operates in countries where political, economic, social and
legal developments could have an impact on the operational activities. The
effects of such risks on the Company's results of operations, which
F-29
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
arise during the normal course of business, are not reasonably determinable and
are therefore not included in the accompanying financial statements.
The Company may be involved in lawsuits, claims, investigations and
proceedings, including product liability and commercial matters which are
handled and defended in the ordinary course of business. There are no such
matters pending that the Company and its general counsel expect to be material
in relation to the Company's business, financial position or results of
operation.
Legal matters
The group companies may be subject to litigation from time to time in the
ordinary course of business. As of December 31, 1999, the Company's management
and its legal advisers are not aware of any claims which could materially
affect the business, net assets, financial position or results of the Group.
Note 18. Geographic, Segment and Significant Customer Information
The Company is managed as one business segment. Under the definition of SFAS
No. 131, "Disclosure about Segments of an enterprise and related Information",
Brokat is currently operating in one segment only. The number of business
segments may expand as the Company introduces new products or services or
expands into different markets.
The following geographical allocation of the sales depends on the seat of
the subsidiary recording the sales. The assets comprise long-lived assets with
the exception of deferred tax assets.
<TABLE>
<CAPTION>
Asia-
Germany UK Pacific USA Other Elimination Consolidated
------- ----- ------- ----- ----- ----------- ------------
(DM in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Six months ended
December 31, 1999
Revenue................ 35,472 8,331 4,808 5,405 5,796 (8,525) 51,287
Long-lived assets...... 208,701 1,090 535 2,614 304 (198,590) 14,654
Year ended June 30, 1999
Revenue................ 55,818 3,407 1,774 2,895 1,646 (3,053) 62,487
Long-lived assets...... 391,444 952 438 1,678 202 (198,539) 8,323
Year ended June 30, 1998
Revenue................ 27,149 3,709 1,566 -- 880 (3,733) 29,571
Long-lived assets...... 5,114 178 237 111 8 (2,187) 3,461
Year ended June 30, 1997
Revenue................ 12,101 -- -- -- -- -- 12,101
Long-lived assets...... 1,080 -- -- -- -- -- 1,080
</TABLE>
The external revenue by product group break down as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended
------------------- December 31,
1998 1999 1999
--------- --------- ------------
(DM in thousands)
<S> <C> <C> <C>
Professional services...................... 16,529 21,913 22,630
License revenues........................... 7,231 21,056 19,141
Sales of hardware.......................... 4,414 13,492 3,558
Customer support........................... 1,397 5,970 5,709
Other...................................... 0 56 249
--------- --------- ------
29,571 62,487 51,287
========= ========= ======
</TABLE>
F-30
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the six months ended December 31, 1999, approximately 11.3% of sales were
recorded with one customer. In the year ended June 30, 1999, approximately
20.3% of sales were recorded with one customer and approximately 18.5% with
another customer. In the year ended June 30, 1998, approximately 16.1% of sales
were recorded with one customer. In the year ended June 30, 1997, approximately
21.8% of sales were recorded with one customer.
<TABLE>
<CAPTION>
Six months ended Fiscal year ended Fiscal year ended
December 31, 1999 June 30, 1999 June 30, 1998
------------------ ------------------- ------------------
KDM % of rev. KDM % of rev. KDM % of rev.
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales
Cost of software
licensing fees....... (200) (1.0)% (200) (0.9)% (100) (1.4)%
Cost of professional
service fees......... (15,510) (68.5)% (14,770) (67.4)% (10,467) (63.3)%
Cost of customer
support fees......... (3,510) (61.5)% (4,198) (70.3)% (961) (68.8)%
Cost of product
sales................ (3,717) (104.5)% (12,157) (90.1)% (3,965) (89.8)%
Cost of other fees.... 0 0.0 % 0 0.0 %
Total cost of sales... (22,937) (44.7)% (31,325)% (50.1)% (15,493) (52.4)%
======= ======== ======= ======= ======= =======
</TABLE>
Note 19. Related Party Transactions
License agreement with Fernbach Software S.A., Luxembourg
Effective December 30, 1999, Brokat (licensee) entered into a license
agreement with Fernbach Software S.A., Luxembourg (licensor). The purpose of
the license agreement is to give Brokat the right to market the computer
programs offered by Fernbach. The license is restricted to specific programs up
to a value of DM 3.0 million; for each item ordered Brokat will be given a
discount of 50% on the list price. In return Brokat made an advance payment for
the license fees of DM 3.0 million against which all the deliveries of software
by the licensor to Brokat are offset. The agreement has a term of 10 years and
can be extended thereafter for a year provided notice of six months is not
given.
The prepaid amount of DM 3.0 has been shown as a current asset even though
all purchases under this agreement may not be made during the next twelve
months. This prepaid amount will then be recorded as an expense in the
respective fiscal year in which the license programs were acquired.
Transaction Software Technologies, Inc., Atlanta, USA, (TST)
Before the acquisition date of TST, the Company recognized sales with TST
for software licenses of DM 753.0 thousand in the year ended June 30, 1999, and
of DM 0 thousand in the years ended June 30, 1998, and 1997.
MeTechnology Europe GmbH, Dolzig/Leipzig
MeTechnology Europe GmbH is a 100% subsidiary of MeTechnology AG, Leipzig.
Before the acquisition date of MeTechnology AG, the Company recognized sales
with MeTechnology Europe GmbH for software licenses of DM 3,000.0 thousand in
the year ended June 30, 1999, and of DM 0 thousand in the years ended June 30,
1998, and June 30, 1997.
Attorneys' office Haver & Mailander
The attorneys Haver & Mailander resident in Stuttgart regularly work for the
Company. The wife of the Chief Executive Officer of the Company works there as
a partner. In her capacity as partner of the firm
F-31
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dr. Rover is not, however, involved in the Brokat engagement. The advisory
services charged by the attorneys' office to the Company in the six months
ended December 31, 1999, amounted to DM 251.0 thousand, in the year ended June
30, 1999, DM 301.0 thousand, in the year ended June 30, 1998, DM 2.0 thousand
and in the year ended June 30, 1997, DM 0 thousand.
Tax advisory firm RWT Reutlinger Wirtschaftstreuhand GmbH and the related
attorneys' office Rechtsanwaltsgesellschaft RWT Anwaltskanzlei GmbH (RWT)
The RWT resident in Reutlingen regularly work for the Company. The managing
partner of RWT is the supervisory board member Dr. Hermann Wundt. The services
charged by RWT to the Company in the six months ended December 31, 1999,
amounted to DM 53.0 thousand, in the year ended June 30, 1999, DM 351.0
thousand, in the year ended June 30, 1998, DM 62.0 thousand and in the year
ended June 30, 1997, DM 88.0 thousand.
In addition, see Note 11 for debts to shareholders and Note 16 for options
granted directly by management shareholders to employees of the Company.
Management believes that these related party transactions were under terms
no less favorable to the Company than those arranged with other parties.
Note 20. Subsequent Events
In February 2000, the management of Brokat decided to exercise the option to
acquire the remaining 74.9% of interest in Fernbach Financial Software S.A.,
Luxembourg. The option purchase price amounted to DM 35,760.0 thousand and will
be met by an issue of Companies shares (see also Note 3).
The following unaudited pro forma financial information presents results as
if the acquisition of TST and MeTechnology AG (see Note 4) had occurred at the
beginning of the periods June 30, 1998 and June 30, 1999 and as if the
acquisition of Fernbach Financial Software had occurred at the beginning of the
periods June 30, 1999, December 31, 1999 and June 30, 2000.
<TABLE>
<CAPTION>
June 30, June 30, December 31, June 30,
1998 1999 1999 2000
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ------------ -----------
(DM in thousands, except per share data)
<S> <C> <C> <C> <C>
Pro forma revenue............ 39,731 93,738 62,442 90,019
Pro forma net loss........... (50,721) (95,195) (54,829) (79,572)
Pro forma loss per share
before extraordinary items.. (4.14) (2.03) (2.85)
Pro forma loss per share..... (4.14) (2.03) (2.85)
</TABLE>
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization expense as a result
of goodwill arising from the purchase and interest expense on acquisition debt.
The pro forma results are not necessarily indicative of the results of
operations which actually would have resulted had the purchase been in effect
at the beginning of the respective periods or of future results.
Acquisition of Blaze Software, Inc. and GemStone Systems, Inc. (unaudited)
On June 20, 2000 the Company announced the acquisitions of Blaze Software,
Inc. and GemStone Systems, Inc. The purchase of Blaze will be made through the
issuance of approximately 4.9 million new shares of Brokat AG and is expected
to be closed by October 2000. The purchase of GemStone will be made
F-32
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through the issuance of approximately 2.4 million new shares of Brokat AG and
is expected to be closed by September 2000.
Note 21. Additional Local Disclosure Requirements
Exemption from the duty to prepare consolidated financial statements under
German GAAP in accordance with sec. 292 a HGB
As a listed company the parent company makes use of the option to prepare
exempting consolidated financial statements according to international
accounting standards as set forth in sec. 292 a HGB.
In accordance with the interpretation by the German Accounting Standards
Committee (GASC) in German Accounting Standard DRS 1 the consolidated financial
reporting of the parent company is in line with Directive 83/349/EG.
Variances to the HGB principles of group financial reporting relate to the
capitalization of tax loss carryforwards pursuant to SFAS 109, foreign currency
translation (SFAS 52), the measurement of work in process using the percentage-
of-completion method (Accounting Research Bulletin No. 45 (ARB) in conjunction
with SOP 97-2), the capitalization of costs for internally used software (SOP
98-1), the offsetting of issuing costs against issuing gains without effect on
income (SAB 1), the recording of expenses from employee stock options (APB 25)
and the amount of purchased goodwill (APB 16).
Consolidated companies
The consolidated financial statements of Brokat include all subsidiaries in
which the parent company holds an indirect or direct majority of voting rights.
<TABLE>
<CAPTION>
Equity
December 31, Net result
1999 1999
(in local (in local
Share Local currency, in currency, in
Name/seat of company as % Currency '000) '000)
-------------------- ----- -------- ------------ ------------
<S> <C> <C> <C> <C>
Brokat Asia Pte. Ltd., Singapore................... 100.0 SGD (5,981) (1,339)
Brokat Ltd., Hounslow, United Kingdom ............. 100.0 GBP (2,987) (772)
Brokat Infosystems Inc., Alpharetta, USA........... 100.0 USD (9,164) (3,085)
Brokat Systeme AG, Zurich, Switzerland ............ 100.0 CHF (1,418) (492)
Brokat Infosystems Ges.m.b.H., Wien, Austria ...... 100.0 ATS (8,726) (5,195)
GO-Solutions GmbH, Wilhelmshaven................... 51.0 DM 870 54
McTechnology AG, Leipzig........................... 100.0 DM 169,846 3,831
MeTechnology Europe GmbH, Dolzig................... 100.0 DM (6,689) 3,179
MeTechnology Kft., Budapest, Hungary .............. 100.0 HFT 16,652 7,716
Brokat Financial Systems Inc., Atlanta, USA
(former: Transaction Software Technologies, Inc.).. 100.0 USD (2,571) (1,991)
Brokat Australia Pty Ltd., Sydney, Australia....... 100.0 AUD (434) (434)
Brokat Infosystems S.a.r.l., Luxembourg............ 100.0 LUF 757 257
GEKA Beteiligungs Aktiengesellschaft,
Frankfurt a.M. ................................... 100.0 DM 99 0
</TABLE>
Brokat Australia and Brokat Luxembourg were founded in the six months ended
December 31, 1999. GEKA Beteiligungs Aktiengesellschaft was acquired in the six
months ended December 31, 1999. MeTechnology Europe GmbH, Dolzig/Leipzig, is a
subsidiary of MeTechnology AG, Leipzig. MeTechnology
F-33
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Kft., Budapest, Hungary, and GEKA Beteiligungs Aktiengesellschaft are
subsidiaries of MeTechnology Europe GmbH, Dolzig/Leipzig.
For the 100% subsidiaries of Brokat in Singapore, UK, USA, Switzerland,
Australia, Austria and Luxembourg, as well as for Go-Solutions GmbH and for
MeTechnology Kft. the disclosed net results refer to the six months ended
December 31, 1999. For the other subsidiaries the disclosed net results refer
to the full financial year 1999.
The net results of MeTechnology AG and MeTechnology Europe GmbH are
material affected by redemption of loans by the former shareholders of
MeTechnology AG.
Brokat's material additional investments are:
<TABLE>
<CAPTION>
Equity
December 31,
Share 1999 Net results 1999
Name/seat of company as % (in Euro, in '000) (in Euro, in '000)
-------------------- ----- ------------------ ------------------
<S> <C> <C> <C>
Fernbach Financial Software
S.A., Luxembourg............. 25.1 2,307 (27)
Fernbach Software S.A.,
Luxembourg................... 25.1 (1,250) (1,081)
Fernbach Software AG, Germany
............................. 25.1 106 43
Fernbach Software AG,
Switzerland ................. 25.1 (511) (200)
</TABLE>
All of the investments were acquired in the six months ended December 31,
1999 (see also Note 3).
Management Board and power of representation
Members of the Management Board are:
Stefan Rover Spokesman of the Board of Management
Dr. Boris Anderer Deputy Spokesman of the Board of Management
Michael Janssen Chief Financial Officer
Other directorships
Supervisory Board:
german networker Multimedia AG
Achim Schlumpberger Executive Vice President "New Technologies"
Michael Schumacher Executive Vice President of the "Financial
Systems Division"
Angelo Maestrini Chief Operating Officer Field Operations since
September 17, 1999
Total remuneration paid to members of the Management Board in the six
months ended December 31, 1999, amounted to DM 770.0 thousand.
The following were members of the Supervisory Board during the six months
ended December 31, 1999:
Mr. Falk F. Strascheg, Chairman
Munich General manager and partner of Technologie-
holding Venture Capital GmbH
F-34
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other directorships
Supervisory Board:
BinTec Communications AG
EOS AG
Ponsit Information Technologies AG
Scanla AG Optical Scanning
Going Public AG
Bank Austria TFV High Tech-Unternehmens Bet.
GmbH
European Technologies Holding N.V.
Advanced European Technologies N.V.
Strategic European Technologies N.V.
Technologieholding Central&Eastern Europe Fund
N.V.
Technologieholding Central&Eastern Europe
Parallel Fund B.V.
Dolphin Associates Informations &
Communications Technology Fund for Central and
Eastern Europe Oy.
Dr. Hermann Wundt, Tubingen Deputy Chairman
General manager and shareholder of RWT
Anwaltskanzlei GmbH and RWT Reutlinger
Wirtschaftstreuhand GmbH
Chairman of the management of RWT Gruppe
Other directorships
Supervisory Board:
SOMAT AG
Mr. Ernst G. Mayer, Pulheim General manager of Technologie-Beteiligungs-
Gesellschaft mbH der Deutschen Ausgleichsbank
Other directorships
Supervisory Board:
Artemedia AG
Otogene AG
Wavelight AG
Consultant:
cv cryptovision gmbh
Prof. Dr. Wolfgang Konig, University professor
Frankfurt
Other directorships
Supervisory Board:
Innovative Software AG
Ms. Angelika Pohlenz, General secretary ICC Deutschland
Wiesbaden
Ms. Maisy Ng, Singapore until November 18, 1999
Dr. Peter Page, Ottobrunn Independent market analyst since November 18,
1999
F-35
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other directorships
Supervisory Board:
AutInform AG
ATAMA AG
WEB.DE
Consultant:
i2 Technologies
Macros Consult
CuraData
Total remuneration paid to members of the Supervisory Board during the six
months ended December 31, 1999, amounted to DM 35.0 thousand.
Employees
Personnel expenses included in the Consolidated Statements of Operations are
as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
June 30, December 31,
1999 1999
---------- ------------
(DM in thousands)
<S> <C> <C>
(56,611) (51,551)
======= =======
thereof non-cash charges associated with stock
option grants (16,340) (12,240)
======= =======
Number of salaried employees (annual average)
<CAPTION>
Six Months
Year Ended Ended
June 30, December 31,
1999 1999
---------- ------------
<S> <C> <C>
311 538
======= =======
Income relating to other periods
<CAPTION>
Six Months
Year Ended Ended
June 30, December 31,
1999 1999
---------- ------------
(DM in thousands)
<S> <C> <C>
0 1,078
======= =======
</TABLE>
F-36
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEVELOPMENT OF FIXED ASSETS OF THE GROUP FOR THE SIX MONTHS ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
Acquisition and Manufacturing Cost Accumulated Depreciation Net Book Values
---------------------------------------- ---------------------------------------- ---------------------
July 1, December 31, July 1, December 31, June 30, December 31,
1999 Additions Reversals 1999 1999 Additions Reversals 1999 1999 1999
------- --------- --------- ------------ ------- --------- --------- ------------ -------- ------------
(DM in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intangible
assets
Goodwill........ 212,948 0 24,062 188,887 3,542 15,249 0 18,792 209,406 170,095
Customer list... 5,324 0 0 5,324 143 532 0 675 5,181 4,649
Software........ 2,709 443 28 3,124 635 507 62 1,080 2,074 2,044
------- ----- ------ ------- ------ ------ --- ------ ------- -------
220,980 443 24,090 197,335 4,320 16,288 62 20,547 216,661 176,788
Tangible assets
Computer
equipment,
furnitures and
fixtures........ 14,587 3,891 369 18,109 6,264 2,588 245 8,607 8,323 9,502
------- ----- ------ ------- ------ ------ --- ------ ------- -------
235,567 4,334 24,459 215,442 10,584 18,876 307 29,153 224,984 186,290
======= ===== ====== ======= ====== ====== === ====== ======= =======
Financial assets
Investment in
associated
companies....... 0 4,155 0 4,155 0 16 0 16 0 4,139
Other long-term
investments..... 0 1,013 0 1,013 0 0 0 0 0 1,013
------- ----- ------ ------- ------ ------ --- ------ ------- -------
0 5,168 0 5,168 0 16 0 16 0 5,152
======= ===== ====== ======= ====== ====== === ====== ======= =======
</TABLE>
F-37
<PAGE>
BROKAT AG
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
Note TDM TDM
---- ----------- ------------
(in thousands of Deutsche
Mark - TDM)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... 163,856 6,963
Accounts receivable (less allowance for doubtful
accounts of TDM 3,244 and TDM 1,575 at June 30,
2000 and December 31, 1999, respectively)...... 63,419 36,187
Cost and estimated earnings in excess of
billings on uncompleted contracts.............. (3) 2,965 1,965
Advances on purchase commitments................ 0 3,000
Prepaid expenses and other current assets....... 21,781 6,795
-------- --------
Total current assets............................ 252,021 54,910
-------- --------
Property and equipment, at cost
Computer equipment............................... 19,080 12,813
Furniture and fixtures........................... 9,699 5,296
Less: accumulated amortization................... (14,397) (8,607)
-------- --------
14,382 9,502
-------- --------
Goodwill......................................... 245,267 188,887
Other intangible assets.......................... 10,130 8,448
Less: accumulated amortization................... (36,627) (20,547)
-------- --------
218,770 176,788
-------- --------
Investments in associated companies.............. 0 4,139
Other long-term investments...................... 6,631 1,013
Deferred income taxes............................ 4,363 2,333
-------- --------
Total Assets.................................... 496,167 248,685
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt to banks........................ (3) 174 42,271
Other short-term debt........................... 0 5,665
Accounts payable, trade......................... 8,391 5,043
Payroll-related accruals........................ 8,852 5,296
Tax-related accruals............................ 4,096 2,150
Billings in excess of cost and estimated
earnings on uncompleted contracts.............. (3) 5,546 1,818
Other accrued expenses and current liabilities.. 17,217 6,264
Deferred income................................. 4,853 3,579
Deferred income taxes........................... 4,025 2,377
-------- --------
Total current liabilities....................... 53,154 74,463
-------- --------
Long-term debt to banks.......................... 2,000 2,000
Other long-term debt............................. (3) 246,596 1,850
-------- --------
Total liabilities............................... 301,750 78,313
-------- --------
Minority interest............................... 326 426
-------- --------
Shareholders' equity: (3)
Common Stock.................................... 53,416 52,512
Additional paid-in capital...................... 449,336 343,260
Accumulated deficit............................. (185,719) (109,064)
Deferred compensation........................... (118,809) (113,376)
Accumulated other comprehensive loss............ (4,133) (3,386)
-------- --------
Total shareholders' equity...................... 194,091 169,946
-------- --------
Total liabilities and shareholders' equity...... 496,167 248,685
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-38
<PAGE>
BROKAT AG
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
(unaudited) TDM (unaudited) TDM
---------------- ----------------
(in thousands of Deutsche Mark--
TDM)
<S> <C> <C>
Cash flow from Operating Activities:
Net loss.................................... (76,686) (25,394)
Adjustments to reconcile net loss to net
cash used in operating activities
Minority interest........................... (99) (90)
Depreciation and amortization............... 19,231 5,720
Gain on disposal of property and equipment.. 0 (2)
Deferred income taxes....................... (381) 0
Non-cash charges associated with stock
option grants.............................. 30,735 10,280
Changes in operating assets and liabilities:
Accounts receivable........................ (23,963) (20,247)
Net changes in cost and estimated earnings
in excess of billings..................... 3,823 3,186
Prepaid expenses and other current assets.. (11,378) 790
Accounts payable, trade.................... 2,676 3,459
Payroll and tax related accruals........... 2,796 2,050
Other accrued expenses and liabilities..... 9,613 (3,123)
Deferred income............................ (1,998) (319)
------- -------
Net cash used in operating activities....... (45,631) (23,690)
------- -------
Cash flow from Investing Activities
Acquisitions of intangible assets............ (1,124) (4,745)
Purchases of property and equipment......... (6,607) (2,694)
Purchases of investments.................... (5,357) 0
Acquisitions, net of cash acquired.......... 1,132 (29,431)
Proceeds from sale of property and
equipment.................................. 0 293
------- -------
Net cash used in investing activities...... (11,956) (36,577)
------- -------
Cash Flow from Financing Activities
Net change in short-term debt............... (47,761) 0
Proceeds from debt issuances................ 244,744 0
Proceeds from sale of common stock, net of
costs...................................... 18,244 219
------- -------
Net cash provided by financing activities.. 215,227 219
------- -------
Effect of Exchange Rate Differences on Cash.. (747) (1,650)
Increase (Decrease) in Cash and Cash
Equivalents................................. 156,893 (61,698)
Cash and Cash Equivalents.................... 6,963
At the beginning of the period............... 68,839
------- -------
At the end of the period..................... 163,856 7,141
------- -------
Supplemental Disclosure of Cash Flow
Information Cash paid for:
Interest.................................... 867 616
Income taxes................................ 0 0
</TABLE>
Supplemental disclosures of non-cash transactions:
Effective as of May 19, 2000 BROKAT AG exercised its option to acquire the
remaining 74.9% of interest in Fernbach Financial Software S.A., Luxembourg
through the issuance of 182,838 of the Company's common shares. TDM 148 of
incidental acquisitions costs were paid in cash.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-39
<PAGE>
BROKAT AG
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000, AND 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three months ended Three months ended Six months ended
June 30, June 30, June 30, Six months ended
2000 1999 2000 June 30,
(unaudited) (unaudited) (unaudited) 1999
Note TDM TDM TDM (unaudited) TDM
---- ------------------ ------------------ ---------------- ----------------
(in thousands of Deutsche Mark--TDM)
<S> <C> <C> <C> <C> <C>
Revenues................ (5) 43,247 25,173 81,729 42,816
Cost of Sales (exclusive
of TDM 3,055 TDM 2,222
TDM 9,503 and TDM 3,871
of non-cash charges from
stock option grants in
the three months ended
June 30, 2000 and
June 30, 1999 and the
six months ended
June 30, 2000 and June
30, 1999)............... (16,966) (15,462) (32,870) (20,954)
---------- ---------- ---------- ----------
Gross profit............ 26,281 9,711 48,859 21,862
---------- ---------- ---------- ----------
Selling expenses
(exclusive of TDM 3,724
TDM 1,923 TDM 10,489 and
TDM 4,306 of non-cash
charges from stock
option grants in the
three months ended June
30, 2000 and June 30,
1999 and the six months
ended June 30, 2000 and
June 30, 1999).......... (20,679) (13,379) (36,283) (23,313)
General and
administrative expenses
(exclusive of TDM 1,559
TDM 582 TDM 4,546 and
TDM 1,209 of non-cash
charges from stock
option grants in the
three months ended June
30, 2000 and June 30,
1999 and the six months
ended June 30, 2000 and
June 30, 1999).......... (8,659) (4,046) (15,725) (6,547)
Research and development
expenses (exclusive of
TDM 2,040 TDM 413 TDM
6,197 and TDM 894 of
non-cash charges from
stock option grants in
the three months ended
June 30, 2000 and June
30, 1999 and the six
months ended June 30,
2000 and June 30,
1999)................... (11,328) (2,874) (21,437) (4,837)
Amortization of goodwill
and other intangible
assets from
acquisitions............ (8,026) (4,020) (15,184) (4,020)
Non-cash charges
associated with stock
option grants........... (10,378) (5,140) (30,735) (10,280)
---------- ---------- ---------- ----------
Total operating
expenses............... (59,070) (29,459) (119,364) (48,997)
---------- ---------- ---------- ----------
Operating loss.......... (32,789) (19,748) (70,505) (27,135)
---------- ---------- ---------- ----------
Financial Income, net... (5,582) (275) (6,410) 53
Other, net.............. (2,107) 2,156 460 1,711
---------- ---------- ---------- ----------
Loss before income
taxes.................. (40,478) (17,867) (76,455) (25,371)
---------- ---------- ---------- ----------
Income tax benefit
(expense).............. 22 (113) (227) (113)
Minority interest....... 36 59 99 90
Other taxes............. (92) 0 (103) 0
---------- ---------- ---------- ----------
Net loss................ (4) (40,512) (17,921) (76,686) (25,394)
---------- ---------- ---------- ----------
Basic and diluted loss
per share:
Net loss................ (1.5) (0.91) (2.84) (1.29)
---------- ---------- ---------- ----------
Weighted average number
of common shares
outstanding............. 27,083,699 19,694,650 26,966,236 19,694,650
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-40
<PAGE>
BROKAT AG
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
BROKAT AG (formerly: BROKAT Infosystems AG), Stuttgart, Germany, was founded
on September 17, 1994. The Company and its subsidiaries develop and market
cross-channel software for the integration of existing IT systems and
applications into various electronic channels such as Internet, mobile radio or
call centers. The Company's main customers are banks and other institutions
that offer and process services through electronic channels.
The accompanying consolidated financial statements, which include the
operations of the Company and its wholly-owned subsidiaries, and the financial
information included herein are unaudited. However, such information includes
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary to fairly state the results of the
interim periods. Interim results are not necessarily indicative of results to
be expected for the full year. It is suggested that these consolidated
financial statements be read in conjunction with the Company's audited
consolidated financial statements for the six months ended December 31, 1999,
and for the years ended June 30, 1999, 1998 and 1997 and notes thereto.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
2. NET INCOME (LOSS) PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per share ("SFAS
128"). Basic net income (loss) per share is calculated by dividing net income
(loss) available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net income (loss) per
share is calculated in the same manner as basic net income (loss) per share
except that such computation includes the effects of the Company's outstanding
stock options, if dilutive. For the three months ended June 30, 2000, and 1999,
and the six months ended June 30, 2000 and 1999 the effects of including
outstanding stock options in the diluted net income (loss) per share
calculation would have been anti-dilutive. Therefore, options to purchase
2,409,639 shares of common stock for the three and the six months ended June
30, 2000 and 1,204,818 shares of common for the three and the six months ended
June 30, 1999, respectively, were not considered in the computation of diluted
loss per share for such periods.
3. FINANCIAL STATEMENT COMPONENTS
Cost and estimated earnings on uncompleted contracts
Costs and estimated earnings on uncompleted contracts and related amounts
billed are as follows:
<TABLE>
<CAPTION>
June
30, December 31,
2000 1999
TDM TDM
------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts.............. 12,723 5,379
Estimated earnings................................... 14,840 6,161
------- -------
27,563 11,540
------- -------
Less billings to date................................ (30,144) (11,393)
-- --
------- -------
(2,581) 147
======= =======
</TABLE>
F-41
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Such amounts are included in the accompanying Consolidated Balance Sheets
under the following captions:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
TDM TDM
-------- ------------
<S> <C> <C>
Cost and estimated earnings in excess of billings
on uncompleted contracts......................... 2,965 1,965
Billings in excess of cost and estimated earnings
on uncompleted contracts......................... (5,546) (1,818)
------ ------
(2,581) 147
====== ======
</TABLE>
Short-term debt to banks
At June 30, 2000, the Company had TDM 75,500 (December 31, 1999: TDM 75,500)
general purpose lines of credit with several banks. Under the Credit
Arrangements, the Company has the option to borrow amounts at various interest
rates, payable in Deutsche Mark. Use of the borrowing is unrestricted, with the
exception of the borrowings under the line of credit with Deutsche Bank AG,
Stuttgart, and the borrowings are unsecured.
At June 30, 2000, the Company had outstanding debt borrowings under the
Credit Arrangements amounting to TDM 174 (December 31, 1999: TDM 42,271).
The interest rate on short-term borrowings outstanding at June 30, 2000, was
between 6.5% and 9.0% (December 31, 1999: between 4.08% and 6.0%).
Long-Term Debt
During the first quarter of 2000 the Company issued a total of EURO 125
million in senior notes. The senior notes mature in March 2010. Interest on the
notes will accrue form the date of their issuance and be payable in cash at a
rate of 11 1/2% per year semiannually in arrears on March 31 and September 30
of each year, commencing September 30, 2000, to holders of record on the
immediately preceding March 15 and September 15. The net proceeds of the senior
notes were and will be used to repay existing short-term and long-term
indebtedness under the bank credit facilities.
The Company entered into a registration rights agreement relating to the
notes. Under this agreement, the Company agreed to file a registration
statement on the appropriate form under the United States Securities Act of
1933, as amended (the "Act") with respect to an offer to exchange notes for New
Notes registered under the Act with terms substantially identical to those of
the Notes. In connection with the exchange offer, application will be made to
list the New Notes on the Luxembourg Stock Exchange.
Under the registration rights agreement, the Company also agreed to pay
liquidated damages if (among others) the registration statement required under
the registration rights agreement is not filed on or prior to the applicable
filing deadline. Liquidated damages will accrue from the date of such default
on the principal amount of the notes at a rate of 0.25% per annum for the first
90-day period immediately following the occurrence of such a default,
increasing by an additional 0.25% per annum with respect to each subsequent
90-day-period up to a maximum of liquidated damages of 2.0% per annum. On May
25, 2000 the Company filed a registration statement on the F-4 form of the
Securities Act relating to the senior notes issued in March 2000. This
registration statement was amended on July 19, 2000.
F-42
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's subsidiaries are restricted from paying dividends unless they
meet the statutory financial requirements applicable to them. In addition, the
Company's debt covenants restrict its subsidiaries from (1) paying dividends or
making any other distributions to the Company or any other subsidiaries of the
Company (2) paying any indebtedness owed to the Company or any subsidiary of
the Company (3) making loans or advances to the Company or any subsidiary of
the Company, or (4) transferring any properties or assets to the Company or any
subsidiary of the Company. The amount of restricted net assets at December 31,
1999, the end of the most recently completed fiscal year, was immaterial.
Shareholders' Equity
On November 7, 1999, the Company passed a resolution to increase capital by
issuing 279,573 new shares with an equivalent value of EURO 10 million (TDM
19,558) with Intel Atlantic, Inc., Santa Clara, USA. The Company is entitled to
the funds once the capital increase has been entered in the trade register.
This has been done as of May 12, 2000.
In February 2000, the management of BROKAT exercised its option to acquire
the remaining 74.9% of interest in Fernbach Financial Software S.A.,
Luxembourg. The option purchase price amounted to TDM 35,760 and was funded
through the issuance of 182,838 of the Company's common shares, effective as of
May 19, 2000.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Six months ended Six months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
TDM TDM TDM TDM
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss)....... (40,512) (17,921) (76,686) (25,394)
Foreign currency
translation
adjustments............ 1,081 (1,650) (747) (1,650)
Unrealized gain on
available for sale
securities............. 0 0 36 0
------- ------- ------- -------
(39,431) (19,571) (77,433) (27,044)
======= ======= ======= =======
</TABLE>
5. SEGMENT INFORMATION
The Company is managed as one business segment. The number of business
segments may expand as the Company introduces new products or services or
expands into different markets.
The external revenues by product group break down as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Six months ended Six months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
TDM TDM TDM TDM
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
License revenues........ 19,528 6,450 38,499 15,598
Professional services... 18,365 6,797 31,094 12,275
Customer support........ 4,945 1,752 8,891 3,440
Income from the sale of
hardware............... 406 10,118 3,207 11,447
Other................... 3 56 38 56
------ ------ ------ ------
43,247 25,173 81,729 42,816
====== ====== ====== ======
</TABLE>
F-43
<PAGE>
BROKAT INFOSYSTEMS AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. ACQUISITIONS
On June 20, 2000 the Company announced the acquisitions of Blaze Software,
Inc. and Gemstone Systems, Inc. The purchase of Blaze will be made through the
issuance of approximately 4.9 million new shares of BROKAT AG and is expected
to be closed by October 2000. The estimated value of consideration issued is DM
1,145 Mio.
The purchase of Gemstone will be made through the issuance of approximately
2.4 Million new shares of BROKAT AG and is expected to be closed by September
2000. The estimated value of consideration issued is DM 554 Mio.
The issuance of new shares is possible only after the corresponding increase
of the Company's common stock, that is, the date on which the increase of
common stock is registered with the Trade Register. This registration has not
been completed as of June 30, 2000.
On June 28, 2000 Brokat entered into a definitive agreement with MyAlert.com
S.A., Madrid, Spain, to participate in an increase of share capital. Brokat
will eventually purchase 1,365 shares by paying TDM 2,199 and by a contribution
in kind of 96,149 new shares of Brokat. The agreed estimated value of
consideration issued is TDM 26,329. As of June 30, 2000 the deal was not
consummated. It is expected to close in the 3rd quarter of 2000.
MyAlert has been a customer of Brokat AG with purchases of DM 8.1 Mio. in
the 6 months ended June 30, 2000 and DM 0.0 in the comparable period in the
prior year.
F-44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Transaction Software Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Transaction
Software Technologies, Inc. (a Georgia corporation) and subsidiary as of
September 30, 1998 and 1997 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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transaction Software
Technologies, Inc. and subsidiary as of September 30, 1998 and 1997 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.
Arthur Andersen LLP
Atlanta, Georgia
January 21, 2000
F-45
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 720,111 $ 617,675
Accounts receivable, net of allowance for doubtful
accounts of $121,349 and $134,188 in 1998 and
1997, respectively................................ 1,092,139 1,232,698
Prepaid expenses................................... 43,839 11,322
---------- ----------
Total current assets.............................. 1,856,089 1,861,695
---------- ----------
Property and equipment:
Computer equipment................................. 978,094 901,004
Office furniture................................... 110,789 100,547
---------- ----------
1,088,883 1,001,551
Less accumulated depreciation...................... (813,830) (674,767)
---------- ----------
Property and equipment, net....................... 275,053 326,784
---------- ----------
Total assets...................................... $2,131,142 $2,188,479
========== ==========
<CAPTION>
Liabilities and shareholders' equity 1998 1997
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable................................... $ 62,827 $ 17,725
Accrued expenses................................... 106,666 178,035
Accrued income taxes............................... 19,447 0
Deferred income taxes.............................. 322,700 334,924
Current maturities of notes payable................ 290,518 85,121
Deferred revenue................................... 594,828 642,361
---------- ----------
Total current liabilities......................... 1,396,986 1,258,166
---------- ----------
Long-term liabilities:
Notes payable, less current portion................ 29,816 280,074
Deferred income taxes.............................. 29,100 5,605
---------- ----------
Total long-term liabilities....................... 58,916 285,679
---------- ----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $1 par value; 10,000 shares
authorized; 600 shares issued and outstanding in
1998 and 1997..................................... 600 600
Additional paid-in capital......................... 18,960 18,960
Retained earnings.................................. 655,680 625,074
---------- ----------
Total shareholders' equity........................ 675,240 644,634
---------- ----------
Total liabilities and shareholders' equity........ $2,131,142 $2,188,479
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-46
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenue:
Contract revenue................................... $3,312,163 $2,843,150
Service revenue.................................... 1,186,715 1,053,792
---------- ----------
Total revenue...................................... 4,498,878 3,896,942
---------- ----------
Operating expenses:
Cost of services................................... 1,500,410 1,427,210
General and administrative......................... 418,740 281,205
Sales and marketing................................ 632,099 625,248
Research and development........................... 1,841,363 1,873,673
---------- ----------
Total operating expenses........................... 4,392,612 4,207,336
---------- ----------
Operating income.................................... 106,266 (310,394)
Other income (expense):
Investment income.................................. 24,346 14,534
Interest expense................................... (12,936) (16,608)
---------- ----------
Income before income taxes.......................... 117,676 (312,468)
Provision (benefit) for income taxes (Note 5)....... 47,070 (124,987)
---------- ----------
Net income (loss)................................... $ 70,606 $ (187,481)
========== ==========
Net income (loss) per share:
Basic.............................................. $ 117.68 $ (312.47)
========== ==========
Diluted............................................ $ 117.68 $ (312.47)
========== ==========
Weighted average shares:
Basic.............................................. 600 600
========== ==========
Diluted............................................ 600 600
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-47
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
------------- Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, September 30,
1996.................... 600 $600 $18,960 $842,555 $862,115
Net loss................ 0 (187,481) (187,481)
Dividends on common
stock.................. 0 (30,000) (30,000)
--- ---- ------- -------- --------
Balance, September 30,
1997.................... 600 600 18,960 625,074 644,634
Net income.............. 0 70,606 70,606
Dividends on common
stock.................. 0 (40,000) (40,000)
--- ---- ------- -------- --------
Balance, September 30,
1998.................... 600 $600 $18,960 $655,680 $675,240
=== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-48
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 70,606 $(187,481)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 139,063 142,481
Deferred income taxes................................... 11,271 331,933
Changes in operating assets and liabilities:
Accounts receivable..................................... 140,559 (415,533)
Other current assets.................................... (32,517) 4,145
Accounts payable........................................ 45,102 (37,093)
Accrued expenses........................................ (51,922) 161,350
Deferred revenues....................................... (47,533) 284,171
-------- ---------
Cash provided by operating activities.................... 274,629 283,973
-------- ---------
Cash flows from investing activities:
Purchases of equipment and furniture..................... (87,332) (136,257)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................. 22,500 245,000
Principal payments on notes payable...................... (67,361) (79,425)
Dividends paid........................................... (40,000) (30,000)
-------- ---------
Cash provided by (used in) financing activities.......... (84,861) 135,575
-------- ---------
Change in cash and cash equivalents....................... 102,436 283,291
Cash and cash equivalents, beginning of year.............. 617,675 334,384
-------- ---------
Cash and cash equivalents, end of year.................... $720,111 $ 617,675
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 12,936 $ 16,608
======== =========
Cash paid for taxes...................................... $ 7,315 $ 944
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-49
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. Nature of business
Transaction Software Technologies, Inc. (the "Company") creates, markets,
licenses, installs, and services various software products that allow financial
institutions to conduct electronic commerce with their corporate clients
through dial-up services or over the Internet. The Company's wholly owned
subsidiary, Transoft Services, Inc. ("TSI"), provides related consulting
services.
2. Summary of significant accounting policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and TSI. All significant intercompany accounts and transactions have been
eliminated.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be the equivalent of cash for the
purpose of balance sheet and statement of cash flows presentation. Cash
equivalents, which consist primarily of money market accounts, are carried at
cost which approximates fair market value.
Property and Equipment
Property and equipment which primarily consists of computer equipment and
furniture and fixtures, are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the various classes of
property, which are three to five years for all computer equipment, and five to
seven years for all furniture and fixtures. Depreciation expense for the years
ended September 30, 1998 and 1997 was $139,063 and $142,481, respectively.
Expenditures for maintenance and repairs are charged to expense as incurred,
and the costs of renewals and betterments are capitalized. Costs and the
related accumulated depreciation of assets sold or retired are removed from the
respective accounts. Any resulting gain or loss is reflected in the
consolidated statements of operations.
During 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used for long-
lived assets and certain identifiable intangibles to be disposed of. The
Company reviews its long-lived assets consisting of property and equipment for
impairment at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset should be assessed.
An impairment is recognized when the undiscounted future cash flows estimated
to be generated by the assets are not sufficient to recover the unamortized
balance of the assets. In such event, an impairment loss is recorded for the
difference between the fair value of the asset
F-50
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(based on discounted cash flows) and its carrying amount. Management believes
that the long-lived assets in the accompanying balance sheets are appropriately
valued.
Revenue Recognition
Contract Revenue
Revenue from fixed price contracts is recognized using the percentage of
completion method measured by the cost to cost method. Contract costs include
direct labor, combined with allocations of operational overhead, and other
direct costs. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job conditions
resulting in changes to estimated profitability may result in revisions to
costs and revenue and are recognized in the period in which the revisions are
determined.
Services Revenue
Revenue from consulting services is recognized as the service is performed.
Maintenance revenue is deferred and recognized ratably over the term of the
maintenance agreement, which is typically 12 months.
Product Development Costs
Costs incurred to establish the technological feasibility of computer
software products are included in research and development expense and are
charged to expense as incurred. The Company capitalizes costs incurred between
the point of establishing technological feasibility and general release when
such costs are material. As of September 30, 1998 and 1997, the Company has no
capitalized computer software development costs.
Income Taxes
The company utilizes the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes are determined based on the difference between
the financial and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized.
Fair Values of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, notes payable, and other short-term
assets and liabilities. The fair value of the Company's long-term debt is
estimated based on the current rates offered to the Company for debt of similar
terms and maturities. Under this method, the Company's fair value of long-term
debt was not significantly different than the stated value at September 30,
1998 and 1997. Based on the short-term nature or variable interest rates of the
remaining financial instruments, the estimated fair market values of the
Company's financial instruments approximate their carrying values at September
30, 1998 and 1997.
Concentrations of Business and Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. Accounts receivable
represent trade receivables and are unsecured. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral to support customer receivables.
F-51
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's clients operate within the financial services industry, and a
significant portion of the Company's revenues is derived from a limited number
of clients. During the years ended September 30, 1998 and 1997, the following
clients individually accounted for more than 10% of the Company's revenue:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Client A.......................... 21% 27%
Client B.......................... 12% 13%
Client C.......................... 11% *
Client D.......................... 12% *
</TABLE>
--------
*Accounted for less than 10% of total revenues for the period indicated.
At September 30, 1998, 15% of the Company's accounts receivable related to
Client A and the remaining three clients make up 20%.
Net income (loss) per share
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" for all periods presented. This statement
replaces previously reported primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share exclude any dilutive effect of options and convertible
securities. Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common stock outstanding during
the period. Diluted net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common stock and dilutive stock
equivalents outstanding during the period. The following table sets forth the
computation of basic and diluted net income (loss) per share.
<TABLE>
<CAPTION>
1998 1997
------- ---------
<S> <C> <C>
Numerator:
Net income (loss)...................................... $70,606 $(187,481)
======= =========
Denominator:
Weighted average shares outstanding--Basic ............ 600 600
Weighted average shares outstanding--Diluted........... 600 600
</TABLE>
Recent Accounting Pronouncements
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and disclosing comprehensive
income and its components. Comprehensive income is defined as the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. In addition to net
income, SFAS No. 130 requires the reporting of other comprehensive income,
defined as revenues, expenses, gains, and losses that under generally accepted
accounting principles are not included in net income. As of September 30, 1998,
the Company had no items of other comprehensive income.
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
at fair value. Under this statement, accounting for changes in fair value of a
derivative depends on its intended use and designation. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB
F-52
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of SFAS
133. SFAS 133 will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 is not to be applied retroactively
to financial statements of prior periods. The Company expects no material
impact on its results of operations, comprehensive income or financial position
as a result of the adoption of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Under SOP 98-1, computer
software costs incurred in the preliminary project stage are expensed as
incurred. Additional, specified upgrades and enhancements may be capitalized;
however, external costs related to maintenance, unspecified upgrades, and
enhancements should be recognized as expense over the contract period on a
systematic basis. Internal costs incurred for maintenance should be expensed as
incurred. In the opinion of management, the adoption of SOP 98-1 will not have
a material effect on the consolidated financial statements of the Company.
3. Notes Payable
Notes payable consist of the following at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Note payable to vendor, noninterest-bearing, principal
balance due in six equal monthly installments beginning
December 22, 1998....................................... $232,500 $210,000
Note payable to bank, interest at 8.7%, principal and
interest payable in monthly installments of $2,895
through December 1999; secured by computer equipment.... 41,137 70,781
Note payable to bank, interest at 7.8%, principal and
interest payable in monthly installments of $1,212
through January 2001; secured by computer equipment..... 30,954 42,494
Note payable to bank, interest at 8.75%, principal and
interest payable in monthly installments of $1,108
through December 1999; secured by computer equipment.... 15,743 27,127
Equipment loan, interest at 6.5%, principal and interest
payable in monthly installments of $2,989 through
February 1998........................................... 0 14,793
-------- --------
320,334 365,195
Less current portion..................................... 290,518 85,121
-------- --------
$ 29,816 $280,074
======== ========
</TABLE>
Following are maturities of notes payable as of September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999................................ $290,518
2000................................ 26,831
2001................................ 2,985
--------
$320,334
========
</TABLE>
4. Shareholders' Equity
During the years ended September 30, 1998 and 1997, the board of directors
declared dividends on common stock. The Company paid dividends in the amount of
$66.67 and $50 per share during the years ended September 30, 1998 and 1997,
respectively.
F-53
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Income Taxes
Income tax expense for the years ended September 30, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Current income tax provision ........................... $ 42,562 $ 7,786
Deferred income tax provision (benefit)................. 4,508 (132,773)
-------- ---------
$ 47,070 $(124,987)
======== =========
</TABLE>
The following is a summary of the items which resulted in recorded income
tax provision to differ from taxes computed using the statutory federal income
tax rate for the years ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Statutory federal income tax rate.............................. 34.0% 34.0%
Effect of:
State income tax............................................ 6.0 6.0
----- -----
Pro forma income taxes......................................... 40.0% 40.0%
===== =====
</TABLE>
All net income (loss) before taxes was derived in the United States.
The components of the deferred tax liabilities as of September 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current:
Accrual basis financial statement income in excess of
cash basis taxable income.............................. $322,700 $334,924
======== ========
Long-term:
Depreciation............................................ $ 29,100 $ 5,605
======== ========
</TABLE>
6. Commitments and Contingencies
Legal Proceedings
The Company is not currently a party to any material legal proceedings. From
time to time, the Company may be subject to legal proceedings and claims in the
ordinary course of business. Such claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources. In
addition, the Company, from time to time, may become a party to legal or
administrative proceedings or arbitration that arise in the ordinary course of
business.
Operating Leases
The Company leases its office facilities and other equipment under
noncancelable operating lease agreements which expire on various dates through
November 1999. The Company recorded lease expense of approximately $98,600 and
$101,500 for the years ended September 30, 1998 and 1997, respectively, related
to these leases.
F-54
<PAGE>
TRANSACTION SOFTWARE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Minimum future payments under noncancelable operating leases as of September
30 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999................................. $79,980
2000................................. 19,995
-------
$99,975
=======
</TABLE>
7. Retirement Plan
Effective May 1, 1993, the Company adopted a 401(k) retirement plan (the
"Plan") covering substantially all employees. The Plan provides for
discretionary employer matching contributions. The Company contributed
approximately $44,500 and $18,500 during the years ended September 30, 1998 and
1997, respectively. These amounts have been recorded as general and
administrative expenses.
8. Subsequent event (unaudited)
Effective May 10, 1999, BROKAT Infosystems AG ("BROKAT"), a German company,
acquired substantially all of the assets of the Company under the terms of a
stock purchase agreement. The purchase price was approximately $18.6 million
and is being accounted for by BROKAT under the purchase method of accounting.
F-55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ESD Vermogensverwaltungsgesellschaft mbH:
We have audited the accompanying consolidated balance sheets of ESD
Vermogensverwaltungsgesellschaft mbH and subsidiaries (the "Company") as of
December 31, 1997 and the related consolidated statements of operations, cash
flows and shareholders' equity for the year then ended. These consolidated
financial statements, which have been prepared in compliance with German
commercial law, are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in Germany which are substantially consistent with those standards in
the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ESD Vermogensverwaltungsgesellschaft mbH and subsidiaries as of December 31,
1997 and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles in Germany.
Accounting practices used by ESD Vermogensverwaltungsgesellschaft mbH in
preparing the accompanying consolidated financial statements conform with
generally accepted accounting principles in Germany but do not conform with
accounting principles generally accepted in the United States (US GAAP). A
description of these differences and a complete reconciliation of consolidated
net income and shareholders' equity to US GAAP are set forth in Note V.
Arthur Andersen
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Stuttgart, Germany Dr. Schmidt Baierl
March 10, 2000 Wirtschaftsprufer Wirtschaftsprufer
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of MeTechnology Aktiengesellschaft:
We have audited the accompanying consolidated balance sheets of MeTechnology
Aktiengesellschaft and subsidiaries (the "Company") as of December 31, 1998 and
the related consolidated statements of operations, cash flows and shareholders'
equity for the year then ended. These consolidated financial statements, which
have been prepared in compliance with German commercial law, are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in Germany which are substantially consistent with those standards in
the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MeTechnology Aktiengesellschaft and subsidiaries as of December 31, 1998 and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles in Germany.
Accounting practices used by MeTechnology Aktiengesellschaft in preparing
the accompanying consolidated financial statements conform with generally
accepted accounting principles in Germany but do not conform with accounting
principles generally accepted in the United States (US GAAP). A description of
these differences and a complete reconciliation of consolidated net income and
shareholders' equity to US GAAP are set forth in Note V.
Arthur Andersen
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Stuttgart, Germany Dr. Schmidt Baierl
March 10, 2000 Wirtschaftsprufer Wirtschaftsprufer
F-57
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(DM in thousands)
<S> <C> <C>
ASSETS
FIXED ASSETS
Intangible assets
Software.......................................... 94 28
------ ------
Property, plant and equipment
Buildings on third party land..................... 30 16
Other equipment, factory and office equipment..... 832 428
------ ------
862 444
------ ------
956 472
------ ------
CURRENT ASSETS
Inventories
Raw materials, consumables and supplies........... 47 74
Work in process................................... 719 263
------ ------
766 337
------ ------
Receivables and other assets
Trade receivables................................. 2,275 170
Other assets...................................... 588 117
------ ------
2,863 287
------ ------
Other securities................................... 0 1,869
Cash, bank balances................................ 808 1,454
------ ------
808 3,323
------ ------
4,437 3,947
------ ------
PREPAID ASSETS...................................... 10 73
------ ------
ACCUMULATED DEFICIT FOR THE YEAR NOT COVERED BY
EQUITY............................................. 15,046 8,175
------ ------
20,449 12,667
====== ======
EQUITY AND LIABILITIES
EQUITY
Common Stock....................................... 1,000
GmbH capital....................................... 150
Additional paid-in capital......................... 417 1,000
Accumulated deficit covered by equity.............. (1,417) (1,150)
------ ------
0 0
------ ------
CONTRIBUTIONS FROM SILENT PARTNERS
SUBORDINATED LOANS
Contributions from silent partners................. 9,950 8,000
Subordinated loans................................. 3,530 3,530
------ ------
13,480 11,530
------ ------
ACCRUALS
Other accruals..................................... 939 231
------ ------
LIABILITIES
Convertible bonds.................................. 3,352 0
Liabilities to banks............................... 750 8
Payments received on account of orders............. 513 262
Trade payables..................................... 916 201
Other liabilities.................................. 460 435
------ ------
5,991 906
------ ------
DEFERRED INCOME..................................... 39 0
------ ------
20,449 12,667
====== ======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-58
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997
------------ -----------
(DM in thousands)
<S> <C> <C>
Revenue............................................. 4,870 1,965
Increase (decrease) in inventories.................. 456 (25)
Other operating income.............................. 240 84
Cost of materials
Cost of raw materials, consumables and supplies
and for purchased goods.......................... (238) (88)
Cost of purchased services........................ (407) (210)
Personnel expenses
Wages and salaries................................ (5,481) (2,953)
Social security and other pension payments........ (1,004) (554)
-- thereof for pensions TDM 22 (prior year: TDM
20)
Depreciation on intangible assets, and property,
plant and equipment................................ (486) (177)
Other operating expenses............................ (4,794) (2,579)
Interest and similar income......................... 42 136
Interest and similar expenses....................... (309) (281)
------------ -----------
Loss before taxes................................... (7,111) (4,682)
------------ -----------
Income tax benefit.................................. 0 1
Other taxes......................................... (27) (1)
------------ -----------
Consolidated net loss............................... (7,138) (4,682)
------------ -----------
Accumulated deficit, beginning of year.............. (9,325) (4,643)
------------ -----------
Accumulated deficit, end of year.................... (16,463) (9,325)
============ ===========
<CAPTION>
DM
------------
<S> <C> <C>
Loss per share...................................... (35.69)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-59
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------
Additional Total
GmbH Paid in Accumulated Shareholders Comprehensive
Shares Amount Capital Capital loss Equity Income (Loss)
------- ------ ------- ---------- ----------- ------------ -------------
(DM in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31,
1996................... 0 0 150 1,000 (4,643) (3,493)
Net loss for the year... 0 0 0 0 (4,682) (4,682) (4,682)
------
Comprehensive Loss...... 0 0 0 0 0 0 (4,682)
------- ----- ---- ----- ------- ------- ------
As of December 31,
1997................... 0 0 150 1,000 (9,325) (8,175)
------- ----- ---- ----- ------- -------
Foundation of
MeTechnology AG........ 20,000 100 0 0 0 100
Contribution in kind
GmbH................... 180,000 900 (150) (750) 0 0
Recognition of discount
on convertible bond.... 0 0 0 167 0 167
Net loss for the year... 0 0 0 0 (7,138) (7,138) (7,138)
------
Comprehensive Loss...... 0 0 0 0 0 0 (7,138)
------- ----- ---- ----- ------- ------- ======
As of December 31,
1998................... 200,000 1,000 0 417 (16,463) (15,046)
======= ===== ==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-60
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1998 1997
------ ------
(DM in
thousands)
<S> <C> <C>
Cash flow from Operating Activities
Net loss...................................................... (7,138) (4,682)
Adjustments to reconcile net loss to net cash used in operat-
ing activities
Accretion of interest expense on noninterest bearing debt.... 19 0
Depreciation and amortization................................ 486 177
Changes in trade receivables................................. (2,105) 265
Changes in inventories....................................... (429) (44)
Changes in prepaid expenses and other current assets......... (408) (121)
Changes in trade payables.................................... 715 (122)
Changes in other accruals.................................... 708 137
Changes in liabilities....................................... 315 (94)
------ ------
Net cash used in operating activities....................... (7,837) (4,484)
------ ------
Cash flow from Investing Activities
Acquisitions of intangible assets............................ (90) (29)
Purchases of property and equipment.......................... (880) (296)
Proceeds from sale of property and equipment................. 0 36
------ ------
Net cash used in investing activities....................... (970) (289)
------ ------
Cash flow from Financing Activities
Net change in short-term bank debt........................... 742 8
Changes in securities classified as current assets........... 1,869 (1,869)
Long-term borrowings......................................... 5,450 130
Issuances of share capital................................... 100 0
------ ------
Net cash provided (used) by financing activities............ 8,161 (1,731)
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (646) (6,504)
CASH AND CASH EQUIVALENTS
At the beginning of the period.............................. 1,454 7,958
------ ------
At the end of the period.................................... 808 1,454
====== ======
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest..................................................... 366 205
Taxes........................................................ 27 1
------ ------
393 206
====== ======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-61
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(I)GENERAL DISCLOSURES
The consolidated financial statements of MeTechnology Aktiengesellschaft,
Leipzig, for the year ended December 31, 1998 and ESD
Vermogensverwaltungsgesellschaft mbH, Munchen, for the year ended December 31,
1997 have been prepared in thousands of Deutsche Mark (TDM) in accordance with
the 3rd book of the German Commercial Code (HGB). The income statement has been
prepared according to the method of total costs.
To improve clarity individual items of the consolidated balance sheet and
consolidated income statement have been combined. These items are disclosed
separately in the notes to the financial statements.
To further improve clarity, the items in the consolidated balance sheet and
consolidated income statement have not been numbered.
(II)CONSOLIDATION GROUP
For the financial year 1997 the consolidated financial statements comprise
the parent company ESD Vermogensverwaltungsgesellschaft mbH, Munchen (ESD-VV),
and ESD Information Technology Entwicklungsgesellschaft mbH, Dolzig (ESD-IT),
as a 100 % subsidiary. The first-time consolidation at the time of acquisition
in 1994 was performed according to the revaluation method in accordance with
sec. 301 (1) no. 2 HGB (German Commercial Code). The purchase price of ESD-IT
and the equity being taken over amounted to TDM 50 so that a goodwill did not
arise at the time of first-time consolidation.
By a merger agreement certified by a notary public and signed July 13, 1998,
ESD-IT was retroactively merged into ESD-VV as of January 1, 1998. At a
shareholders' meeting on the same day, ESD-VV was renamed MeTechnology Europe
GmbH (Me GmbH) and the statutory seat moved from Munchen to Bienitz. At the
time of the merger the accounts of ESD-IT and EDS-VV were combined using their
historical cost bases, as this merger represents a reorganization of entities
under common control.
MeTechnology Aktiengesellschaft with statutory seat in Leipzig (Me AG) was
founded on June 26, 1998, as a holding company with common stock of TDM 100. By
contract certified by a notary public dated October 21, 1998 the common stock
of Me AG was increased by a contribution in kind of all shares in Me GmbH to Me
AG.
As of December 31, 1998, the consolidated financial statements of Me AG thus
contain the parent company and Me GmbH as a wholly owned subsidiary. The
shareholders of the two companies were identical at the time of the
contribution of Me GmbH into Me AG and held the identical percentage interests
in the two companies (common ownership). Accordingly, the contribution of Me
GmbH into Me AG has also been reflected as a reorganization of entities under
common control, and was accounted for using the historical cost bases of the
combining entities. Due to the fact that the two groups are actually identical
for economic purposes and in order to make the consolidated financial
statements for the years 1997 and 1998 comparable, the consolidation was
prepared as if the new structure had been started at January 1, 1998.
In 1997, the shares in Yellowstar Gesellschaft fur Softwarevertrieb und
Marketing mbH, Haar, a 100 % subsidiary of ESD-VV, were sold. This company was
not included in the consolidated financial statements of ESD-VV in 1997 in
accordance with sec. 296 (1) no. 2 and 3 HGB.
On August 19, 1998, Me AG as sole shareholder founded MeTechnology Ltd., UK,
with common stock of GBP 100. During 1998, MeTechnology Ltd., UK, was a non-
operating legal entity. In accordance with sec. 296 (2) HGB, MeTechnology Ltd.,
UK, has not been included in the consolidation group due to immateriality.
The shareholdings of ESD-VV and Me AG are included in Note (VI)(2).
F-62
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(III) PRINCIPLES OF CONSOLIDATION
In 1997, the capital consolidation of ESD-VV and ESD-IT under local (German)
GAAP was performed according to the revaluation method pursuant to sec. 301 (1)
no. 2 HGB by offsetting the acquisition cost against the pro rata equity of the
consolidated subsidiary at the time of acquisition in 1994, retroactively.
Capital consolidation of Me AG and Me GmbH under local (German) GAAP was
performed according to the pooling-of-interests method pursuant to sec. 302 (1)
HGB. Consequently, the difference of TDM 750 between common stock issued by Me
AG of TDM 900 and GmbH capital contributed in return of TDM 150 was offset
against additional paid-in capital in accordance with sec. 302 (2) HGB.
Intercompany results, intercompany sales, expenses and income as well as
intercompany receivables and liabilities between the consolidated companies
have been eliminated. There were no intercompany profits as of the closing
date.
(IV) SIGNIFICANT ACCOUNTING AND VALUATION METHODS, CURRENCY TRANSLATION
The financial statements of the consolidated group companies were prepared
according to uniform accounting and valuation methods.
Intangible assets, where acquired for a consideration, are capitalized at
acquisition cost and subject to scheduled depreciation. Intangible assets are
written off using the straight-line method of depreciation over a period of 3
years.
Buildings on third party land concern to capitalized electrical
installations inside the leased buildings.
Property, plant and equipment are stated at cost less scheduled depreciation
or at net realizable value, if lower, as of the balance sheet date.
The following depreciation methods were applied to property, plant and
equipment:
<TABLE>
<CAPTION>
Method Years
------------- -----
<S> <C> <C>
Buildings on third party land............................... straight-line 3
Other equipment, office and factory equipment............... straight-line 4-5
</TABLE>
Low value assets are fully expensed in the year of acquisition.
Extraordinary depreciation is charged if an item has to be disclosed at the
lower attributable value.
Inventories of raw materials and supplies as well as work in process is
valued at acquisition or manufacturing cost or at net realizable value, if
lower. Manufacturing cost includes direct labor costs including appropriate
overheads.
Receivables and other assets are stated at the nominal amount or the lower
attributable value. The collection risk on receivables has been covered by
creation of a bad debt allowance of 1 % of the net receivables on hand, which
approximates historic bad debt write-offs.
Cash and cash equivalents have been valued at nominal value.
Other accruals are created on the basis of prudent commercial judgement to
cover all potential losses from pending transactions and contingent liabilities
as of the balance sheet date.
Liabilities are stated at the repayment value.
Receivables and liabilities in foreign currency are valued at the rate
prevailing at the date of origin. Exchange rate losses occurring prior to the
balance sheet date or evident are considered with effect on income.
F-63
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(V)US-GAAP RECONCILIATION
The audited consolidated financial statements of Me AG and ESD-VV were
prepared according to German accounting principles. A reconciliation of the net
losses and equity from the German accounting principles to the accounting
principles generally accepted in the United States of America (US-GAAP) for the
financial years 1997 and 1998 is presented in the following tables.
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(DM in thousands)
<S> <C> <C>
Net loss per German generally accepted accounting princi-
ples..................................................... (7,138) (4,682)
Long-term projects for software adaptation................ (1,489) (23)
Unrealized losses/gains on marketable securities.......... (20) 20
-------- --------
Net loss according to US generally accepted accounting
principles............................................... (8,647) (4,685)
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- ------
(DM in
thousands)
<S> <C> <C>
Equity per German generally accepted accounting principles... (16,463) (9,325)
Long-term projects for software adaptation................... (1,326) 163
------- ------
Equity according to US generally accepted accounting princi-
ples........................................................ (17,789) (9,162)
======= ======
</TABLE>
Under German GAAP, license revenues can be realized upon delivery of the
software while software adaptations are posted separately according to the
completed contract method. Under US-GAAP license and software adaptation
revenues are realized uniformly according to the percentage of completion
method.
Under US-GAAP, marketable securities that are available for sale are
recorded at fair market value, with the offsetting unrealized gain or loss
recorded as a component of other comprehensive income. Under German GAAP,
marketable securities are recorded at cost, but provisions for losses are
recorded when prudent.
In 1997, the Company, under German GAAP, recorded a provision of TDM 20
related to unrealized losses on marketable securities available for sale. At
that time, the fair market value of the securities was below their carrying
amount by more than TDM 20. However, as discussed in Note (VI)(4), the Company
received a gurantee from Financial Intelligent Transactions
Vermogensverwaltungs GmbH, Munchen, whereby the Company's maximum loss on these
securities would be limited to TDM 20.
Under US-GAAP, the reduction in the fair value of these securities in 1997,
up to the TDM 20 limit, would be recorded as a reduction in other comprehensive
income rather than as a charge to expense, since the decline in market value
was not of a permanent nature. This difference has no effect on reported
shareholders' equity but would reduce other comprehensive income by TDM 20 in
1997.
In 1998, the Company sold the marketable securities at an amount nearly
identical to their original cost basis. Under German GAAP, the Company recorded
a gain of approximately TDM 20, as the carrying value of those securities had
been reduced in 1997 by the provision described above. Under US-GAAP, the
Company would have recorded no gain or loss on the disposal, but would have had
a gain in other comprehensive income of TDM 20 due to the appreciation in the
fair value of the securities prior to their sale. Again, this difference in
accounting would have no effect on reported shareholders' equity.
F-64
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Under German GAAP, provisions for contingencies are established for all
potential losses from pending transactions and contingent liabilities as of the
balance sheet date. Under US-GAAP, such provisions can only be recorded when an
exposure is probable and the amount of the exposure is reasonably estimable. At
December 31, 1998 and 1997, though, there were no accruals recorded under
German GAAP that would not be recorded under US-GAAP.
Under German GAAP, unrealized foreign exchange gains in each group of
currencies are not included in income. Exchange losses in each group of
currencies, though, are charged to the statement of operations immediately.
Under US-GAAP, foreign currency transaction gains and losses are expensed as
incurred. At December 31, 1998 and 1997, no material amounts in foreign
currency were recorded.
Under German GAAP, certain balances are classified differently than under
US-GAAP. For example, changes in inventory accounts which are recorded as
revenues under German GAAP, would be considered part of cost of goods sold
under US-GAAP. In addition, costs and estimated profits in excess of billings
on long-term construction type contracts would be categorized as such under US-
GAAP, but such amounts are classified as inventories for German GAAP. These
differences in classification yield no GAAP differences in reported net loss or
shareholders' equity.
US-GAAP requires that all majority owned and controlled subsidiaries be
consolidated. Under German GAAP, such subsidiaries need not to be consolidated
if they do not have material operations. During the year ended December 31,
1998, the Company had one inactive subsidiary that was not consolidated for
German GAAP purposes. However, the consolidation of this subsidiary under US-
GAAP would yield no material differences in reported net income or
shareholders' equity, or any other balance sheet or statement of operations
account.
F-65
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(VI)EXPLANATORY COMMENTS ON THE CONSOLIDATED FINANCIAL STATEMENTS
(1)Fixed assets
DEVELOPMENT OF FIXED ASSETS OF THE GROUP FOR THE FINANCIAL YEAR 1997
<TABLE>
<CAPTION>
NET BOOK
ACQUISITION AND MANUFACTURING COST ACCUMULATED DEPRECIATION VALUES
-------------------------------------------- -------------------------------------------- ------------
Jan 1, 1997 Additions Reversals Dec 31, 1997 Jan 1, 1997 Additions Reversals Dec 31, 1997 Dec 31, 1997
----------- --------- --------- ------------ ----------- --------- --------- ------------ ------------
(DM in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTANGIBLE AS-
SETS
Software........ 7 29 0 36 1 7 0 8 28
--- --- --- --- --- --- --- --- ---
PROPERTY, PLANT
AND EQUIPMENT
Buildings on
third party
land........... 21 4 0 25 2 7 0 9 16
Other equipment,
factory and
office
equipment...... 539 292 173 658 205 163 138 230 428
--- --- --- --- --- --- --- --- ---
560 296 173 683 207 170 138 239 444
--- --- --- --- --- --- --- --- ---
FINANCIAL ASSETS
Shares in affil-
iated compa-
nies........... 250 0 250 0 250 0 250 0 0
--- --- --- --- --- --- --- --- ---
817 325 423 719 458 177 388 247 472
=== === === === === === === === ===
</TABLE>
DEVELOPMENT OF FIXED ASSETS OF THE GROUP FOR THE FINANCIAL YEAR 1998
<TABLE>
<CAPTION>
ACQUISITION AND MANUFACTURING COST ACCUMULATED DEPRECIATION
-------------------------------------------- --------------------------------------------
Jan 1, 1998 Additions Reversals Dec 31, 1998 Jan 1, 1998 Additions Reversals Dec 31, 1998
----------- --------- --------- ------------ ----------- --------- --------- ------------
(DM in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTANGIBLE AS-
SETS
Software........ 36 90 0 126 8 24 0 32
--- --- --- ----- --- --- --- ---
PROPERTY, PLANT
AND EQUIPMENT
Buildings on
third party
land........... 25 28 0 53 9 14 0 23
Other equipment,
factory and
office equip-
ment........... 658 852 208 1,302 230 448 208 470
--- --- --- ----- --- --- --- ---
683 880 208 1,355 239 462 208 493
--- --- --- ----- --- --- --- ---
719 970 208 1,481 247 486 208 525
=== === === ===== === === === ===
<CAPTION>
NET BOOK
VALUES
-------------------------
Dec 31, 1998 Dec 31, 1997
------------ ------------
<S> <C> <C>
INTANGIBLE AS-
SETS
Software........ 94 28
------------ ------------
PROPERTY, PLANT
AND EQUIPMENT
Buildings on
third party
land........... 30 16
Other equipment,
factory and
office equip-
ment........... 832 428
------------ ------------
862 444
------------ ------------
956 472
============ ============
</TABLE>
F-66
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2)Shareholdings and consolidation group
<TABLE>
<CAPTION>
Result
Participation Equity of the financial
quota December 31, year
Currency as % 1997 1997
-------- ------------- ------------ ----------------
(DM in thousands)
<S> <C> <C> <C> <C>
ESD Information Technology
Entwicklungsgesellschaft
mbH, Dolzig.............. DEM 100 (8,313) (4,628)
</TABLE>
<TABLE>
<CAPTION>
Result
Participation Equity of the financial
quota December 31, year
Currency as % 1998 1998
-------- ------------- ------------ ----------------
(DM in thousands)
<S> <C> <C> <C> <C>
MeTechnology Europe
GmbH, Bienitz.......... DEM 100 (11,890) (15,728)(/1/)
MeTechnology Ltd., UK... GBP 100 0 0(/2/)
</TABLE>
--------
Notes:
(1) Single entity financial statements for the financial year 1998 include a
loss from the merger of ESD-VV and ESD-IT of TDM 9,013, which corresponds
to operating losses of ESD-IT before the first-time consolidation as of
January 1, 1998.
(2) MeTechnology Ltd., UK, during 1998 was a non-operating legal entity.
(3)Receivables and other assets
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------------------------- --------------------------
thereof thereof
with a residual term with a residual term
of more than of more than
Total 1 year Total 1 year
----- -------------------- ----- --------------------
(DM in thousands)
<S> <C> <C> <C> <C>
Trade receivables......... 2,275 0 170 0
Other assets.............. 588 112 117 50
----- --- --- ---
2,863 112 287 50
===== === === ===
</TABLE>
Other assets in the consolidated financial statements contain receivables
from deposits, receivables from employees and prepaid taxes. Other assets
contain receivables from shareholders in the amount of DM 3.0 thousand.
(4)Other securities
In 1997, other securities relate to marketable securities public traded on
the German Stock Exchange which are held in a custody account at Oberbank,
Munchen. Financial Intelligent Transactions Vermogensverwaltungs GmbH, Munchen,
has agreed to guarantee that the maximum loss to be borne by the Company upon
sale of these securities to be TDM 20. In 1997, the Company recorded a loss of
TDM 20 to reflect the fact that the fair value of these securities was below
their carrying amount. In 1998 the securities were sold at an amount nearly
identical to their original cost basis.
F-67
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(5)Additional paid-in capital
The Me AG additional paid-in capital amounts to TDM 167 as of December 31,
1998, resulting from the convertible bond as described in Note (8). The
additional amount of TDM 250 results from the capital consolidation as
described in Note (III).
(6)Contribution of silent partners and subordinated loans
In 1996, the subsidiary ESD-IT entered into a silent partnership agreement
with SBF Sachsischer Beteiligungsfonds GmbH (SBF), Leipzig, until December 31,
2001. As of December 31, 1997 the contribution amounted to TDM 8,000. The
contribution was increased by TDM 1,950 to TDM 9,950 in 1998. SBF has issued a
letter of subordination for its claims from the silent partnership. SBF
receives a 20% share of the company's profits, but does not participate in
losses. SBF also receives annual servicing compensation of 2% of the
investment amount.
In 1996, GSM Industriebeteiligungen GmbH, Munchen, also granted ESD-IT a
subordinated loan. As of December 31, 1998, the loan still amounts to TDM
3,530. The loan has to be repaid by the year 2005 and is subject to interest
at a rate of 8%.
(7)Other accruals
The other accruals mainly contain amounts for warranties, costs yet to be
incurred, personnel expenses, costs relating to the preparation of financial
statements and legal and consulting costs as well as the remuneration of the
supervisory board.
(8)Liabilities
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- ------------
up to up to
Total 1 year Total 1 year
------ ------ ----- ------
(DM in thousands)
<S> <C> <C> <C> <C>
Convertible bond..................................... 3,352 0 0 0
Liabilities to banks................................. 750 750 8 8
Payments received on account of orders............... 513 513 262 262
Trade payables....................................... 916 916 201 201
Other liabilities.................................... 460 460 435 435
- thereof taxes................................... 0 0 119 119
------ ----- --- ---
5,991 2,639 906 906
====== ===== === ===
</TABLE>
The convertible bond was subscribed by Private Equity Bridge Investment
Ltd. (PEB), Grand Cayman, Cayman Islands, British West Indies, on November 12,
1998. The bond entitles PEB until October 31, 2000, to convert at any time a
nominal amount of the convertible bond of DM 500 into one share of Me AG. The
convertible bond is interest free until January 31, 2000, after which it is
subject to a 6% interest rate. That part of the convertible bond which has not
yet been converted is repayable on October 31, 2000. Discounted at a rate of
interest for comparable debt of 5%, the face value of the bond at November 12,
1998 was TDM 3,333,
with the difference of TDM 167 to the face value of the bond of TDM 3,500
being credited to additional paid-in capital. Other liabilities include
liabilities to shareholders in the amount of TDM 8.0.
F-68
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9)Other financial commitments
In 1997 the other financial liabilities from rent and lease agreements of
ESD-VV relate to:
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------
more than Total
Up to on year one year amount
------------- --------- ------
(DM in thousands)
<S> <C> <C> <C>
Leases for buildings............................. 326 388 714
Car pool leases.................................. 61 35 96
Leases for telecommunications.................... 26 154 180
--- --- ---
413 577 990
=== === ===
</TABLE>
In 1998 the other financial liabilities from rent and lease agreements of Me
AG relate to:
<TABLE>
<CAPTION>
Year ended December 31, 1998
------------------------------
More than Total
Up to on year one year amount
------------- --------- ------
(DM in thousands)
<S> <C> <C> <C>
Leases for buildings............................. 558 558 1,116
Car pool leases.................................. 141 71 212
Leases for telecommunications.................... 29 135 164
--- --- -----
728 764 1,492
=== === =====
</TABLE>
(10)Sales
The sales of the company, which were generated exclusively on the domestic
market, relate to:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997
----------- -----------
(DM in thousands)
<S> <C> <C>
Licenses................................................ 2,953 712
Bank applications....................................... 1,221 743
Other................................................... 696 510
----------- -----------
4,870 1,965
=========== ===========
</TABLE>
(11)Other operating income
In 1997, other operating income mainly includes income from the sale of
fixed assets, from the reversal of accruals and the reduction of general
valuation allowance. In a total amount of TDM 48, the other operating income
relates to other periods.
In 1998, other operating income mainly includes the reversal of accruals,
relating to other periods, and gains on the sale of securities of TDM 78.
F-69
<PAGE>
METECHNOLOGY AKTIENGESELLSCHAFT
PRIOR YEAR: ESD VERMOGENSVERWALTUNGSGESELLSCHAFT MBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) Other operating expenses
In 1997 and 1998, other operating expenses mainly concern selling and
administrative expenses as well as legal and consulting costs. In an total
amount of TDM 42 (1997: TDM 29), the other operating expenses relate to other
periods.
(13) Number of salaried employees (annual average)
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
76 46
====== ======
</TABLE>
(14) Capital stock authorized for issue
The share capital may be increased by TDM 50 through the issuance of
additional authorized capital. This may be issued to satisfy conversion rights
of holders of convertible bonds, which issuance has been agreed by the
shareholders' meeting on November 6, 1998.
(15) Disclosures on company boards
In 1997, the management of ESD-VV comprised:
Dr. Christoph Bulfon General manager
In 1998, the management board of Me AG comprised:
Joszef Bugovics Chairman
In consideration and accordance with the effect of sec. 286 (4) HGB not only
on the single entity financial statements of the parent company, but also on
the consolidated financials, disclosure of total remuneration for the
management board has been omitted.
(16) Supervisory Board
In 1998 the supervisory board of Me AG comprised:
<TABLE>
<S> <C>
Dr. Peter Page Chairman
Prof. Dr. Wulf von
Schimmelmann Deputy Chairman
Dr. Hans-Joachim Korber
</TABLE>
Total remuneration for the supervisory board in 1998 amounted to TDM 27.
(17) Advisory Board
Total remuneration for the advisory board in 1998 amounted to TDM 4 and in
1997 amounted to TDM 70.
Leipzig, February, 2000
ESD Vermogensverwaltungsgesellschaft mbH,
MeTechnology AG
Joszef Bugovics
F-70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Blaze Software, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Blaze Software, Inc. and its subsidiaries at March 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of Blaze Software, Inc.'s management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States, 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 audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 19, 2000, except for Note 15
as to which the date is June 20, 2000
F-71
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 57,295 $ 2,129
Short-term investments.................................. 11,998 --
Accounts receivable, net of allowance for doubtful
accounts of $512 and $443, respectively................ 4,939 3,658
Prepaid expenses and other current assets............... 1,108 964
-------- --------
Total current assets................................... 75,340 6,751
Property and equipment, net............................... 1,933 786
Restricted cash........................................... 702 --
Deposits and other assets................................. 384 228
-------- --------
Total assets........................................... $ 78,359 $ 7,765
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank borrowings......................................... $ -- $ 1,631
Bridge loan from related parties........................ -- 1,596
Current portion of capital lease obligations............ 176 81
Note payable............................................ -- 129
Accounts payable........................................ 1,972 1,526
Accrued expenses........................................ 7,446 2,873
Deferred revenue........................................ 2,728 3,231
-------- --------
Total current liabilities.............................. 12,322 11,067
Long-term liabilities:
Capital lease obligations, net of current portion....... 256 19
Other long-term liabilities............................. 12 --
-------- --------
Total liabilities...................................... 12,590 11,086
-------- --------
Mandatorily Redeemable Preferred Stock: par value $0.0001
Authorized: none at March 31, 2000
Issued and outstanding: none at March 31, 2000 and 3,179
at March 31, 1999...................................... -- 20,882
-------- --------
Commitments and contingencies (Note 12)
Stockholders' Equity (Deficit):
Series B Convertible Preferred Stock: par value $0.0001
Authorized: none at March 31, 2000
Issued and outstanding: none at March 31, 2000 and 2,273
at March 31, 1999...................................... -- --
Preferred Stock: par value $0.0001
Authorized: 10,000 at March 31, 2000
Issued and outstanding: none at March 31, 2000 and
1999................................................... -- --
Common Stock, $0.0001 par value
Authorized: 200,000 shares at March 31, 2000
Issued and outstanding: 22,020 at March 31, 2000 and 344
at March 31, 1999...................................... 2 --
Additional paid-in capital................................ 144,642 (1,842)
Accumulated other comprehensive income.................... 489 290
Unearned stock-based compensation......................... (21,207) --
Accumulated deficit....................................... (58,157) (22,651)
-------- --------
Total stockholders' equity (deficit)................... 65,769 (24,203)
-------- --------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity (deficit).............. $ 78,359 $ 7,765
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Net revenues:
Product licenses................................. $ 8,486 $ 3,722 $ 3,559
Services and maintenance......................... 9,710 5,332 803
-------- ------- -------
Total revenues................................. 18,196 9,054 4,362
-------- ------- -------
Cost of revenues:
Product licenses................................. 67 40 74
Services and maintenance......................... 6,808 2,892 512
-------- ------- -------
Total cost revenues............................ 6,875 2,932 586
-------- ------- -------
Gross profit....................................... 11,321 6,122 3,776
-------- ------- -------
Operating expenses:
Research and development (excluding $3,651 stock-
based compensation expense)..................... 5,079 3,843 1,938
Sales and marketing (excluding $4,300 stock-based
compensation expense)........................... 12,226 5,586 3,702
General and administrative (excluding $8,449
stock-based compensation expense)............... 3,785 2,205 1,106
Stock-based compensation......................... 16,400 -- --
-------- ------- -------
Total operating expenses....................... 37,490 11,634 6,746
-------- ------- -------
Operating loss..................................... (26,169) (5,512) (2,970)
Interest expense................................... (377) (300) (692)
Other income and (expense), net.................... 275 51 99
-------- ------- -------
Net loss from continuing operations before income
taxes............................................. (26,271) (5,761) (3,563)
Provision for income taxes......................... (153) (87) (68)
-------- ------- -------
Net loss from continuing operations................ (26,424) (5,848) (3,631)
Discontinued operations (Note 3):
Income (loss) from operations of discontinued
user interface business (net of income taxes)... 2,657 248 (2,174)
-------- ------- -------
Net loss........................................... (23,767) (5,600) (5,805)
Accretion of mandatorily redeemable preferred stock
to redemption value............................... (442) (1,258) (1,040)
Beneficial conversion feature...................... (11,739) -- --
-------- ------- -------
Net loss attributable to common stockholders....... (35,948) (6,858) (6,845)
Other comprehensive income (loss), net of tax:
Unrealized loss on investments................... (20) -- --
Translation adjustments.......................... 219 180 (20)
-------- ------- -------
Comprehensive loss................................. $(35,749) $(6,678) $(6,865)
======== ======= =======
Basic and diluted net loss per common share
attributable to common stockholders:
Loss from continuing operations.................. $ (6.68) $(19.15) $(37.37)
Earnings/(loss) from discontinued operations..... 0.46 0.66 (17.39)
-------- ------- -------
Basic and diluted net loss per common share
attributable to common stockholders............... $ (6.22) $(18.49) $(54.76)
======== ======= =======
Number of shares used in the calculation of basic
and diluted net loss per share.................... 5,781 371 125
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Mandatorily Series B Series AA Series BB
Redeemable Convertible Convertible Convertible
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Common Stock
-------------- ------------- ------------- ------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
April 1, 1997... 2,013 $ 9,684 2,272 $ -- -- $-- -- $ -- 232 $--
Issuance of
Common Stock
pursuant to
exercise of
options........ -- -- -- -- -- -- -- -- 172 --
Repurchase of
Common Stock... -- -- -- -- -- -- -- -- (1) --
Issuance of
Series F
Preferred
Stock, net of
issuance
costs.......... 972 7,400 -- -- -- -- -- -- -- --
Conversion of
bridge loan to
Series F
Preferred
Stock.......... 194 1,500 -- -- -- -- -- -- -- --
Issuance of
Series B
Preferred
Stock pursuant
to exercise of
options........ -- 1 -- -- -- -- -- -- --
Accretion of
Mandatorily
Redeemable
Preferred
Stock to
redemption
value.......... -- 1,040 -- -- -- -- -- -- -- --
Net Loss....... -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment..... -- -- -- -- -- -- -- -- -- --
----- ------- ----- ---- --- --- --- ---- ---- ---
Balances at
March 31, 1998.. 3,179 $19,624 2,273 $ -- -- $-- -- $ -- 403 $--
Issuance of
Common Stock
pursuant to
exercise of
options........ -- -- -- -- -- -- -- -- 98 --
Issuance of
Common Stock... -- -- -- -- -- -- -- -- 1 --
Repurchase of
Common Stock... -- -- -- -- -- -- -- -- (158) --
Accretion of
Mandatorily
Redeemable
Preferred
Stock to
redemption
value.......... -- 1,258 -- -- -- -- -- -- -- --
Net loss....... -- -- -- -- -- -- -- -- -- --
Cumulative
translation
adjustment..... -- -- -- -- -- -- -- -- -- --
----- ------- ----- ---- --- --- --- ---- ---- ---
Balances at
March 31, 1999.. 3,179 $20,882 2,273 $ -- -- $-- -- $ -- 344 $--
--------------------------------------------------
===== ======= ===== ==== === === === ==== ==== ===
<CAPTION>
Notes Accumulated Total
Additional Receivable Other Stockholders'
Paid-In from Comprehensive Unearned Accumulated Equity
Capital Stockholders Income Compensation Deficit (Deficit)
---------- ------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
April 1, 1997... $ 391 $(70) $130 $-- $(11,246) $(10,795)
Issuance of
Common Stock
pursuant to
exercise of
options........ 97 -- -- -- -- 97
Repurchase of
Common Stock... (1) -- -- -- -- (1)
Issuance of
Series F
Preferred
Stock, net of
issuance
costs.......... -- -- -- -- -- --
Conversion of
bridge loan to
Series F
Preferred
Stock.......... -- -- -- -- -- --
Issuance of
Series B
Preferred
Stock pursuant
to exercise of
options........ 1 -- -- -- -- 1
Accretion of
Mandatorily
Redeemable
Preferred
Stock to
redemption
value.......... (1,040) -- -- -- (1,040)
Net Loss....... -- -- -- -- (5,805) (5,805)
Cumulative
translation
adjustment..... -- -- (20) -- -- (20)
---------- ------------ ------------- ------------ ----------- -------------
Balances at
March 31, 1998.. $ (552) $(70) $110 $-- $(17,051) $(17,563)
Issuance of
Common Stock
pursuant to
exercise of
options........ 56 -- -- -- -- 56
Issuance of
Common Stock... -- -- -- -- -- --
Repurchase of
Common Stock... (88) 70 -- -- -- (18)
Accretion of
Mandatorily
Redeemable
Preferred
Stock to
redemption
value.......... (1,258) -- -- -- (1,258)
Net loss....... -- -- -- -- (5,600) (5,600)
Cumulative
translation
adjustment..... -- -- 180 -- -- 180
---------- ------------ ------------- ------------ ----------- -------------
Balances at
March 31, 1999.. $(1,842) $ -- $290 $-- $(22,651) $(24,203)
--------------------------------------------------
========== ============ ============= ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(in thousands)
<TABLE>
<CAPTION>
Series B Series AA Series BB
Mandatorily Convertible Convertible Convertible
Redeemable Preferred Preferred Preferred Accumulated
Preferred Stock Stock Stock Stock Common Stock Additional Other
---------------- -------------- -------------- -------------- -------------- Paid-In Comprehensive
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Income
------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March
31, 1999......... 3,179 $ 20,882 2,273 $ -- -- $ -- -- $ -- 344 $ -- $ (1,842) $290
Issuance of
Common Stock
pursuant to
exercise of
options......... -- -- -- -- -- -- -- -- 1,486 -- 755 --
Issuance of
Common Stock
pursuant to
conversion of
warrants........ -- -- -- -- -- -- -- -- 362 -- 67 --
Accretion of
Mandatorily
Redeemable
Preferred Stock
to redemption
value........... -- 442 -- -- -- -- -- -- -- -- (442) --
Beneficial
Conversion
Feature......... -- -- -- -- -- -- -- -- -- -- 11,739 --
Adjustment of
Mandatorily
Redeemable
Preferred Stock
Series C per
anti-dilution
provision....... 20 -- -- -- -- -- -- -- -- -- -- --
Conversion of
Mandatorily
Redeemable
Preferred Stock
to Common
Stock........... (3,199) (21,324) -- -- -- -- -- -- 3,199 1 21,323 --
Conversion of
Series B Stock
to Common
Stock........... -- -- (2,273) -- -- -- -- -- 2,273 -- -- --
Issuance of
Series AA
Preferred Stock,
net of issuance
costs........... -- -- -- -- 8,416 1 -- -- -- -- 4,403 --
Issuance of
Series BB
Preferred
Stock........... -- -- -- -- -- -- 1,953 -- -- -- 13,943 --
Conversion of
Series AA
Preferred Stock
to Common
Stock........... -- -- -- -- (8,416) (1) -- -- 8,416 1 -- --
Conversion of
Series BB
Preferred Stock
to Common
Stock........... -- -- -- -- -- -- (1,953) -- 1,953 -- -- --
Issuance of
Common Stock
pursuant initial
public
offering........ -- -- -- -- -- -- -- -- 4,000 -- 57,090 --
Unearned
compensation.... -- -- -- -- -- -- -- -- -- -- 37,607 --
Amortization of
unearned
compensation.... -- -- -- -- -- -- -- -- -- -- -- --
Repurchase of
Common Stock.... -- -- -- -- -- -- -- -- (13) -- (1) --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
Unrealized loss
on investments.. -- -- -- -- -- -- -- -- -- -- -- (20)
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- -- 219
------ -------- ------ ---- ------ ---- ------ ---- ------ ---- -------- ----
Balances at March
31, 2000......... -- $ -- -- $ -- -- $ -- -- $ -- 22,020 $ 2 $144,642 $489
====== ======== ====== ==== ====== ==== ====== ==== ====== ==== ======== ====
<CAPTION>
Total
Stockholders'
Unearned Accumulated Equity
Compensation Deficit (Deficit)
------------ ----------- -------------
<S> <C> <C> <C>
Balances at March
31, 1999......... $ -- $(22,651) $(24,203)
Issuance of
Common Stock
pursuant to
exercise of
options......... -- -- 755
Issuance of
Common Stock
pursuant to
conversion of
warrants........ -- -- 67
Accretion of
Mandatorily
Redeemable
Preferred Stock
to redemption
value........... -- -- (442)
Beneficial
Conversion
Feature......... -- (11,739) --
Adjustment of
Mandatorily
Redeemable
Preferred Stock
Series C per
anti-dilution
provision....... -- -- --
Conversion of
Mandatorily
Redeemable
Preferred Stock
to Common
Stock........... -- -- 21,324
Conversion of
Series B Stock
to Common
Stock........... -- -- --
Issuance of
Series AA
Preferred Stock,
net of issuance
costs........... -- -- 4,404
Issuance of
Series BB
Preferred
Stock........... -- -- 13,943
Conversion of
Series AA
Preferred Stock
to Common
Stock........... -- -- --
Conversion of
Series BB
Preferred Stock
to Common
Stock........... -- -- --
Issuance of
Common Stock
pursuant initial
public
offering........ -- -- 57,090
Unearned
compensation.... (37,607) -- --
Amortization of
unearned
compensation.... 16,400 -- 16,400
Repurchase of
Common Stock.... -- -- (1)
Net loss........ -- (23,767) (23,767)
Unrealized loss
on investments.. -- -- (20)
Cumulative
translation
adjustment...... -- -- 219
------------ ----------- -------------
Balances at March
31, 2000......... $(21,207) $(58,157) $ 65,769
============ =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(23,767) $(5,600) $(5,805)
Add (deduct) loss (income) from discontinued
operations........................................ (2,657) (248) 2,174
-------- ------- -------
Loss from continuing operations.................... (26,424) (5,848) (3,631)
Adjustments to reconcile net loss to net cash used
in operating activities:
Bridge loan interest converted to equity.......... -- 96 --
Depreciation and amortization..................... 597 899 868
Amortization of stock-based compensation.......... 16,400 -- --
Loss on write-off of equipment.................... 71 129 --
Capital lease for construction-in-progress........ 40 -- --
Changes in assets and liabilities:
Accounts receivable............................. (1,779) (557) (1,579)
Income taxes refund receivable.................. -- 27 (4)
Prepaid expenses and other...................... (144) (533) 417
Accounts payable................................ 492 7 (31)
Accrued expenses................................ 4,573 (757) (255)
Deferred revenue................................ (503) (95) (569)
Deposits and other assets....................... (156) 260
Other long-term liabilities..................... 12 -- --
-------- ------- -------
Net cash used in continuing operations............. (6,821) (6,372) (4,784)
Net cash provided by (used in) discontinued
operations........................................ 3,109 2,061 (294)
-------- ------- -------
Net cash used in operating activities......... (3,712) (4,311) (5,078)
-------- ------- -------
Cash flows from investing activities:
Capital expenditures............................... (1,388) (779) (140)
Purchases of short-term investments................ (12,018) -- --
-------- ------- -------
Net cash used in investing activities......... (13,406) (779) (140)
-------- ------- -------
Cash flows from financing activities:
Proceeds from note payable......................... -- 129 --
Repayment of note payable.......................... (129) -- --
Payments of principal under capital lease
financing......................................... (136) (172) (442)
Bank borrowings, net............................... (1,631) (1,047) 1,327
Repayment of note payable to stockholder........... -- -- (310)
Proceeds from issuance of Common Stock............. 57,847 56 96
Repurchase of Common Stock......................... (1) (18) (1)
Proceeds from issuance of Preferred Stock, Series B
(net of issuance costs)........................... -- -- 1
Proceeds from issuance of Preferred Stock, Series D
and Series E warrants (net of issuance costs)..... 67 -- --
Proceeds from issuance of Preferred Stock, Series F
(net of issuance costs)........................... -- -- 7,400
Proceeds from issuance of Preferred Stock, Series
AA (net of issuance costs)........................ 2,807 -- --
Proceeds from issuance of Preferred Stock, Series
BB................................................ 13,943 -- --
Proceeds from bridge loan.......................... -- 1,500 1,500
Increase in restricted cash........................ (702) -- --
-------- ------- -------
Net cash provided by financing activities..... 72,065 448 9,571
-------- ------- -------
Effect of exchange rate changes in cash............ 219 180 (20)
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 55,166 (4,462) 4,333
Cash and cash equivalents at beginning of year..... 2,129 6,591 2,258
-------- ------- -------
Cash and cash equivalents at end of year........... $ 57,295 $ 2,129 $ 6,591
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year: Interest................ $ 313 $ 202 $ 692
Cash paid during the year: Income taxes............ $ 11 $ 49 $ 19
Supplemental non-cash investing and financing
activities:
Cancellation of stockholder note in exchange for
Common Stock...................................... $ -- $ 70 $ --
Assets acquired under capital lease obligations.... $ 468 $ -- $ --
Accretion of cumulative dividends on Preferred
Stock............................................. $ 442 $ 1,258 $ 1,040
Unearned compensation related to stock option
grants............................................ $ 37,607 $ -- $ --
Conversion of bridge loan to Preferred Stock....... $ 1,596 $ -- $ 1,500
Conversion of Mandatorily Redeemable Preferred
Stock to Common Stock............................. $ 20,882 $ -- $ --
Beneficial conversion feature...................... $ 11,739 $ -- $ --
Write-off of property and equipment................ $ 776 $ 3,761 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY:
Blaze Software, Inc. (together with its wholly-owned subsidiaries, unless
context requires otherwise, "Blaze Software" or the "Company") was incorporated
in California on June 4, 1985 as Neuron Data, Inc. Its principal activities
include the development and licensing of infrastructure software that enables
adaptable and personalized interactions that are consistent across all company
communication channels, or touch points. This software enables companies to
implement their policies, practices and procedures, or business rules, in e-
business applications across multiple touch points. Blaze Software also
provides related maintenance and consulting services. Blaze Software markets
its products to a wide range of customers mainly in North America, Europe and
the Pacific Rim primarily through a direct sales force. In March 2000, Blaze
Software reincorporated in the State of Delaware.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principals of consolidation
The consolidated financial statements include the accounts of Blaze
Software, Inc. and its wholly owned subsidiaries, Blaze Software GmbH, Blaze
Software S.A.R.L., Blaze Software (UK) Ltd, Blaze Software Japan, Inc., and
Blaze Software Australia Pty Ltd (together, "Blaze Software" or the "Company").
All material intercompany balances and transactions have been eliminated.
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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign currency translation
The functional currency of Blaze Software's subsidiaries is the local
currency. Accordingly, Blaze Software applies the current exchange rate to
translate the subsidiaries' assets and liabilities and the weighted average
exchange rate to translate the subsidiaries' revenues, expenses, gains and
losses into U.S. dollars. Translation adjustments are included as a separate
component of comprehensive income within stockholders' equity in the
accompanying consolidated financial statements.
Business risk and concentration of credit risk
Blaze Software currently operates in a single business segment and revenue
from continuing operations is principally attributable to the sale of software
products and related maintenance, consulting and training services which are
characterized by rapid technological advances, changes in customer requirements
and industry standards. Any failure by Blaze Software to anticipate or to
respond adequately to technological changes in its industry, changes in
customer requirements or changes in industry standards, could have a material
adverse effect on Blaze Software's business and operating results.
Financial instruments which potentially subject Blaze Software to
concentrations of credit risk consist primarily of temporary cash investments,
including money market accounts. Blaze Software places its temporary cash
investments with two major financial institutions. Deposits at any point in
time may exceed the federally insured limits. Blaze Software performs ongoing
credit evaluations of its customers' financial condition and does not require
collateral. Blaze Software maintains allowances for potential credit losses and
such losses have been within management's expectations.
F-77
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of March 31, 2000, two customers accounted for approximately 18% and 15%
of the aggregate accounts receivable balance. As of March 31, 1999, one
customer accounted for approximately 12% of the aggregate accounts receivable
balance. For the fiscal year 2000 and 1999, one customer accounted for
approximately 23% and 19% of total revenues, respectively. No customer
accounted for 10% or more of total revenues in fiscal year 1998.
Fair value of financial instruments
Carrying amounts of certain Blaze Software's financial instruments,
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and other liabilities
approximate fair value due to their short maturities. Based upon borrowing
rates currently available to Blaze Software for loans with similar terms, the
carrying value of capital lease obligations approximate fair value.
Cash equivalents and short-term investments
Blaze Software invests its excess cash in money market accounts and debt
instruments and considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash
equivalents. Investments with an original maturity at the time of purchase of
over three months are classified as short-term investments regardless of the
maturity date as all investments are classified as available-for-sale and can
be readily liquidated to meet current operational needs. The securities are
carried at amortized cost, which approximates fair value. Fair value is based
upon market prices quoted on the last day of the fiscal year.
Unrealized gains and losses are reported as a separate component of
stockholders' equity. The amortized cost of the debt securities is adjusted for
the amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in
interest expense, net. Realized gains and losses and declines in value judged
to be other-than-temporary are also included in interest expense, net and have
not been material. The cost of securities sold is based on the specific
identification method.
Property and equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the related assets, generally three to
five years. Leased assets are amortized on a straight-line basis over the
lesser of the estimated useful life or the lease term.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in operations.
Impairment of long-lived assets
Blaze Software evaluates the recoverability of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment
of long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.
Revenue recognition
Blaze Software's revenues are derived from two sources: product license
revenues and service revenues. Product license revenues are derived from
product sales to end users and independent software vendors as well
F-78
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as royalties from independent software vendors. Service revenues are derived
from providing consulting and training, maintenance and support services to end
users.
Blaze Software recognizes revenues in accordance with the American Institute
of Certified Public Accountants Statement of Position No. 97-2, Software
Revenue Recognition, as amended. License revenues from sales to end users and
systems integrators are recognized upon shipment of the product, if an executed
agreement or purchase order has been received, the fee is fixed and
determinable and collection is deemed probable. If an acceptance period is
provided, revenue is recognized upon the earlier of customer acceptance or the
expiration of that period. For enterprise application vendors, Blaze Software
receives quarterly reports from these vendors on sell-through of Blaze Software
products to end users. Blaze Software recognizes royalty revenues upon receipt
of the quarterly reports from vendors. For sales made through distributors,
Blaze Software recognizes revenues upon shipment of the product, if an executed
agreement or purchase order has been received, the fee is fixed and
determinable, collection is deemed probable, and the distributor has identified
an end-user for the product. In those instances where a distributor has not
identified a valid end-user for the product, the revenue is deferred.
Distributors have no right of return.
For contracts with multiple obligations (e.g., product licenses, maintenance
and other services), Blaze Software allocates revenue to each component of the
contract based on objective evidence of its fair value, which is based on the
price when each component is sold separately, or when not sold separately, the
price established by management. Blaze Software recognizes revenue allocated to
undelivered products when the criteria for product revenue set forth above are
met.
Service revenues from consulting, installation and training are recognized
as the related services are performed and collectibility is probable. Revenues
from maintenance and support agreements, which includes product updates, are
deferred and recognized on a straight-line basis over the term of the related
agreement. Payments of maintenance fees are generally made in advance and are
nonrefundable.
Prior to the adoption of SOP 97-2, Blaze Software recognized revenue from
the sale of products upon shipment if remaining obligations were insignificant,
collection of resulting accounts receivable was probable and product returns
reasonably estimable.
Advertising
Blaze Software expenses advertising costs as they are incurred. Advertising
expense for the years ended March 31, 2000, 1999 and 1998 was approximately
$1,517,000, $431,000 and $1,071,000, respectively.
Income taxes
Blaze Software accounts for income taxes in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. This statement prescribes the use of the
liability method whereby deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets
and liabilities and measured at tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets where it is more likely than not the
deferred tax asset will not be realized.
Stock-based compensation
Blaze Software has elected to adopt the disclosure provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation ("SFAS No. 123"). Blaze Software accounts for stock-based
compensation using Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to
F-79
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employees, ("APB No. 25") and, accordingly, pro forma disclosures required
under SFAS No. 123 have been presented (See Note 10). Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the deemed fair value of Blaze Software's common stock and the
exercise price. Additionally, pursuant to SFAS No. 123, common stock issued to
non-employees is accounted for at the fair value of the equity instruments
issued, or at the fair value of the consideration received, whichever is more
reliably measurable.
Research and development expenditures
Costs related to research, design and development of products are charged to
research and development expense as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. To date, attaining technological feasibility of Blaze Software's
products and general release have substantially coincided. As a result, Blaze
Software has not capitalized any software development costs.
Net loss per share
Blaze Software computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
Under the provisions of SFAS No. 128, basic net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Options, warrants, mandatorily redeemable preferred stock
and convertible preferred stock were not included in the computation of diluted
net loss per share because the effect would be antidilutive.
F-80
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Basic and diluted net loss per share:
Numerator:
Net loss from continuing operations........... $(26,424) $(5,848) $(3,631)
Accretion of mandatorily redeemable preferred
stock to redemption value.................... (442) (1,258) (1,040)
Beneficial conversion feature of preferred
stock........................................ (11,739) -- --
-------- ------- -------
Net loss from continuing operations
attributable to common stockholders.......... (38,605) (7,106) (4,671)
Income (loss) from operations of discontinued
user interface business...................... 2,657 248 (2,174)
-------- ------- -------
Loss attributable to common stockholders...... $(35,948) $(6,858) $(6,845)
======== ======= =======
Denominator:
Weighted average common shares outstanding.... 5,913 444 283
Weighted average unvested common shares
subject to repurchase........................ (132) (73) (158)
-------- ------- -------
Denominator for basic and diluted
calculation.................................. 5,781 371 125
======== ======= =======
Basic and diluted net loss per share
attributable to common stockholders.......... $ (6.22) $(18.49) $(54.76)
======== ======= =======
Antidilutive securities including options,
warrants and preferred stock not included in
net loss per share calculations.............. 4,479 7,392 7,502
======== ======= =======
</TABLE>
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
Blaze Software is assessing the potential impact of this pronouncement on the
financial statements; however, the Company does not expect any significant
impact.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, Revenue Recognition ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance on disclosure
related to revenue recognition policies. The Company believes that it currently
complies with SAB 101.
F-81
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB 25 (the
"Interpretation"). This Interpretation clarifies (a) the definition of an
employee for purposes of applying APB 25, (b) the criteria for determining
whether a stock plan qualifies as a non-compensatory plan, (c) the accounting
consequence 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. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
this Interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1, 2000,
the effects of applying this Interpretation are recognized on a prospective
basis from July 1, 2000. Blaze Software is assessing the potential impact of
this Interpretation on the financial statements; however, the Company does not
expect any significant impact.
Reclassifications
Certain amounts in the fiscal year 1999 and 1998 financial statements have
been reclassified to conform to the fiscal year 2000 presentation.
NOTE 3--DISCONTINUED OPERATIONS:
In December 1999, the Company's Board of Directors resolved to discontinue
Blaze Software's entire user interface line of business. The accompanying
financial statements have been prepared to reflect the historical results of
operations and cash flows of the user interface business as discontinued
operations for all periods presented.
Balance sheet data (in thousands)
<TABLE>
<CAPTION>
As of March
31,
------------
2000 1999
---- ------
<S> <C> <C>
Current assets................................................. $615 $1,183
Current liabilities............................................ (24) (70)
---- ------
Net assets of discontinued operations.......................... $591 $1,113
==== ======
</TABLE>
The current assets and current liabilities noted above comprise accounts
receivable and accounts payable, respectively.
Income statement data (in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Revenues........................................ $ 5,013 $ 9,094 $ 18,313
Costs and expenses.............................. (2,356) (8,846) (20,487)
------- ------- --------
Income (loss) from discontinued operations...... $ 2,657 $ 248 $ (2,174)
======= ======= ========
</TABLE>
F-82
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash flow data (in thousands)
<TABLE>
<CAPTION>
Years Ended March
31,
-------------------
2000 1999 1998
------ ------ -----
<S> <C> <C> <C>
Net cash provided by (used in) discontinued
operations.......................................... $3,109 $2,061 $(294)
====== ====== =====
</TABLE>
NOTE 4--FAIR VALUE OF CASH INVESTMENTS:
Available-for-sale investments as of March 31, 2000, consists of the
following (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Municipal bonds.................. $12,000 $ -- $ -- $12,000
Commercial paper................. 35,869 -- (20) 35,849
Money market funds............... 17,346 -- -- 17,346
------- ---- ---- -------
$65,215 $ -- $(20) $65,195
======= ==== ==== =======
Included in cash and cash
equivalents..................... $53,197
Included in short-term
investments..................... 11,998
-------
$65,195
=======
</TABLE>
The amortized cost and estimated fair value of investments in debt
securities at March 31, 2000, by contractual maturity were as follows (in
thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
Due in 1 year or less.................................. $47,869 $47,849
======= =======
</TABLE>
NOTE 5--BALANCE SHEET COMPONENTS:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
As of March 31,
----------------
2000 1999
------- -------
<S> <C> <C>
Computer equipment......................................... $ 2,636 $ 1,626
Furniture and fixtures..................................... 463 337
Leasehold improvements..................................... 316 412
------- -------
3,415 2,375
Less: accumulated depreciation and amortization............ (1,482) (1,589)
------- -------
$ 1,933 $ 786
======= =======
</TABLE>
Property and equipment under capital leases, included in the above table,
consist of the following (in thousands):
<TABLE>
<CAPTION>
As of March 31,
----------------
2000 1999
------- -------
<S> <C> <C>
Computer equipment......................................... $ 705 $ 268
Less: accumulated amortization............................. (322) (206)
------- -------
$ 383 $ 62
======= =======
</TABLE>
F-83
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortization of assets recorded under capital leases is included within
depreciation expense.
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
As of March
31,
-------------
2000 1999
------ ------
<S> <C> <C>
Accrued compensation.......................................... $1,622 $ 617
Sales and income tax payable.................................. 1,276 975
Other accrued liabilities..................................... 4,548 1,281
------ ------
$7,446 $2,873
====== ======
</TABLE>
NOTE 6--BANK BORROWINGS:
Blaze Software had a line of credit facility with Coast Business Credit, a
division of Southern Pacific Bank, whereby Blaze Software could borrow up to
80% of eligible United States and United Kingdom accounts receivable with a
maximum borrowing of $5,000,000. Borrowings under the facility bore interest at
the prime rate plus 3% (10.75% as of March 31, 1999) and were collateralized by
certain assets of Blaze Software. As of March 31, 1999, Blaze Software had
borrowed $1,631,000 under this facility. The facility was repaid and terminated
in March 2000.
In November 1998, Blaze Software entered into a bridge loan agreement with
several of its existing investors totaling $1.5 million. The loan bore interest
at the rate of 25%, was subordinated to the agreement between Blaze Software
and Coast Business Credit, and was collateralized by certain assets of Blaze
Software. The bridge loan was converted into 2,777,778 shares of Series AA
Preferred Stock in June 1999.
NOTE 7--INITIAL PUBLIC OFFERING:
In March 2000, Blaze Software completed its initial public offering and
issued 4,000,000 shares of its common stock to the public at a price of $16.00
per share. Blaze Software received net proceeds of approximately $57,090,000 in
cash. Upon the closing the offering, all of the outstanding shares of the
Series AA and BB convertible preferred stock were converted into an aggregate
of 10,369,000 shares of common stock. In addition, the underwriters exercised
their over-allotment option, see Note 15, Subsequent Events.
NOTE 8--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In June 1999, Blaze Software converted all of its outstanding mandatorily
redeemable preferred stock into common stock at the applicable conversion
rates.
NOTE 9--STOCKHOLDERS EQUITY:
Reverse Stock Split
In March 2000, Blaze Software's stockholders approved a 1-for-2 reverse
stock split of the Company's preferred and common stock. All share data
information has been restated to reflect the reverse stock split.
Series B Preferred Stock
In June 1999, Blaze Software converted all of its outstanding Series B
preferred stock into shares of common stock.
F-84
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock Warrants
In December 1996, warrants to purchase 107,143 shares of the Company's
Series B preferred stock were issued at a price per share of $5.60. These
warrants expired in December 1999. The fair value of these warrants was not
material to the financial statements.
Series AA and BB Preferred Stock
In June 1999 and September 1999, Blaze Software issued 8,134,839 and 281,376
shares, respectively, of Series AA convertible preferred stock at a price of
$0.54 per share. Net proceeds to Blaze Software were cash of $2.8 million and
the cancellation of indebtedness of $1.6 million. Prior to the issuance of
Series AA convertible preferred stock, Blaze Software converted all of its
outstanding shares of Series A, Series B, Series C Series D, and Series F
convertible preferred stock into common stock and all of its warrants for
Series E preferred stock into warrants for common stock at the applicable
conversion rates in effect for each series. The issuance in September 1999
resulted in a beneficial conversion feature of approximately $2.2 million,
calculated in accordance with Emerging Issues Task Force No. 98-5, which
resulted in an immediate charge to additional paid-in capital.
On December 31, 1999 1,952,735 shares of Series BB preferred stock were
issued for gross proceeds of approximately $13.9 million. The issuance resulted
in a beneficial conversion feature of approximately $9.5 million, calculated in
accordance with Emerging Issues Task Force No. 98-5, which resulted in an
immediate charge to additional paid-in capital.
In March 2000, all shares of Series AA and BB preferred stock were converted
to shares of common stock effective with the Company's initial public offering.
Delaware Reincorporation
In March 2000, Blaze Software reincorporated in the State of Delaware. The
par value of the preferred and common stock is $0.0001 per share. All share
data information has been restated to reflect the reincorporation.
Preferred Stock
In March 2000, Blaze Software's Certificate of Incorporation was amended to
authorize 10,000,000 shares of preferred stock. The Board of Directors has the
authority to fix or alter the designation, powers, preferences and rights of
the shares of preferred stock, and the qualifications, limitations or
restrictions to any unissued series of preferred stock.
Common Stock
In March 2000, Blaze Software's stockholders approved an increase in the
authorized number of common shares from 54,000,000 shares to 200,000,000
shares. Each share of common stock has the right to one vote. The holders of
common stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to the prior
rights of holders of all classes of stock outstanding at the time having
priority rights as to dividends.
F-85
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Blaze Software has reserved shares of common stock for future issuance as of
March 31, 2000 as follows (in thousands):
<TABLE>
<S> <C>
Options outstanding.................................................... 4,478
Options available for future grants.................................... 1,059
Shares available for the employee stock purchase plan.................. 750
Outstanding warrants for common stock.................................. 1
-----
6,288
=====
</TABLE>
Common Stock Warrants
The following table summarizes the activity on common stock warrants:
<TABLE>
<CAPTION>
Common Stock Warrants
-------------------------
Exercise
Shares Price Amount
------ -------- --------
<S> <C> <C> <C>
Balance, April 1, 1997............................ 5,000 28,000
Warrants granted.................................. 1,005 $5.60 5,625
------ --------
Balance, March 31, 1998 and 1999.................. 6,005 $ 33,625
Warrants exercised................................ (5,000) $5.60 (28,000)
------ --------
Balance, March 31, 2000........................... 1,005 $ 5,625
------ --------
</TABLE>
The fair value of these common stock warrants is not material to these
financial statements.
NOTE 10--EMPLOYEE BENEFIT PLANS:
Tax Deferred Savings Plan
The Company has a savings plan that is intended to qualify as a deferred
salary arrangement under Sections 401(a) and 401(k) of the Internal Revenue
Code (the "Savings Plan"). All full-time employees of Blaze Software are
eligible to participate in the Savings Plan pursuant to the terms of the plan.
Participants may defer up to 15 percent of their pre-tax earnings (up to the
Internal Revenue Service limit). The Company matches 25 percent of employee
contributions up to a maximum of $1,000 per employee. The participants' as well
as the Company's matching contributions are fully vested. Company contributions
to the Savings Plan were approximately $ 47,000, $ 40,000 and $ 45,000 for
fiscal 2000, 1999 and 1998, respectively.
Stock Option Plans
In 1986, Blaze Software adopted the 1986 Stock Option Plan (the "1986 Plan")
and had 1,254,500 shares of Common Stock reserved for issuance thereunder. In
1996, the 1986 Plan was discontinued and replaced with the 1996 Stock Option
Plan (the "1996 Plan"). Under the 1996 Plan, Blaze Software reserved
5,753,429 shares of common stock for issuance, and in March 2000, stockholders
approved an increase in the number of shares available under the 1996 Plan by
1,250,000 shares, to bring the total number of shares available under the 1996
Plan to 7,003,429. In March 2000, stockholders approved the 2000 Stock Option
Plan (the "2000 Plan") and reserved 250,000 shares of common stock for future
issuance under this plan, plus any shares which have been reserved but unissued
under the 1996 stock plan, any shares returned to the 1996 stock plan, and an
annual increases equal to the lesser of: (1) 50,000 shares, (2) 4% of the
outstanding shares or (3) a lesser amount determined by the board of directors.
Pursuant to the terms of the 1996 Plan and 2000 Plan, on March 8, 2000 a total
of 1,163,198 shares, representing all of the shares that had been reserved but
unissued under the 1996 Plan, were transferred to the pool of shares reserved
for issuance under the 2000 Plan. This brought the total number of shares
reserved for issuance under the 2000 Plan to 1,413,198.
F-86
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options granted under the 1996 Plan and the 2000 Plan (the "Plans") may be
incentive stock options or nonqualified stock options and shall be granted at a
price not less than 100% or 85% of fair market value, respectively, or at a
price not less than 110% of fair market value under certain circumstances. Fair
market value (as defined in the Plans) and the vesting, of these options shall
be determined by Blaze Software's Board of Directors. The options expire no
later than 10 years from the date of grant. Unvested options on termination of
employment are canceled and returned to the Plans. Options can be exercised
from the date of issuance, even though they have not fully vested. Such shares
are subject to repurchase on a pro rata basis over a four-year period from the
date of issuance. As of March 31, 2000 and 1999, there were approximately
734,400 and 73,500 shares, respectively, subject to repurchase, at a weighted
average price of $ 0.73 per share and $0.56 per share, respectively. During
fiscal year 2000 and 1999, approximately 13,100 and 157,500 shares,
respectively, were repurchased.
Shares acquired under the Plans are subject to Stock Purchase Agreements,
which provide Blaze Software with a right of first refusal and grant Blaze
Software repurchase rights for unvested shares, at their original cost.
Options granted under the Plans have a term of ten years measured from the
grant date and are initially unvested. Participants vest in the option shares
granted over a four-year period with (i) twenty-five percent of the option
shares vesting upon the completion of one year of service, and (ii) the balance
of the option shares in thirty-six successive equal monthly installments upon
the participants completion of each additional month of service.
A summary of the status of Blaze Software's stock option plans as of March
31, 1998, 1999, and 2000 and changes during the years ended on these dates is
presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Weighted
Average
Exercise
Shares Number Price
Available of per
for Grant Shares Share
--------- ------ --------
<S> <C> <C> <C>
Options outstanding at April 1, 1997.............. 253 1,231 $0.56
Granted........................................... (673) 673 $0.62
Exercised......................................... -- (173) $0.56
Canceled.......................................... 425 (425) $0.57
------ ------ -----
Options outstanding at March 31, 1998............. 5 1,306 $0.59
Additional shares reserved........................ 104 -- --
Granted........................................... (625) 625 $0.80
Exercised......................................... -- (98) $0.57
Canceled.......................................... 637 (637) $0.59
------ ------ -----
Options outstanding at March 31, 1999............. 121 1,196 $0.70
Additional shares reserved........................ 5,706 -- --
Granted........................................... (4,970) 4,970 $1.83
Exercised......................................... -- (1,486) $0.51
Canceled.......................................... 202 (202) $1.42
------ ------ -----
Options outstanding at March 31, 2000............. 1,059 4,478 $1.98
====== ====== =====
</TABLE>
F-87
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning options outstanding
and exercisable under the Plans as of March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
------------------------------------
Weighted-
Average
Remaining Weighted-
Contractual Average
Number of Life Exercise
Range of Exercise Price Shares (Years) Price
----------------------- -------------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
$0.10.................................. 2,368 9.43 $ 0.10
$0.56.................................. 116 6.79 $ 0.56
$0.80.................................. 618 8.33 $ 0.80
$1.00-$2.00............................ 394 9.61 $ 1.16
$6.00.................................. 613 9.83 $ 6.00
$8.00-$16.00........................... 369 9.96 $10.67
-----
4,478 9.32 $ 1.98
=====
</TABLE>
2000 Employee Stock Purchase Plan
In February 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (the "ESPP"), which is designated to allow eligible employees of
the Company to purchase shares of common stock at semiannual intervals through
periodic payroll deductions. An aggregate of 750,000 shares of common stock
have been reserved for the ESPP, and no shares have been issued through March
31, 2000. The ESPP permits eligible employees to purchase common stock through
payroll deductions of up to 15% of an employee's compensation, up to a maximum
of $25,000 for all purchases ending within the same calendar year. Each
offering period will run for twenty-four months and consist of four six-month
purchase periods. The price at which common stock will be purchased under the
ESPP is equal to 85% of the fair market value of the common stock on the first
day of the offering period or the last day of each purchase period, whichever
is lower.
Stock-based compensation
In connection with certain stock option grants during the year ended March
31, 2000, Blaze Software recorded stock-based compensation totaling $37.6
million, which is being amortized in accordance with FASB Interpretation No. 28
over the vesting periods of the related options, which is generally four years.
Stock-based compensation amortization recognized during the year ended March
31, 2000 totaled $16.4 million. If the stock-based compensation for the year
ended March 31, 2000 had been allocated across the relevant functional expense
categories within operating expenses, it would be allocated as follows:
<TABLE>
<CAPTION>
Year Ended
March 31,
2000
----------
<S> <C>
Research and development.......................................... $ 3,651
Selling and marketing............................................. 4,300
General and administrative........................................ 8,449
-------
$16,400
=======
</TABLE>
F-88
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The following information concerning Blaze Software's stock option plans is
provided in accordance with SFAS No. 123. Blaze Software accounts for such
plans in accordance with APB No. 25.
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions for grants:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 5.7% 4.7% 5.3%
Expected life........................................ 5 years 5 years 5 years
Dividend yield....................................... -- -- --
Expected volatility.................................. 0% 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options are amortized over the option's vesting period. Blaze Software pro
forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Net loss attributable to common stockholders... $(35,948) $(6,858) $(6,845)
======== ======= =======
Net loss--FAS 123 adjusted..................... $(36,119) $(6,896) $(6,896)
======== ======= =======
Net loss per share--as reported
Basic and diluted............................ $ (6.22) $(18.49) $(54.76)
======== ======= =======
Net loss per share--FAS 123 adjusted
Basic and diluted............................ $ (6.25) $(18.59) $(55.17)
======== ======= =======
</TABLE>
The weighted-average fair value of options granted in fiscal 2000, 1999 and
1998 was $0.44, $0.18 and $0.14, respectively.
The effects of applying SFAS No. 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future periods are
anticipated.
NOTE 11--COMPREHENSIVE INCOME:
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") Blaze Software displays all items required
to be recognized under accounting standards as components of its comprehensive
income.
F-89
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The comprehensive loss presented in the accompanying statements of
operations consists of the net unrealized gains and losses on available-for-
sale-investments and foreign currency translation adjustments, net of the
related tax effects for all periods presented. The tax effects for other
comprehensive income were immaterial for all periods presented. The balances
for each component of accumulated other comprehensive income are as follows (in
thousands):
<TABLE>
<CAPTION>
As of
March 31,
----------
2000 1999
---- ----
<S> <C> <C>
Cumulative translation adjustments............................... $509 $290
Unrealized gain/(loss) on investments............................ (20) --
---- ----
Accumulated other comprehensive income........................... $489 $290
==== ====
</TABLE>
NOTE 12--COMMITMENTS AND CONTINGENCIES:
Blaze Software leases administrative, engineering and sales facilities in
the United States, the United Kingdom, France, Germany, Japan and Australia
under noncancelable operating leases that expire at various dates through 2005.
Blaze Software is generally responsible for insurance and property taxes. Blaze
Software's primary lease in San Jose, California, is subject to annual payment
increases based on the consumer price index. Blaze Software also leases
computer equipment under leases classified as capital leases.
The Company's primary building lease for its corporate headquarters is
secured by a certificate of deposit of $702,000. This deposit has been
classified as restricted cash on the balance sheet as of March 31, 2000.
As of March 31, 2000, the aggregate future minimum lease payments under all
noncancelable leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year Ended March 31,
2001....................................................... $ 265 $2,191
2002....................................................... 238 1,846
2003....................................................... 80 1,772
2004....................................................... -- 1,675
2005....................................................... -- 1,367
----- ------
Total minimum lease payments............................. 583 $8,851
======
Less: amount representing interest......................... (151)
-----
Present value of capital lease obligations................. 432
Current portion............................................ (176)
-----
Long-term portion.......................................... $ 256
=====
</TABLE>
Rent expense in fiscal years 2000, 1999 and 1998 was approximately $976,000,
$1,002,000 and $871,000, respectively.
F-90
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment agreements
Blaze Software has entered into employment agreements with certain officers
of the Company. Some employment agreements also provide for severance in the
event the individual is terminated without cause.
Litigation
From time to time, Blaze Software may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes that
there are no claims or actions pending or threatened against Blaze Software,
the ultimate disposition of which would have a material impact on Blaze
Software's financial position or results of operations. On January 6, 2000, a
founder and former director of Blaze Software, notified the Company of claims
that he may assert against Blaze Software. The founder and former director
contends that his personal equity ownership of Blaze Software was diluted
improperly in connection with our Series AA preferred stock financing that
closed in June and September 1999. In particular, he contends that he was
wrongfully denied the opportunity to purchase shares at a price of $0.54 per
share in connection with the financing, and that the financing was otherwise
unfair and benefited participating stockholders. If he had participated in the
financing, he would have been able to purchase up to 1,710,949 shares. The
Company believes that his assertions are without merit and intend to vigorously
defend any claims that he may bring against Blaze Software. On March 17, 2000,
the Company filed a complaint against the founder and former director in the
United States District Court for the Northern District of California asking for
declaratory relief regarding his allegations. However, should any litigation be
decided adversely to the Company, Blaze Software may be required to pay
substantial damages or issue additional shares to him. In addition, other
stockholders that did not participate in the financing may assert similar
claims against the Company. If the Company is required to issue additional
shares to him or other stockholders, then-existing stockholders would
experience dilution of their ownership and the Company would need to record an
accounting charge in the statement of operations equal to the fair market value
of the shares at the time of issuance.
NOTE 13--INCOME TAXES:
The components of income tax expense consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Years ended March
31,
-----------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ -- $ --
Foreign................................................. 149 82 68
State................................................... 4 5 --
Deferred--federal and state............................... -- -- --
----- ----- -----
Income tax expense...................................... $ 153 $ 87 $ 68
===== ===== =====
</TABLE>
F-91
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net deferred tax assets were as follows (in thousands):
<TABLE>
<CAPTION>
As of March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Accrued liabilities....................................... $ 846 $ 576
Deferred revenue.......................................... 20 12
Net operating loss carryforwards.......................... 7,906 6,702
Credit carryforwards and other............................ 2,099 1,428
-------- -------
10,871 8,718
Valuation allowance....................................... (10,871) (8,718)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax asset
in future tax returns, Blaze Software has placed a valuation allowance against
its net deferred tax assets. The valuation allowance increased by $2,153,000,
$1,618,000 and $1,969,000 during fiscal years 2000, 1999 and 1998,
respectively.
Blaze Software's expected U.S. Federal statutory income tax rate (34%)
differs from the effective tax rate as follows:
<TABLE>
<CAPTION>
Years ended March
31,
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
"Expected" income
benefit.................. (34.0)% (34.0)% (34.0)%
Net operating loss not
benefited................ 10.5 34.0 34.0
Foreign income and
withholding taxes........ 1.0 1.6 1.4
Stock compensation........ 23.5 -- --
----- ----- -----
Effective tax rate...... 1.0 % 1.6 % 1.4 %
===== ===== =====
</TABLE>
At March 31, 2000, Blaze Software had available net operating loss
carryforwards of approximately $22,454,000 and $6,987,000 to offset future
federal and state taxable income, respectively. At March 31, 2000, Blaze
Software also had available research and development credit carryforwards and
other credit carryforwards of approximately $1,297,000 and $479,000 to offset
future federal and state taxable income, respectively, and foreign tax credits
of approximately $322,000 available to offset future federal taxable income.
These carryforwards expire from 2000 to 2010.
For federal and state tax purposes, a portion of Blaze Software's net
operating loss carryforwards may be subject to certain limitation on annual
utilization in case of a change in ownership, as defined by federal and state
tax law.
F-92
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--SEGMENT INFORMATION:
Blaze Software, which operates in a single business segment, develops and
licenses component-based development software for building business-critical
applications and also provides related maintenance and consulting services.
Operations of Blaze Software's overseas subsidiaries consist of product license
revenues and service revenues.
Intercompany transfers between geographic areas are accounted for at prices
that approximate arm's length transactions.
Information regarding geographic areas at March 31, 2000, 1999 and 1998, and
for each of the years then ended, is as follows (in thousands):
<TABLE>
<CAPTION>
Geographic Area Americas Europe Pacific Rim Eliminations Total
--------------- -------- ------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
March 31, 2000 and for
the year then ended:
Sales to unaffiliated
customers............. $ 15,112 $ 2,137 $ 947 $ -- $ 18,196
-------- ------- ------- -------- --------
Operating (loss)
income................ (24,446) (335) (1,388) -- (26,169)
-------- ------- ------- -------- --------
Liabilities--continued
operations............ 15,679 6,981 4,487 (14,533) 12,614
Liabilities--
discontinued
operations............ (24) -- -- -- (24)
-------- ------- ------- -------- --------
Total Liabilities.... 15,655 6,981 4,487 (14,533) 12,590
-------- ------- ------- -------- --------
Identifiable assets--
continued operations.. 84,962 6,053 1,610 (14,881) 77,744
Identifiable assets--
discontinued
operations............ 209 223 183 -- 615
-------- ------- ------- -------- --------
Total Identifiable
assets.............. $ 85,171 $ 6,276 $ 1,793 $(14,881) $ 78,359
======== ======= ======= ======== ========
March 31, 1999 and for
the year then ended:
Sales to unaffiliated
customers............. $ 6,933 $ 1,563 $ 558 $ -- $ 9,054
-------- ------- ------- -------- --------
Operating (loss)
income................ (4,944) (603) 35 -- (5,512)
-------- ------- ------- -------- --------
Liabilities--continued
operations............ 13,718 5,764 3,838 (12,164) 11,156
Liabilities--
discontinued
operations............ (70) -- -- -- (70)
-------- ------- ------- -------- --------
Total Liabilities.... 13,648 5,764 3,838 (12,164) 11,086
-------- ------- ------- -------- --------
Identifiable assets--
continued operations.. 11,233 5,408 2,320 (12,379) 6,582
Identifiable assets--
discontinued
operations............ 417 416 350 -- 1,183
-------- ------- ------- -------- --------
Total Identifiable
assets.............. $ 11,650 $ 5,824 2,670 $(12,379) $ 7,765
======== ======= ======= ======== ========
March 31, 1998 and for
the year then ended:
Sales to unaffiliated
customers............. $ 3,492 $ 808 $ 62 $ -- $ 4,362
-------- ------- ------- -------- --------
Operating (loss)
income................ (1,452) (1,713) 195 -- (2,970)
-------- ------- ------- -------- --------
Liabilities--continued
operations............ 15,041 4,502 3,307 (11,498) 11,352
Liabilities--
discontinued
operations............ 441 -- -- -- 441
-------- ------- ------- -------- --------
Total Liabilities.... 15,482 4,502 3,307 (11,498) 11,793
-------- ------- ------- -------- --------
Identifiable assets--
continued operations.. 16,472 4,034 1,453 (11,714) 10,245
Identifiable assets--
discontinued
operations............ 1,643 927 1,039 -- 3,609
-------- ------- ------- -------- --------
Total Identifiable
assets.............. $ 18,115 $ 4,961 $ 2,492 (11,714) 13,854
======== ======= ======= ======== ========
</TABLE>
F-93
<PAGE>
BLAZE SOFTWARE, INC.
(FORMERLY NEURON DATA, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--SUBSEQUENT EVENTS
In April 2000, in connection with the initial public offering, the
underwriters purchased an additional 600,000 shares of common stock as a result
of the exercise of their over-allotment option. This sale resulted in
additional net proceeds of approximately $8,800,000.
On June 20, 2000, Brokat Infosystems AG and Blaze Software announced that
the companies had entered into a definitive agreement for Brokat to acquire
Blaze Software in a stock-for-stock merger, subject to the approval of Blaze
Software stockholders, regulatory agencies and other customary closing
conditions. Under the terms of the agreement, Blaze Software stockholders will
receive an American Depositary Share equivalent of 0.1826 of a Brokat ordinary
share in exchange for each share of Blaze Software common stock. Based on
Brokat's closing price on June 19, 2000, the acquisition is valued at
approximately $560 million. The merger is intended to be accounted for as a
purchase, tax-free to Blaze Software stockholders, and is expected to close in
September 2000.
F-94
<PAGE>
BLAZE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, March
2000 31, 2000
----------- --------
(unaudited) (a)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 45,099 $ 57,295
Short-term investments.................................. 22,821 11,998
Accounts receivable, net................................ 5,444 4,939
Prepaid expenses and other current assets............... 1,973 1,108
-------- --------
Total current assets.................................. 75,337 75,340
Property and equipment, net............................... 3,223 1,933
Restricted cash........................................... 716 702
Deposits and other assets................................. 369 384
-------- --------
Total assets.......................................... $ 79,645 $ 78,359
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................ $ 914 $ 1,972
Current portion of capital lease obligations............ 173 176
Accrued expenses........................................ 6,261 7,446
Deferred revenue........................................ 2,485 2,728
-------- --------
Total current liabilities............................. 9,833 12,322
Long-term liabilities:
Capital lease obligations, net of current portion....... 211 256
Other long-term liabilities............................. 34 12
-------- --------
Total liabilities..................................... 10,078 12,590
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock......................................... -- --
Common stock............................................ 2 2
Additional paid-in capital.............................. 153,385 144,642
Accumulated other comprehensive income.................. 318 489
Unearned stock-based compensation....................... (16,876) (21,207)
Accumulated deficit..................................... (67,262) (58,157)
-------- --------
Total stockholders' equity............................ 69,567 65,769
-------- --------
Total liabilities and stockholders' equity................ $ 79,645 $ 78,359
======== ========
</TABLE>
--------
(a) The balance sheet at March 31, 2000 has been derived from the audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these consolidated financial
statements.
F-95
<PAGE>
BLAZE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts--unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Net revenues:
Product licenses........................................... $ 3,320 $ 1,394
Services and maintenance................................... 3,914 1,926
------- -------
Total revenues........................................... 7,234 3,320
------- -------
Cost of revenues:
Product licenses........................................... 10 10
Services and maintenance................................... 3,194 1,187
------- -------
Total cost revenues...................................... 3,204 1,197
------- -------
Gross profit................................................. 4,030 2,123
------- -------
Operating expenses:
Research and development................................... 1,902 1,260
Sales and marketing........................................ 5,959 1,894
General and administrative................................. 1,838 638
Stock-based compensation................................... 4,330 --
------- -------
Total operating expenses................................. 14,029 3,792
------- -------
Operating loss............................................... (9,999) (1,669)
Interest expense............................................. (28) (112)
Other income and (expense), net.............................. 1,050 10
------- -------
Net loss from continuing operations before income taxes...... (8,977) (1,771)
Provision for income taxes................................... (6) (12)
------- -------
Net loss from continuing operations.......................... (8,983) (1,783)
Discontinued operations:
Income (loss) from operations of discontinued user
interface business (net of income taxes).................. (121) 652
------- -------
Net loss..................................................... (9,104) (1,131)
Accretion of mandatorily redeemable preferred stock to
redemption value............................................ -- (442)
------- -------
Net loss attributable to common stockholders................. (9,104) (1,573)
Other comprehensive income (loss), net of tax:
Unrealized loss on investments............................. (35) --
Translation adjustments.................................... (136) (111)
------- -------
Comprehensive loss........................................... $(9,275) $(1,684)
======= =======
Basic and diluted net loss per common share attributable to
common stockholders:
Loss from continuing operations............................ $ (0.41) $ (1.01)
Earnings/(loss) from discontinued operations............... (0.01) 0.30
------- -------
Basic and diluted net loss per common share attributable to
common stockholders......................................... $ (0.42) $ (0.71)
======= =======
Number of shares used in the calculation of basic and diluted
net loss per share.......................................... 21,864 2,211
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-96
<PAGE>
BLAZE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (9,104) $(1,131)
Add (deduct) loss (income) from discontinued operations..... 121 (652)
-------- -------
Loss from continuing operations............................. (8,983) (1,783)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 232 119
Amortization of stock-based compensation.................. 4,330 --
Changes in assets and liabilities:
Accounts receivable...................................... (1,062) 242
Prepaid expenses and other............................... (865) (54)
Accounts payable......................................... (1,034) (441)
Accrued expenses ........................................ (1,185) 452
Deferred revenue......................................... (243) (608)
Deposits and other assets................................ 15 213
Other long-term liabilities.............................. 22 --
-------- -------
Net cash used in continuing operations...................... (8,773) (1,860)
Net cash provided by discontinued operations................ 412 674
-------- -------
Net cash used in operating activities.................. (8,361) (1,186)
-------- -------
Cash flows from investing activities:
Capital expenditures........................................ (1,522) (20)
Purchases of short-term investments, net.................... (10,858) --
-------- -------
Net cash used in investing activities.................. (12,380) (20)
-------- -------
Cash flows from financing activities:
Repayment of note payable................................... -- (43)
Payments of principal under capital lease financing......... (48) (31)
Bank borrowings, net........................................ -- 102
Proceeds from issuance of Common Stock...................... 8,769 15
Repurchase of Common Stock.................................. (26) --
Proceeds from issuance of Preferred Stock warrants, Series D
and Series E (net of issuance costs)....................... -- 36
Proceeds from issuance of Preferred Stock, Series AA (net of
issuance costs)............................................ -- 2,860
Increase in restricted cash................................. (14) --
-------- -------
Net cash provided by financing activities.............. 8,681 2,939
-------- -------
Effect of exchange rate changes in cash..................... (136) (111)
-------- -------
Net increase (decrease) in cash and cash equivalents........ (12,196) 1,622
Cash and cash equivalents at beginning of period............ 57,295 2,129
-------- -------
Cash and cash equivalents at end of period.................. $ 45,099 $ 3,751
======== =======
Supplemental non-cash investing and financing activities:
Assets acquired under capital lease obligations............. $ -- $ 22
Accretion of cumulative dividends on Preferred Stock........ $ -- $ 442
Conversion of bridge loan to Preferred Stock................ $ -- $ 1,596
Conversion of Mandatorily Redeemable Preferred Stock to
Common Stock............................................... $ -- $20,882
Write-off of property and equipment......................... $ -- $ 3,761
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-97
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--FORMATION AND BUSINESS OF THE COMPANY
Blaze Software, Inc. ("Blaze Software" or the "Company") was incorporated in
California as Neuron Data, Inc. in 1985. The Company changed its name to Blaze
Software, Inc. in August 1999 and reincorporated in the State of Delaware in
March 2000. Blaze Software develops and licenses infrastructure software that
enables adaptable and personalized interactions that are consistent across all
company communication channels, or touch points. This software enables
companies to implement their policies, practices and procedures, or business
rules, in e-business applications across multiple touch points. Blaze Software
also provides related maintenance and consulting services. Blaze Software
markets its products to a wide range of customers mainly in North America,
Europe and the Pacific Rim primarily through a direct sales force.
NOTE 2--BASIS OF PRESENTATION
Interim Financial Statements
The accompanying condensed consolidated financial statements include the
accounts of Blaze Software and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation. The financial
results and related information as of June 30, 2000 and for the three month
periods ended June 30, 2000 and 1999 are unaudited. The balance sheet at March
31, 2000, has been derived from the audited consolidated financial statements
as of that date but does not necessarily reflect all of the informational
disclosures previously reported in accordance with accounting principles
generally accepted in the United States. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
necessary adjustments, consisting of normal recurring adjustments, to fairly
state the Company's financial position, results of operations, and cash flows
for the periods indicated. The accompanying condensed consolidated financial
statements should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in this Form
10-Q and the consolidated financial statements and notes thereto included with
the Company's Form 10-K and other documents that have been filed with the
Securities and Exchange Commission ("SEC"). The results of the Company's
operations for the interim periods presented are not necessarily indicative of
operating results for the full fiscal year or any future interim periods.
Discontinued Operations
In December 1999, the Company's Board of Directors resolved to discontinue
Blaze Software's entire user interface line of business. The accompanying
condensed consolidated financial statements have been prepared to reflect the
historical results of operations and cash flows of the user interface line of
business as discontinued operations for all periods presented. In July 2000,
the Company sold its user interface line of business, effective as of May 1,
2000. See Note 8, Subsequent Events. Revenues from the discontinued operations
were $174,000 for the three months ended June 30, 2000 and $1.2 million for the
three months ended June 30, 1999.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net loss per share
Blaze Software computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
Under the provisions of SFAS No. 128, basic net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Options, warrants and preferred stock were not included in
the computation of diluted net loss per share because the effect would be
antidilutive.
F-98
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Basic and diluted net loss per share:
Numerator:
Net loss from continuing operations........................ $(8,983) $(1,783)
Accretion of mandatorily redeemable preferred stock to
redemption value.......................................... -- (442)
------- -------
Net loss from continuing operations attributable to common
stockholders.............................................. (8,983) (2,225)
Income (loss) from operations of discontinued user
interface business........................................ (121) 652
------- -------
Loss attributable to common stockholders................... $(9,104) $(1,573)
======= =======
Denominator:
Weighted average common shares outstanding................. 22,497 2,211
Weighted average unvested common shares subject to
repurchase................................................ (633) --
------- -------
Denominator for basic and diluted calculation.............. 21,864 2,211
======= =======
Basic and diluted net loss per share attributable to common
stockholders.............................................. $ (0.42) $ (0.71)
======= =======
Antidilutive securities including options, warrants and
preferred stock not included in net loss per share
calculations.............................................. 4,660 9,520
======= =======
</TABLE>
Use of estimates
The preparation of financial statements in conformity with GAAP 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
Blaze Software is assessing the potential impact of this pronouncement on the
financial statements; however, the Company does not expect any significant
impact.
In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue
Recognition ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance on disclosure related to revenue recognition policies.
The Company believes that it currently complies with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB 25 (the
"Interpretation"). This Interpretation clarifies (a) the
F-99
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
definition of an employee for purposes of applying APB 25, (b) the criteria for
determining whether a stock plan qualifies as a non-compensatory plan, (c) the
accounting consequence 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. This Interpretation became
effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the
period after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying this Interpretation did not have
a material impact on the consolidated financial statements. Blaze Software does
not expect that the adoption of the remaining provision of this Interpretation
will have a material impact on the consolidated financial statements.
NOTE 4--BUSINESS COMBINATIONS
On June 20, 2000, Brokat Infosystems AG ("Brokat"), a company listed on the
German Neuer Markt and Blaze Software announced that the companies had entered
into a definitive agreement for Brokat to acquire Blaze Software in a stock-
for-stock merger. Under the terms of the agreement, Blaze Software stockholders
will receive 0.1826 of a Brokat ordinary share in exchange for each share of
Blaze Software common stock. Based on Brokat's closing price on June 19, 2000,
the acquisition is valued at approximately $560 million. The merger is intended
to be accounted for as a purchase, tax-free to Blaze Software stockholders, and
is expected to close in September 2000.
NOTE 5--CONTINGENCIES
From time to time, Blaze Software may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes that
there are no claims or actions pending or threatened against Blaze Software,
the ultimate disposition of which would have a material impact on Blaze
Software's financial position or results of operations. Blaze Software received
notification of claims from a founder and director that he may assert against
the Company. He contends that his personal equity ownership of Blaze Software
was diluted improperly in connection with a preferred stock financing. Blaze
Software believes that these assertions are without merit and intends to
vigorously defend claims that may be brought against the Company.
NOTE 6--EXERCISE OF OVER-ALLOTMENT OPTION
In April 2000, in conjunction with Blaze Software's initial public offering
in March 2000, the underwriters purchased an additional 600,000 shares of
common stock at $16 a share as a result of their over-allotment option. This
sale resulted in additional net proceeds of approximately $8.8 million.
NOTE 7--SEGMENTAL INFORMATION
Blaze Software, which operates in a single business segment, develops and
licenses component-based development software for building business-critical
applications and also provides related maintenance and consulting services.
Operations of Blaze Software's overseas subsidiaries consist of product license
revenues and service revenues.
Intercompany transfers between geographic areas are accounted for at prices
that approximate arm's length transactions.
F-100
<PAGE>
BLAZE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information regarding geographic areas at June 30, 2000 and 1999, and for
each of the three months then ended, is as follows (in thousands):
<TABLE>
<CAPTION>
Geographic Area Americas Europe Pacific Rim Eliminations Total
--------------- -------- ------ ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
June 30, 2000 and for the
three months then ended:
Sales to unaffiliated
customers.............. $ 5,497 $1,191 $ 546 $ -- $ 7,234
------- ------ ------ -------- -------
Operating (loss)
income................. (9,657) (1) (341) -- (9,999)
------- ------ ------ -------- -------
Liabilities--continued
operations............. 12,564 8,551 5,154 (16,191) 10,078
Liabilities--
discontinued
operations............. -- -- -- -- --
------- ------ ------ -------- -------
Total Liabilities..... 12,564 8551 5,154 (16,191) 10,078
------- ------ ------ -------- -------
Identifiable assets--
continued operations... 87,327 6,887 1,622 (16,191) 79,645
Identifiable assets--
discontinued
operations............. -- -- -- -- --
------- ------ ------ -------- -------
Total Identifiable
assets............... $87,327 $6,887 $1,622 $(16,191) $79,645
======= ====== ====== ======== =======
June 30, 1999 and for the
three months then ended:
Sales to unaffiliated
customers.............. $ 2,884 $ 423 $ 13 $ -- $ 3,320
------- ------ ------ -------- -------
Operating (loss)
income................. (1,236) 12 (445) -- (1,669)
------- ------ ------ -------- -------
Liabilities--continued
operations............. 12,279 6,085 3,516 (12,870) 9,010
Liabilities--
discontinued
operations............. (68) -- -- -- (68)
------- ------ ------ -------- -------
Total Liabilities..... 12,211 6,085 3,516 (12,870) 8,942
------- ------ ------ -------- -------
Identifiable assets--
continued operations... 13,362 5,913 1,603 (12,870) 8,008
Identifiable assets--
discontinued
operations............. 388 230 254 -- 872
------- ------ ------ -------- -------
Total Identifiable
assets............... $13,750 $6,143 $1,857 $(12,870) $ 8,880
======= ====== ====== ======== =======
</TABLE>
NOTE 8--SUBSEQUENT EVENTS
Sale of User Interface Line of Business
In July 2000, Blaze Software signed an agreement to sell its user interface
line of business effective May 1, 2000. The consolidated financial statements
as of, and for the three months ended, June 30, 2000 reflect the sale of the
user interface line of business. The sale of the user interface line of
business resulted in a loss on the disposal of approximately $540,000. The loss
has been included in the statement of operations under income (loss) from
operations of discontinued user interface business (net of income taxes).
Blaze Software may receive future royalty payments for a period of two years
after the effective date of the agreement. No royalty payments were made in the
three months ended June 30, 2000.
Director Option Acceleration
In July 2000, the Company accelerated the remaining vesting period of
outstanding options granted to certain members of the Board of Directors. Due
to this change in the terms of these options, the Company will incur a one-time
stock-based compensation charge of approximately $670,000 in the quarter ended
September 30, 2000.
F-101
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors GemStone Systems, Inc.
We have audited the accompanying consolidated balance sheets of GemStone
Systems, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years ended December 31, 1999. 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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of GemStone Systems, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
March 24, 2000,
except for Note 8, as to which the date is
June 16, 2000
F-102
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 1,209 $ 25 $ 158
Accounts receivable, less allowance for
doubtful accounts of $92 in 1998 and $113 in
1999, and $212 at June 30, 2000............. 4,468 5,633 4,615
Prepaid expenses and other current assets.... 334 480 391
-------- -------- --------
Total current assets........................... 6,011 6,138 5,164
Property and equipment:
Office and computer equipment................ 2,400 1,662 1,676
Furniture and fixtures....................... 660 613 548
Leasehold improvements....................... 391 382 200
-------- -------- --------
3,451 2,657 2,424
Accumulated depreciation..................... 1,811 1,635 1,490
-------- -------- --------
Property and equipment, net.................... 1,640 1,022 934
Other Assets:
Deposits and other assets...................... 277 211 261
-------- -------- --------
Total assets................................... $ 7,928 $ 7,371 $ 6,359
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 2,597 $ 2,235 $ 3,102
Accrued compensation and related expenses.... 1,930 2,113 1,628
Accrued expenses............................. 988 1,165 1,132
Deferred revenue............................. 4,069 4,586 4,672
Current portion of capital lease
obligations................................. 324 268 183
Notes payable to affiliated companies........ -- 2,075 6,825
Notes payable................................ -- 1,173 1,072
-------- -------- --------
Total current liabilities...................... 9,908 13,615 18,614
Capital lease obligations, less current
portion....................................... 336 114 67
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--7,312,294... 37,972 37,972 37,972
Common stock, $0.01 par value:
Authorized shares--15,000,000
Issued and outstanding shares--5,406,400 in
1998 and 5,920,978 in 1999 and 7,409,828
at June 30, 2000 ......................... 5,406 5,923 32,814
Employee Stock Trust......................... -- -- (26,856)
Foreign currency translation adjustment...... 3 (20) (39)
Accumulated deficit.......................... (45,697) (50,233) (56,213)
-------- -------- --------
Total stockholders' equity (deficit)........... (2,316) (6,358) (12,322)
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)..................................... $ 7,928 $ 7,371 $ 6,359
======== ======== ========
</TABLE>
See accompanying notes.
F-103
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Six months
ended
Year ended December 31, June 30,
------------------------ ----------------
1998 1999 1999 2000
----------- ----------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Licenses......................... $ 10,563 $ 12,160 $ 6,099 $ 4,918
Services......................... 10,536 11,480 5,084 7,166
----------- ----------- ------- -------
Total revenues................. 21,099 23,640 11,183 12,084
Cost of revenues:
Licenses......................... 539 704 267 337
Services......................... 6,146 6,394 3,132 4,131
----------- ----------- ------- -------
Total cost of revenues......... 6,685 7,098 3,399 4,468
----------- ----------- ------- -------
Gross profit....................... 14,414 16,542 7,784 7,616
Operating expenses:
Research and development......... 5,175 5,691 2,703 3,733
Sales and marketing.............. 7,841 10,308 4,722 6,406
General and administrative....... 5,285 4,696 2,211 3,013
----------- ----------- ------- -------
Total operating expenses....... 18,301 20,695 9,636 13,152
----------- ----------- ------- -------
Loss from operations............... (3,887) (4,153) (1,852) (5,536)
Interest income.................... 30 36 21 9
Interest expense................... (82) (253) (91) (326)
----------- ----------- ------- -------
Loss before income taxes........... (3,939) (4,370) (1,922) (5,853)
Provision for income taxes......... (77) (166) (69) (127)
----------- ----------- ------- -------
Net loss........................... $ (4,016) $ (4,536) $(1,991) $(5,980)
=========== =========== ======= =======
</TABLE>
See accompanying notes.
F-104
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible Foreign Total
Preferred Stock Common Stock Employee Currency Stockholders'
----------------- ----------------- Stock Translation Accumulated Comprehensive Equity
Shares Amount Shares Amount Trust Adjustment Deficit Loss (Deficit)
--------- ------- --------- ------- -------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1997............. 7,312,294 $37,972 5,354,400 $ 5,354 $ -- $(26) $(41,681) $ 1,619
Exercise of common
stock options....... -- -- 52,000 52 -- -- -- -- 52
Comprehensive loss:
Net loss............ -- -- -- -- -- -- (4,016) $(4,016) (4,016)
Foreign currency
translation
adjustment......... -- -- -- -- -- 29 -- 29 29
-------
Total comprehensive
loss............... $(3,987)
--------- ------- --------- ------- -------- ---- -------- ======= --------
Balances at December
31, 1998............. 7,312,294 37,972 5,406,400 5,406 -- 3 (45,697) (2,316)
Exercise of common
stock options....... -- -- 514,578 517 -- -- -- -- 517
Comprehensive loss:
Net loss............ -- -- -- -- -- -- (4,536) $(4,536) (4,536)
Foreign currency
translation
adjustment......... -- -- -- -- -- (23) -- (23) (23)
-------
Total comprehensive
loss............... -- $(4,559)
--------- ------- --------- ------- -------- ---- -------- ======= --------
Balances at December
31, 1999............. 7,312,294 37,972 5,920,978 5,923 -- (20) (50,233) (6,358)
Exercise of common
stock options
(unaudited)......... -- -- 35,600 35 -- -- -- -- 35
Issuance of common
stock to Rabbi trust
(unaudited)......... -- -- 1,453,250 26,856 (26,856) -- -- -- --
Comprehensive loss:
Net loss
(unaudited)........ -- -- -- -- -- -- (5,980) (5,980) (5,980)
Foreign currency
translation
adjustment
(unaudited)........ -- -- -- -- -- (19) -- (19) (19)
-------
Total comprehensive
loss (unaudited)... $(5,999)
=======
--------- ------- --------- ------- -------- ---- -------- --------
Balances at June 30,
2000 (unaudited)..... 7,312,294 $37,972 7,409,828 $32,814 $(26,856) $(39) $(56,213) $(12,322)
========= ======= ========= ======= ======== ==== ======== ========
</TABLE>
See accompanying notes.
F-105
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
---------------- ------------------
1998 1999 1999 2000
------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss................................ $(4,016) $(4,536) $ (1,991) $ (5,980)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization......... 1,104 913 499 368
Changes in operating assets and
liabilities:
Accounts receivable................. (450) (1,165) (319) 1,018
Prepaid expenses and other current
assets............................. (75) (146) 31 89
Deposits and other assets........... 79 66 (84) (50)
Accounts payable.................... 2,029 (362) (759) 867
Accrued compensation and related
expenses........................... 299 183 287 (485)
Accrued expenses.................... (81) 177 (415) (33)
Deferred revenue.................... 1,277 517 768 86
------- ------- -------- --------
Net cash provided by (used in)
operating activities............. 166 (4,353) (1,983) (4,120)
Investing activities
Purchases of property and equipment..... (145) (231) (100) (268)
Proceeds from sale of property and
equipment.............................. 19 -- -- --
------- ------- -------- --------
Net cash used in investing
activities....................... (126) (231) (100) (268)
Financing activities
Reduction in capital lease obligations.. (359) (342) (183) (144)
Proceeds from exercise of common stock
options................................ 52 517 507 35
Payment on notes payable................ -- (6,414) (1,084) (6,372)
Proceeds from issuance of notes
payable................................ -- 9,662 3,198 11,021
------- ------- -------- --------
Net cash (used in) provided by
financing activities............. (307) 3,423 2,438 4,540
Effect of exchange rate changes on cash
and cash equivalents................... 29 (23) (35) (19)
------- ------- -------- --------
Net (decrease) increase in cash and cash
equivalents............................ (238) (1,184) 320 133
Cash and cash equivalents at beginning
of year................................ 1,447 1,209 1,209 25
------- ------- -------- --------
Cash and cash equivalents at end of
year................................... $ 1,209 $ 25 $ 1,529 $ 158
======= ======= ======== ========
Supplemental disclosures
Interest paid........................... $ -- $ 125 $ 66 $ 187
======= ======= ======== ========
Supplemental disclosures of noncash
investing and financing activities
Capital lease obligations incurred...... $ 431 $ 64 $ 65 $ 12
======= ======= ======== ========
</TABLE>
See accompanying notes.
F-106
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1.Summary of Significant Accounting Policies
Description of Business
GemStone Systems, Inc. ("GemStone" or the "Company"), an Oregon corporation,
is substantially wholly-owned by Lex Magna Ltd. ("LM"). The Company designs,
develops, markets, and distributes enterprise application server software
platforms, which are used by its customers to deploy and manage strategic
business applications. The Company operates in one industry segment
(development and marketing of computer software and related services) and
markets its products and services internationally through foreign subsidiaries,
distributors and resellers located in North America, Europe and the Pacific
Rim, which includes Asia, Australia, New Zealand and South America.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The Company translates the
accounts of its foreign subsidiaries using the local currency as the functional
currency. The assets and liabilities of the foreign subsidiaries are translated
into U.S. dollars using exchange rates in effect at the balance sheet date,
revenues and expenses are translated using the average exchange rate for the
period, and gains and losses from this translation process are credited or
charged to stockholder's equity (deficit). Foreign currency transaction gains
and losses have not been material.
The Company has incurred significant operating losses and had a working
capital deficit and a net capital deficiency at December 31, 1999. The Company
has received cash infusions from affiliated companies owned by LM to fund its
operations. Management expects that its cash flows from operations and
additional funding from LM will be adequate to fund future operations (see Note
8).
Unaudited Interim Financial Information
The interim financial information as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments that management considers
necessary for a fair presentation of the Company's consolidated financial
position at that date and its consolidated results of operations and cash flows
for those periods. Operating results for the six months ended June 30, 2000 are
not necessarily indicative of results that may be expected for any future
periods.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents, which consist of cash and highly liquid short-
term investments with insignificant interest rate risk and original maturities
of three months or less at the date of purchase, are stated at cost, which
approximates fair value.
F-107
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk and Credit Evaluations
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade accounts receivable. Cash equivalents consist principally of money
market and demand deposit accounts and are held principally with one domestic
financial institution. The Company performs periodic evaluations of the
relative credit standing of this institution.
The Company licenses its products primarily to customers in North America
and Europe. The Company generally does not require collateral form its
customers. Reserves are maintained for estimated losses in the collection of
accounts receivable and such losses to date have been within management's
expectations.
Revenue Recognition
The Company adopted Statement of Position 97-2, "Software Revenue
Recognition", ("SOP 97-2") and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", ("SOP
98-4") as of January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for
recognizing revenue on software transactions and supersede Statement of
Position 91-1, "Software Revenue Recognition" ("SOP 91-1").
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-
9"). SOP 98-9 amends SOP 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after
March 15, 1999. The Company adopted SOP 98-9 as of January 1, 2000.
The Company licenses software under noncancellable license agreements.
License fee revenues are recognized when a noncancellable license agreement is
in force, the product has been shipped, the license fee is fixed or
determinable, and collectibility is reasonably assured. If the fee is not fixed
or determinable, revenue is recognized as payments become due from the
customer. License revenue from third-party distributors and value added
resellers is recognized as products are sold to end users under noncancellable
license agreements and collectibility is reasonably assured. If collectibility
is not considered probable, revenue is recognized when the fee is collected.
If an agreement includes both license and service elements, the license fee
is recognized on delivery of the software, provided services do not include
significant customization or modification of the base product, and the payment
terms for licenses are not subject to additional acceptance criteria. The
Company has established vendor specific objective evidence of fair value for
services and determines the allocation of the arrangement fee to the license
component using the residual method. In cases where license fee payments are
contingent on the acceptance of services, recognition of revenues is deferred
for both the license and the service elements until the acceptance criteria are
met.
Maintenance and support revenues are recognized ratably over the term of the
related agreements, which in most cases is one year. Revenues from consulting
services under time and materials contracts and for training are recognized as
services are performed. Revenues from consulting services under fixed price
contracts are recognized under the percentage-of-completion method using the
ratio of labor hours incurred to total expected labor hours as the measure of
progress towards completion. Unbilled work-in-process represents costs incurred
and estimated earnings, production, and other client-reimbursable costs that
have yet to be invoiced. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. To date,
these losses have not been significant.
F-108
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company invoices customers for license and support fees in accordance
with individual contract terms. Payment terms generally require payment of the
license fees and first year support fees from the customer 30 days from the
effective date of the contract. On occasion the Company may offer extended
payment terms of not more than twelve months. The Company does not offer a
right of return to third parties or other customers.
Significant Customers
Revenues from one customer accounted for 12% of total revenues for the year
ended December 31, 1999. Revenues from two customers each accounted for 10% of
total revenues for the year ended December 31, 1998.
Software Development Costs
The Company capitalizes software development costs upon the establishment of
technological feasibility, which is usually upon completion of a working model,
subject to net realizable value considerations. During the years ended December
31, 1999 and 1998, such capitalizable costs were not material. Accordingly, the
Company charged all such costs to research and development expense in the
accompanying consolidated statements of operations. Future capitalized costs,
if any, will be amortized on a straight-line basis over the estimated life of
the products or the ratio of current revenue to the total of current and
anticipated future revenue, whichever expense is greater.
Property and Equipment
Property and equipment consist of office and computer equipment, furniture
and fixtures, and leasehold improvements, which are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, which range from three to five years,
or the lesser of the estimated useful lives or lease term for assets acquired
under capital lease agreements and leasehold improvements.
Income Taxes
The Company uses the liability method of accounting for income taxes under
which deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rules and laws that will be in effect when the
differences are expected to reverse.
Stock Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has adopted the disclosure-only alternative described
in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123").
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"),
which requires that all items that are recognized under accounting standards as
components of comprehensive income (revenues, expenses, gains and losses) be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
F-109
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131") which establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. In addition, it establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
operates in one segment, therefore, the adoption of this pronouncement had no
impact upon the Company.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which establishes accounting
and reporting standards for derivative instruments and hedging activities. FAS
133 requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company will be required to adopt FAS 133 effective January 1, 2001.
Management of the Company does not believe the adoption of this statement will
have a material effect on the Company's consolidated financial position,
results of operations or cash flow.
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"), was issued in December 1999 by the Securities and Exchange
Commission ("SEC"). SAB 101 provides guidance surrounding revenue recognition.
Due to complications surrounding the implementation of SAB 101, the SEC, in
March 2000, deferred the implementation date of certain provisions of SAB 101
until the quarter ended June 30, 2000, with retroactive application to
transactions entered into during the quarter ended March 31, 2000. The Company
has not yet determined the effect on the Company's financial statements of
adopting SAB 101.
Reclassifications
Certain prior year balances have been reclassified to conform with current
year presentation.
2.Related Party Transactions
During the year ended December 31, 1999, the Company borrowed approximately
$2.9 million from affiliates owned by LM to fund operations. The annual
interest rate on the unpaid principal balance is 6% with principal and interest
to be paid on demand. The Company repaid $800,000 of the notes payable during
the year. Interest expense related to the notes payable for the year ended
December 31, 1999 was $69,000.
3.Notes Payable
During 1999, the Company entered into an agreement whereby the Company
finances the accounts receivable of its pre-approved customers with a financial
institution on a full recourse basis through the issuance of notes payable. The
Company uses advances under the notes to pay operating expenses as well as
vendor purchases. The Company maintains the credit risk on all financed
receivables. Only invoices outstanding for less than 90 days from the original
due date have the ability to be financed by the financial institution. As of
December 31, 1999, the Company had outstanding financed receivables of
approximately $1.2 million with the financial institution which is included in
accounts receivable and notes payable in the accompanying consolidated balance
sheets. Interest on the note is due at an annual rate of 21%. The note is
secured by the underlying accounts receivable and the general assets of the
Company.
F-110
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4.Lease Commitments
The Company leases certain premises under operating lease agreements as well
as property and equipment under operating lease and capital lease agreements
certain of which contain renewal options at fair market value.
Future minimum lease payments are as follows at December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
2000....................................................... $295 $ 832
2001....................................................... 90 604
2002....................................................... 22 51
2003....................................................... 12 --
---- ------
Total minimum lease payments............................... 419 $1,487
======
Less interest.............................................. (37)
----
Present value of minimum lease payments.................... 382
Less current portion....................................... 268
----
Capital lease obligations, less current portion............ $114
====
</TABLE>
Cost of and accumulated amortization on assets acquired under capital lease
arrangements was $938,000 and $1,348,000, and $583,000 and $668,000 at December
31, 1999 and 1998, respectively. Rent expense totaled $1,254,000 and $848,000
in 1999 and 1998, respectively.
5.Stockholders' Equity
Convertible Preferred Stock
The Company has 10,000,000 shares of authorized convertible preferred stock
of which 5,000,000 shares are designated Series I, 2,000,000 shares are
designated Series II, and 3,000,000 shares are designated Series III. At
December 31, 1999, 3,175,685 shares of Series I, 2,000,000 shares of Series II
and 2,136,609 shares of Series III convertible preferred stock were
outstanding. All of the shares of convertible preferred stock outstanding are
held by LM.
Holders of convertible preferred stock are entitled to noncumulative cash
dividends, when and if declared by the Board of Directors, prior to any
dividends paid on the common stock. Each share of convertible preferred stock
is convertible into one share of common stock at the option of the holder. Each
share will be automatically converted into common stock upon the closing of an
initial public offering of the Company's common stock at a price per share that
equates to a total value of the Company's capital stock of at least $20,000,000
and an aggregate offering price of at least $7,500,000, or at any such time as
67% of the convertible preferred stock has been converted to common stock.
Each share of convertible preferred stock has voting rights equal to the
number of common shares into which it is convertible. Upon voluntary or
involuntary liquidation or merger with another corporation, the holders of
Series I, Series II and Series III convertible preferred stock are entitled to
receive an amount equal to the original issuance price per share of $5.00,
$2.50 and $8.00, respectively, before adjustments, plus any declared but unpaid
dividends, before any distribution may be made to the holders of common stock.
F-111
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans
Under the Company's 1992 Stock Option Plan (the "Plan"), 1,518,920 shares of
common stock have been reserved for the issuance of incentive stock options
("ISO") or nonstatutory stock options ("NSO") to eligible employees,
consultants, and directors. The ISOs may be granted at a price per share not
less than the fair market value on the date of grant. The NSOs may be granted
at a price per share not less than 85% of the fair market value on the date of
the grant. Options granted under the Plan expire not more than ten years from
the date of grant and generally become exercisable at varying rates over a
five-year period. Unvested options and vested but unexercised options are
canceled and returned to the Company for regrant upon termination of employment
or expiration of the option.
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------
Weighted-
Average
Exercise
Number of Price per
Shares Share
--------- ---------
<S> <C> <C>
Balance at December 31, 1997............................ 1,414,478 $1.76
Granted............................................... 10,000 8.00
Canceled.............................................. (94,800) 2.76
Exercised............................................. (52,000) 1.00
--------- -----
Balance at December 31, 1998............................ 1,277,678 1.77
Canceled.............................................. (75,100) 3.26
Exercised............................................. (514,578) 1.00
--------- -----
Balance at December 31, 1999............................ 688,000 $2.17
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Number Exercise Contractual Number Exercise
Exercise of Price per Life of Price per
Price Shares Share (Years) Shares Share
-------- ------ --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
$1.00 550,500 $1.00 4.76 496,900 $1.00
5.00 51,500 5.00 6.84 27,500 5.00
8.00 86,000 8.00 7.53 40,400 8.00
------- ----- ------- -----
688,000 $2.17 5.26 564,800 $1.70
======= ===== ======= =====
</TABLE>
At December 31, 1999, the Company has reserved the following shares of its
common stock for future issuance:
<TABLE>
<S> <C>
Outstanding stock options.......................................... 688,000
Future stock option grants......................................... 209,942
Outstanding convertible preferred stock............................ 7,312,294
---------
8,210,236
=========
</TABLE>
F-112
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Disclosures of the Effect of Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
common stock on the grant date, no compensation expense is recorded.
Pro forma information regarding net income (loss) is required by FAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31,
1994 under the fair value method of FAS 123. Under this method, the estimated
fair value of the options is amortized to expense over the vesting period of
the options. The effect of applying the fair value method of FAS 123 to the
Company's stock-based awards resulted in net loss for the years ended December
31, 1999 and 1998, which was not materially different than the reported net
loss.
The weighted-average grant-date fair value of options was $2.31 per share
for grants made during the year ended December 31, 1998. There were no grants
during the year ended December 31, 1999.
The fair value for these options was estimated at the date of grant using a
minimum value option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1999 1998
---- -------
<S> <C> <C>
Expected dividend yield......................................... -- 0%
Risk-free interest rate......................................... -- 5.67%
Expected life of the option..................................... -- 6 years
</TABLE>
The minimum value option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the 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 estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its adjusted effect will not be fully reflected until 2000.
6.Income Taxes
Prior to December 7, 1998, the Company was included in the consolidated
return of Sanpao Industries, Inc. ("Sanpao"), which owned greater than 80% of
Servio Logic Corporation ("Servio Logic"), at the time, the direct parent of
the Company. At the time, Sanpao was a wholly-owned subsidiary of LM. In a
series of transactions effected on December 7, 1998, the Company was
reorganized such that the Company became directly owned by LM, and succeeded to
all of the historical tax attributes of both Servio Logic and Sanpao.
There was no provision for U.S. federal or state income taxes for any period
as the Company has incurred operating losses, and there can be no assurance
that the Company will realize the benefit of the net operating loss
carryforwards. The tax provision recorded by the Company during the years ended
December 31, 1999 and 1998 relates primarily to income taxes paid by foreign
subsidiaries and taxes withheld from customer payments in various foreign
jurisdictions.
F-113
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's current and non-current deferred tax
assets and liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 44,189,000 $ 42,515,000
Deferred revenue............................... 1,579,000 1,562,000
Other.......................................... 390,000 398,000
------------ ------------
Total deferred tax assets........................ 46,158,000 44,475,000
Valuation allowance.............................. (46,158,000) (44,475,000)
------------ ------------
Net deferred tax assets.......................... $ -- $ --
============ ============
</TABLE>
During the years ended December 31, 1999 and 1998, the valuation allowance
on the deferred tax assets increased by $1,683,000 and $30,121,000,
respectively.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $115 million. The federal net
operating loss carryforwards will expire at various dates beginning in the
current year through 2019 if not utilized.
Due to the "change in ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss credit carryforwards may
be subject to an annual limitation against taxable
income in future periods if a change in ownership of more than 50% of the value
of the Company's stock should occur over a three-year period, which could
substantially limit the eventual utilization of these carryforwards.
7.Retirement Plan
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code (the 401(k) Plan), which covers substantially all full-time
employees. Participating employees may individually elect to have 1% to 18% of
their total annual compensation contributed to the 401(k) Plan. The Company may
contribute a discretionary matching contribution on behalf of each participant
to be determined each year by the Company. The Company made no contributions to
the 401(k) Plan in 1999 or 1998.
8.Subsequent Events
On June 16, 2000, the Company received a commitment from LM to fund the
Company up to $5 million through December 31, 2000 and not to require payment
on any outstanding notes through June 15, 2001.
Unaudited. From December 31, 1999 through June 30, 2000, the Company
borrowed additional amounts from LM and affiliated companies increasing the
total notes payable to related parties to $6,825,000 as of this date. Amounts
borrowed during this period have the same terms as amounts outstanding at
December 31, 1999.
Unaudited. On June 19, 2000, Brokat Infosystems AG ("Brokat") and the
Company entered into a definitive agreement for Brokat to acquire GemStone,
subject to the approval of GemStone shareholders, regulatory agencies and other
customary closing conditions.
F-114
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited. On June 14, 2000, the Company established a Rabbi Trust (the
"Trust") to fund deferred compensation for certain employees of the Company.
The Company deposited 1.5 million shares of common stock and a demand note in
the amount of $500,000 with the Trust. The Trust limits distributions of its
assets to shares of the Company's common stock. Under Emerging Issue Task Force
Issue 97-14 "Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested", ("EITF 97-14") assets of the
Trust must be consolidated with those of the employer, and the value of the
employer's stock held in the rabbi trust must be classified in stockholders'
equity and generally accounted for in a manner similar to treasury stock. In
accordance with the provisions of EITF 97-14, the Company recorded the 1.5
million shares held by the Trust as Employees Stock Trust included within
stockholders' equity (deficit) in the accompanying consolidated balance sheet
to account for the transaction. The Trust has not demanded the note as of June
30, 2000. In August 2000, the Company deposited an additional 1.3 million
shares of common stock with the trust. The fair value of these shares as at
that date approximates $19.3 million.
Unaudited. In June 2000, the Company's Board of Directors approved a
modification to the Company's stock option plans to provide for acceleration of
vesting on unvested stock options in the event an employee of the Company is
either terminated other than for cause or is assigned new employment duties
which represent a substantial diminution of authority or responsibility. The
modification is effective at the effective date of the merger. In accordance
with FASB Interpretation No 44. "Accounting for Certain Transactions involving
Stock Compensation," the Company will record deferred compensation at the
merger date based upon the difference between the intrinsic value of the option
on the date of the grant and the date of modification for the number of options
which are expected to be affected as a result of the modification. This amount
will be charged to expense over the expected vesting period based on estimates
of the number of options that employees will ultimately retain that would have
otherwise been forfeited, absent the modification. The Company currently does
not anticipate any employee terminations other than for cause and does not
expect terminations due to a substantial diminution of an employee's authority
or responsibility and thus, does not expect to record any deferred compensation
in connection with the modification.
F-115
